By Patricia Clabeaux, Executive Vice President-Chief HR Officer, Independent Health
Now that we’re in the midst of tax season, it’s the perfect time to highlight the various tax advantages associated with Health Savings Accounts (HSA). Employers that offer a qualified high deductible health plan (HDHP) may be able to combine it with an HSA as a way to not only make it easier for their employees to pay certain medical expenses, but also help them realize significant tax savings and save for the future.
Approximately 29 million Americans have an HSA, and balances of these accounts total more than $73.5 billion, according to the 2020 Midyear Devenir HSA Research Report. One of the key factors that makes an HSA so appealing is that it’s one of the most tax-advantaged accounts that the Internal Revenue Service (IRS) recognizes.
While other retirement accounts are taxed at some point — whether that’s when the funds go into the account or when the funds are taken out — HSAs have the following triple tax advantages that other programs just don’t have:
1. Tax-free contributions
Some savings accounts, such as a Roth 401(k) or IRA, are taxed before someone puts funds in. However, the funds are not taxed when money is spent from the account, as long as the accountholder follows the rules set up by the IRS. When someone contributes money to their HSA, the funds are not taxed. This is similar to a traditional 401(k) or IRA.
Because of the significant tax advantages of an HSA, the IRS has put a limit on how much someone can contribute to an HSA each year. For 2021, the maximum contribution limit is $3,600 for an individual and $7,200 for a family, which is up from $3,550 and $7,100 a year ago. Those accountholders 55 and older can contribute an additional $1,000 annually.
2. Tax-free growth
Accountholders can also grow the funds in their account through interest and, potentially, through investing. And, unlike other growth options, the increase in funds is not subject to taxes. There is also no expiration date on an HSA and no required minimum distribution like there is from a 401(k) or IRA. This means that accountholders can potentially spend years growing the funds in their HSA — all tax free.
3. Tax-free distributions
Traditional IRA and 401(k) programs are not taxed when the accountholder puts money in the account, but the money is taxed when it is taken out of the account. This leads to the third tax advantage of HSAs: Funds spent from an HSA are not taxed as long as they are spent on qualified medical expenses. In other words, accountholders can’t use their HSA funds to pay for a vacation or buy a new big-screen TV, but they can fund doctors’ visits, dental and vision care, etc. Spending HSA funds on non-qualified medical expenses results in taxes and an additional 20 percent penalty.
That said, anyone 65 years and older can use their HSA funds for any reason; the money will be taxed, but they will not be subject to the 20 percent tax penalty. If a retiree uses the funds for qualified medical expenses, it will still be totally tax-free.
We make managing an HSA easy
Independent Health is proud to partner with HealthEquity, the leading administrator of HSAs in the nation. Through this collaboration, Independent Health is the only health plan in Western New York that offers an HSA product with complete automated enrollment and claims payment solutions that makes it easier for employers and their employees to manage, use and maximize an HSA. Visit our website to learn more.