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Health Savings Account Tax Benefits

One of the most appreciated benefits in having a health savings account is the enormous tax advantages that are unique to the HSA.  HSAs are triple tax-advantaged:  Your money is tax-deductible upon deposit, earns tax-free interest, and when you spend your HSA dollars on qualified HSA expenses, your money comes out tax-free.

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CONTRIBUTION TAX BENEFITS TO AN EMPLOYER

Would you like to increase income to your employees without increasing your tax liability?  Funding health savings accounts is a strategic way to put more money into your employee's pockets for medical care without increasing salary - saving both of you money in taxes. 

Consider these benefits:

  • Your deposits are excluded from the employee's gross income
     
  • Your deposits are not subject to withholding for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act
     
  • You can allow your employees to make pre-tax contributions through a Section 125 Cafeteria Plan (FSA) - reducing your tax liability even further

You are required to fund your employee accounts in compliance with the IRS Comparability Rules if you don't use a Cafeteria Plan.  This means you must deposit the same dollar amount for each employee who has single insurance coverage and the same dollar amount for each employee who has dependent (family) coverage. 

If you choose to fund the HSA accounts through a Cafeteria Plan, you are not required to follow the Comparability Rules.  This allows you to:

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  • Provide an incentive for employees to make deposits into their HSAs by offering a matching employer deposit
     
  • Deposit into your employee's HSAs based on their participation in wellness, health assessment, or disease management programs. 
    • For example, you could deposit $25 into an employee's HSA upon completion of a health assessment
    • Fund a certain dollar amount each month based on number of steps an employee walked the previous month 
       
  • Give employees opportunities to make pre-tax HSA contributions through the Cafeteria Plan - reducing your tax liability

 


CONTRIBUTION TAX BENEFITS TO AN EMPLOYEE

When an employer deposits funds into your HSA account you immediately have access to tax-free dollars to pay your current and future medical expenses.  Because these funds are not run through payroll, you receive 100% of your HSA dollars every time your employer makes a deposit.

If your employer offers a Section 125 Cafeteria Plan (FSA), you also can make pre-tax deposits into your HSA through payroll deductions.  This reduces your taxable income on your paycheck - putting more money in your pocket right now.

You can make additional after-tax deposits into your account, and receive the tax savings when you file your income tax return.  You simply reduce your gross income on your 1040 by the amount of money you deposited with after-tax dollars.  You don't even have to itemize to get this deduction!

Consider the following benefits of funding an HSA:

  • Reduce your taxable income by the amount you deposit into an HSA.  You don't have to itemize on your taxes to receive this tax benefit.
     
  • Any of your dependents can use the funds tax-free, even if they are not covered on your insurance.
     
  • Interest on your account grows on a tax-deferred basis and is not considered taxable income as long as it is spent on eligible HSA expenses.
     
  • You can use your HSA as supplemental retirement income once you reach age 65.
    • Withdrawals as retirement income are subject to income taxes
    • Withdrawals for qualified HSA expenses continue to be tax-free.
       
  • You can use the money in your HSA tax-free to pay for eligible HSA expenses, such as:
    • Medical, Dental, Vision, Preventative Care, Prescriptions, and Over-the-Counter Drugs (with prescription).
       

Please consult with your insurance agent and tax professional to find out exactly how an HSA can benefit you.  

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CONTRIBUTION TAX BENEFITS TO AN INDIVIDUAL

Have you been wondering about how best to utilize the money you're saving by switching to a High Deductible Health Plan?  Putting that savings into an HSA will provide you with a double benefit.  First, you reduce your taxable income by the amount you deposit into your account.  Secondly, you use the funds tax-free to pay qualified HSA expenses. 

 How much should I deposit into an HSA?

  • Fund at least your anticipated healthcare expenses for the year. 
    • That way you can pay your expenses with tax-free dollars.
       
  • To maximize your tax savings, consider depositing the maximum amount the IRS allows. 
    • This is how you build a balance for future medical expense and/or retirement.

Consider the following benefits of funding an HSA:

  • Reduce your taxable income by the amount you deposit into an HSA.  You don't have to itemize on your taxes to receive this tax benefit.
     
  • Any of your dependents can use the funds tax-free, even if they are not covered on your insurance.
     
  • Interest on your account grows on a tax-deferred basis and is not considered taxable income as long as it is spent on eligible expenses.
     
  • You can use your HSA as supplemental retirement income once you reach age 65.
    • Withdrawals as retirement income are subject to income taxes
    • Withdrawals for qualified HSA expenses continue to be tax-free.
       
  • You can use the money in your HSA tax-free to pay for eligible HSA expenses, such as:
    • Medical, Dental, Vision, Preventative Care, Prescriptions, and Over-the-Counter Drugs (with prescription).
       

Please consult with your insurance agent and tax professional to find out exactly how an HSA can benefit you.

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CONTRIBUTION TAX BENEFITS TO A PARTNER OR S-CORP

If you are a partner or S-Corp, you can still benefit from an HSA.  Generally you are not considered an employee, so deposits into your account are treated differently than an employee. 

Deposits into your HSA:

  • You can deposit different amounts into your HSA than you do into the HSAs of your employees. 
    • This is because your deposits are not treated as employer deposits.
       
  • For tax reporting purposes of the Partnership or S-Corp, your deposits are either reported as distributions or guaranteed payments. 
     
  • Deposits made as guaranteed payments are also deductible by the Partnership or S-Corp. 
    • This means you can receive tax savings on both your business and personal taxes.
       
  • Even though your deposits are reported as distributions from the partnership or guaranteed payments, you are still entitled to deduct the amount of your deposits as an adjustment to your gross income on your federal income tax return.

Consider the following benefits of funding an HSA:

  • Reduce your taxable income by the amount you deposit into an HSA.  You don't have to itemize on your taxes to receive this tax benefit.
     
  • Any of your dependents can use the funds tax-free, even if they are not covered on your insurance.
     
  • Interest on your account grows on a tax-deferred basis and is not considered taxable income as long as it is spent on eligible HSA expenses.
     
  • You can use your HSA as supplemental retirement income once you reach age 65.
    • Withdrawals as retirement income are subject to income taxes
    • Withdrawals for qualified HSA expenses continue to be tax-free.
       
  • You can use the money in your HSA tax-free to pay for eligible HSA expenses, such as:
    • Medical, Dental, Vision, Preventative Care, Prescriptions, and Over-the-Counter Drugs (with prescription).
       

Please consult with your insurance agent and tax professional to find out exactly how an HSA can benefit you.

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CONTRIBUTION TAX BENEFITS FOR THE SELF-EMPLOYED

As a self-employed person you know the value of making every dollar work for you!  That's probably why you purchased (or are considering purchasing) a High Deductible Health Plan (HDHP).  In addition to the tax deductions you receive on your insurance premium as a self-employed individual, you can also benefit from the tax advantages of an HSA.

Consider these benefits:

  • You can deposit money into an HSA each year to pay for current and future medical expenses, and to save for retirement. 
     
  • When filing your tax return, your federal taxable income is reduced by the amount of money you deposited into the account.  Most states also allow a deduction on your state tax return. 
    • Check with your accountant to confirm if this deduction is allowed in your state.
       
  • When you use the money on qualified HSA medical expenses (including dental, vision, prescriptions, and prescribed over-the-counter medications), you spend the money tax-free! 
    • You can use the money for your dependents expenses as well, even if they are not covered on your insurance.
       
  • You can use your HSA as supplemental retirement income once you reach age 65.  Withdrawals are subject to income taxes, but funds spent on qualified HSA medical expenses continue to be tax-free.
    • Prior to age 65 any withdrawal for a non-qualified expense is subject to a 20% penalty, plus income tax.
       

Please consult with your insurance agent and tax professional to find out exactly how an HSA can benefit you.

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