As employers look for ways to control costs, in particular health care expenses, more and more employees will have the option of enrolling in High Deductible Health Plans (often referred to as HDHPs). Per IRS rules, in both 2015 and 2016, HDHPs are Plans in which the annual deductible for individuals is at least $1,300 (or $2,600 for families).
Another characteristic of a HDHP is that the 2015 maximum out-of-pocket for individuals is $6,450 (or $12,900 for families). For 2016, the maximum out-of-pocket for individuals increases by $50 to $6,500. Similarly, the maximum out-of- pocket for families increases by $200 to $13,100.
An added benefit of enrolling in a HDHP is the ability to contribute to a Health Savings Account (HSA).
Contribution Limits and Deadlines
It is important to note that one can have both employer and personal contributions in their HSA. However, the aggregate of all contributions cannot be greater than the limits. For 2015, individuals may contribute up to $3,350, while families may contribute up to $6,650. For 2016, the maximum contribution for individuals remains the same, however, the family contribution increases to $6,750. Similar to IRAs and other qualified plans, individuals over age 55 are permitted to make a “catch-up” contribution of $1,000 in both 2015 and 2016.
Just like IRAs and Roth IRAs, one may contribute to their HSA up to April 15th of the following tax year. Please note, however, that most custodians assume contributions are for the current tax year if a contribution year is not indicated.
Federal Tax Benefits and Disadvantages
HSAs offer many tax benefits, such as tax-deferred growth and tax-free distributions for qualified medical expenses. For individuals contributing through payroll deductions, they benefit by making pre-tax contributions whereas individuals who contribute with post-tax money, will receive an above-the-line tax deduction.
It is essential to note that non-qualified distributions may be subject to both ordinary income tax as well as a 20% penalty.
Unlike other tax-deferred accounts, one does not need to have earned income in order to contribute to an HSA. On the contrary, many retirees, who are not yet enrolled in Medicare, are covered by a HDHP and are therefore allowed to contribute to an HSA. However, it is important to note that once Medicare starts, one may no longer contribute to an HSA. However, one can take distributions for not only their medical care and insurance, but for penalty-free non-qualified expenses as well.
Assuming one does not currently need the funds, one’s HSA is a great investment vehicle. For example, by paying medical expenses out-of-pocket, one allows their HSA to grow, again on a tax-deferred basis. Once an account has a balance of $1,000 many custodians offer investment options. Moreover, assuming that one keeps track of their medical receipts, they can be reimbursed for medical expenses years after such expenses occurred.
Upon the Account Owner’s Passing
If one’s spouse is the surviving beneficiary of the HSA, then they are permitted to continue using the HSA until it is either depleted of assets or they pass away. If, however, one has a non-spouse beneficiary, then one’s HSA will cease to exist as of their date of death. The account will no longer be tax-deferred; however distributions will not be penalized. Nevertheless, the beneficiary may owe income taxes on the growth, if any, of the HSA. In contrast, if one’s estate is the beneficiary, then the HSA will be part of their estate and must be included in their final income tax return.
Author: Meg Vates-Amoudi | Allegheny Financial Group | August 2016
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
The above comments are provided for discussion purposes only and are not meant to be an offer of any specific investment or tax advice.