Health Savings Accounts (HSAs) have grown in popularity over the past decade as more employers and employees opt into high deductible health plans (HDHP).
Below is an overview of the tax benefits as well as important facts regarding participating in HSAs.
- Maximum Contribution for 2023: Maximum contributions for those participating in a HDHP and contributing to an HSA are as follows:
- Self-only coverage: $3,850
- Family coverage: $7,750
- Employees: Contributions to HSAs are tax deductible in the year made. Those employees participating in a HDHP are generally eligible to participate through their employer’s plan with pre-tax money. Contributions to an HSA via payroll allow for automated deductions for federal, FICA (Federal Insurance Contributions Act), and most state and local payroll taxes.
- Employee-Owners of S-Corporations: Contributions to HSAs are tax deductible in the year made. However, the IRS requires more than two percent S-Corporation shareholder-employees and their family members who are also employees to make contributions outside of the employer’s plan. The tax deduction for contributions is reflected on the federal and most state tax returns.
Tax-Free Growth and Expense Reimbursement
Most HSA custodians allow an account owner to invest the account balance. The earnings and any growth are tax-free as long as the balance remains within the account and any distributions from the account are used for qualified medical expenses.
Additionally, once the HSA is established, any future qualified medical expenses incurred are eligible for reimbursement. This allows for the account to grow tax-free and provides the account owner the flexibility to be reimbursed either immediately or in the future for any eligible medical expenses. It is vital to maintain and track annual medical expenses if reimbursement is to be deferred to a future tax year to ensure the distribution is tax-free.
Funding Expenses in Retirement
HSAs offer another benefit for account owners when they retire. The accounts can be used to pay for certain insurance premiums. Eligible premiums include COBRA, health care continuation coverage, and Medicare premiums, including Part B and Part D coverage. Long-term care premiums are also eligible HSA expenses, subject to the annual IRS limits.
An HSA can be an effective tax planning tool for both employees and business owners. The benefits of participating go far beyond the year of contribution, and if used strategically, can provide significant long-term tax benefits. Contact your Kreischer Miller Relationship Director or any member of our Tax Strategies group to discuss how to maximize the benefits of your HSA contributions.
Brian D. Kitchen is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.
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