Examine Health Savings Account Perks

If you weren’t already concerned about paying for healthcare expenses – and most people were concerned – the COVID-19 pandemic should certainly have your attention now.

Strategy: Investigate the merits of health savings accounts (HSAs). This could be a tax-smart way for you to handle your medical expenses in the current environment. Although these tax-favored accounts were initially slow to catch on, interest has heated up in recent years. At the very least, this option deserves a close look in 2020 for those on the fence.

Here’s the whole story: An HSA is like an individual retirement account (IRA) for medical expenses. Contributions can be deducted above-the-line or your company can make tax-deductible contributions on behalf of its employees – or both. As with an IRA, there’s no current federal income tax on the earnings within the account. Furthermore, distributions are federal income tax free if the funds are used to pay for qualified medical expenses. However, distributions taken for other purposes are taxable and are also hit with a 20% penalty if taken before reaching age 65.

HSAs are available to anyone who is:

(1) Not yet eligible for Medicare (generally someone who is under age 66)

(2) Covered by qualifying high-deductible plan

(3) Not covered by another health insurance plan, as defined.

For 2020, a “high deductible plan” is defined as a plan with a deductible of at least $1,400 and out-of-pocket maximum of no more than $6,900 for individual coverage; a deductible of at least $2,800 and out-of-pocket maximum of no more than $13,800 for family coverage. These parameters are indexed for inflation.

For 2020, the HSA contribution maximums are $3,550 for individual coverage and $7,100 for family coverage. In addition, a “catch-up contribution” of $1,000 is permitted for covered individuals age 55 or over.

Finally, be aware that any amount left over in your account at the end of the year can be used to pay medical expenses in the future. This provides a distinct edge for HSAs over flexible spending accounts (FSAs) for healthcare expenses. Reason: At year-end, unused FSA balances are generally forfeited. Alternatively, a 2 ½ month grace period or a carryover of up to $500 ($550 for 2020) may be allowed.

Small Business Tax Strategies

2020