HSA Archives | Wheeler Accountants, LLP

HSAs Can Be Powerful Retirement Saving Tools

Health Savings Accounts (HSAs) are tax-advantaged savings vehicles for funding health care expenses not covered by insurance. And for those in relatively good health, they also may serve as attractive retirement savings vehicles.

To be eligible to contribute, an individual must be covered by a high-deductible health plan (HDHP). In 2024, an HDHP must have a deductible of at least $1,600 for individual coverage or $3,200 for family coverage. For 2024, you can contribute up to $4,150 to an HSA, $8,300 if you have family coverage (plus an additional $1,000 if you’ll be 55 or older this year). Contributions are tax-deductible and withdrawals used to pay for qualified unreimbursed medical expenses are tax-free.

Any funds you don’t need for medical expenses will continue to grow on a tax-deferred basis, providing a valuable supplement to your other retirement accounts. In general, once you reach age 65, you can use your HSA funds to pay for anything. Amounts spent that aren’t for qualified medical expenses will be subject to state and federal taxes, but not subject to a penalty. Contact the office with questions about adding an HSA to your plans for retirement.

408-252-1800

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Avoid Misinformation About Tax-Favored Health Accounts

Green juice surrounded by apples and other produce

Do you have a health Flexible Spending Account, Health Savings Account or similar plan through your employer? The IRS is warning about misinformation that could lead to serious mistakes.

Nonmedical nutrition, wellness and exercise expenses that aren’t explicitly related to a medical diagnosis or treatment aren’t reimbursable under these plans. But that hasn’t stopped certain bad actors from offering to provide a “doctor’s note” (for a price) that they claim would authorize health reimbursement plans to accept ineligible expenses, such as for nonmedical food that doesn’t satisfy normal nutritional needs.

To review the IRS’s related FAQs: https://www.irs.gov/individuals/frequently-asked-questions-about-medical-expenses-related-to-nutrition-wellness-and-general-health

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Did You Overcontribute to Your HSA in 2023?

patient receiving medical care, having their blood pressure taken

By Michael Sands

With the conclusion of tax year 2023, you may wish to check if your HSA contributions for tax year 2023 exceeded allowed limits and make corrective distributions, if needed.

What Are HSAs?

To refresh, an HSA is a tax-advantaged savings account that allows you to pay medical expenses with tax-free dollars. The benefits of an HSA include:

You can claim a tax deduction for contributions you make to an HSA, up to the maximum annual contribution allowed.
HSA contributions made by your employer are excluded from taxable income.
Earnings in the HSA account grow tax-free.
Distributions from the HSA account for qualified medical expense are tax-free.
An HSA is “portable”; it stays with you if you change employers and contributions remain in your account until withdrawn.

What Expenses Do HSAs Cover?

Most deductible medical expenses will qualify as HSA medical expenses. Medical insurance premiums may not qualify, except:

Premiums for long-term care coverage
Health care continuation coverage (such as COBRA)
Health care coverage while receiving unemployment benefits
Medicare or other coverage if 65 or older (other than supplemental policies, such as Medigap).

HSA distributions may be taken to pay for medical costs of the HSA account owner, their spouse, or for dependents that have been claimed on tax returns. Medical expenses should not be deducted on Schedule A to the extent they are paid with tax-free distributions from HSA accounts.

To qualify to make HSA contributions, you must be covered under a high-deductible health (HDHP) plan for any months in which contributions are made. High-deductible health plans have higher annual deductibles that other health plans and must have a maximum limit for total annual deductible and out-of-pocket expenses for covered costs. Also, dependents who can be claimed by another person do not qualify to make HSA contributions.

Types of HSAs

There are two types of HSA accounts: self-only coverage and family coverage. Self-only coverage refers to an HSA account used by one eligible individual only and family coverage refers to an HSA account used by one eligible individual and at least one other individual (whether or not they qualify as an eligible individual).

Maximum Contribution Limits

Every year, IRS sets maximum limits for contributions that individuals may make to their HSA accounts. In 2023, for self-only coverage, the maximum contribution was $3,850. For family coverage, the maximum contribution was $7,750. If you had the same type of coverage throughout the year, you can make any contribution up to the maximum annual amount allowed. Persons who are 55 and older may make an additional $1,000 catch-up contribution for the year.

If your HSA coverage changed during the year, or if you did not have HDHP coverage the entire year, you may still make the maximum annual contribution allowed for the year under the “Last Month Rule”, as long as you had high-deductible health insurance as of the first day of the last month of the year. If you elect to make the full contribution under the “Last Month Rule”, you will be required to maintain HDHP coverage for a testing period of at least one year, or the deduction may be recaptured.

If you discontinued HDHP coverage during the year, or if you started Medicare coverage, your allowed HSA contributions may be limited to less than the maximum annual contribution. Please let us know if this happens so we can determine what the allowed HSA contribution and assist you with any needed withdrawal of excess contributions.

Excess HSA contributions can occur for a variety of reasons, including making regular contributions in an amount that is too high for the number of periods made, contributions by the employer that have not been accounted for, other contributions made by family, or administrative errors.

Excess HSA contributions are any HSA contributions made in excess of allowed annual limits. Excess contributions may be subject to a 6% excise tax if they are not withdrawn by the filing date for the tax year (generally April 15 of the following year, or October 15 if an extension has been filed). This 6% excise tax may be assessed for every year the excess contribution is not withdrawn.

Correcting for Overcontribution

There are two methods to correct excess HSA contributions. The first is taking a distribution to withdraw the excess contribution, including any earnings on the distribution, by the regular or extended due date for the tax year. Form 1099-SA will be issued showing the corrective distribution with a code “2”. The employer may issue a corrected W-2 to include excess contributions in wages; if not, the excess contribution should be included as other income when filing your tax returns.

The second method is to apply the excess HSA contribution as a contribution for the subsequent tax year. Only excess contributions may be applied, and any applied will count toward the annual limit for the subsequent year. If there are earnings on the excess contributions applied, this method may involve greater complexity than the first method and Form 5329 may need to be filed with your tax returns.

Either method will avoid the 6% excise tax if withdrawn by the regular or extended due date for the tax year. You may wish to consider filing a tax extension if you need additional time to make corrective distributions.

Please let us know if you think you made excess HSA contributions for tax year 2023 and we will provide any assistance needed.

408-252-1800

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One-Time Thing: IRA to HSA transfer

Did you know that you can transfer funds directly from your IRA to a Health Savings Account (HSA) without taxes or penalties? Under current law, you’re permitted to make one such “qualified HSA funding distribution” during your lifetime.

Typically, if you have an IRA and an HSA, it’s a good idea to contribute as much as possible to both to maximize their tax benefits. But if you’re hit with high medical expenses and have an insufficient balance in your HSA, transferring funds from your IRA may be a solution.

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Calling in the Cavalry

An HSA is a savings account that can be used to pay qualified medical expenses with pre-tax dollars. It’s generally available to individuals with eligible high-deductible health plans. For 2023, the annual limit on tax-deductible or pre-tax contributions to an HSA is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, the limits are $4,850 and $8,750, respectively. Those same limits apply to an IRA-to-HSA transfer, reduced by any contributions already made to the HSA during the year.

Here’s an example illustrating the potential benefits of a qualified HSA funding distribution from an IRA: Joe is 58 years old, with a self-only, high-deductible health plan. In 2023, he needs surgery for which he incurs $5,000 in out-of-pocket costs. Joe is strapped for cash, has made no contributions to his HSA in 2023 and has only $500 left in his HSA, but he does have a $50,000 balance in his traditional IRA. Joe may move up to $4,850 from his IRA to his HSA tax- and penalty-free.

Considering Other Factors

If you decide to transfer funds from your IRA to your HSA, keep in mind that the distribution must be made directly by the IRA trustee to the HSA trustee, and, again, the transfer counts toward your maximum annual HSA contribution for the year.

Also, funds transferred to the HSA in this case aren’t tax deductible. But, because the IRA distribution is excluded from your income, the effect is the same (at least for federal tax purposes).

Exploring the Opportunity

IRA-to-HSA transfers are literally a once-in-a-lifetime opportunity, but that doesn’t mean they’re the right move for everyone. If you’re interested, contact the office to explore whether taking this step makes sense in the context of your tax and financial circumstances.

(408) 252-1800

HSA IRA Retirement Savings

HSA Limits Increase for 2024

Contributions to a Health Savings Account (HSA) are used to pay the current or future medical expenses of the account owner, their spouse, and any qualified dependent and are adjusted annually for inflation. For 2024, the annual inflation-adjusted contribution limit for a Health Savings Account (HSA) increases to $$4,150 for individuals with self-only coverage (up $300 from 2023) and $8,300 for family coverage (up $550 from 2023). The additional catch-up contribution for individuals aged 55 or older before the end of the tax year remains at $1,000.

To take advantage of an HSA, individuals must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance, with the exception of insurance for accidents, disability, dental care, vision care, or long-term care. Medical expenses such as deductibles, copayments, and other amounts (excluding premiums) must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.

For the calendar year 2024, a qualifying HDHP must have a deductible of at least $1,600 for self-only coverage or $3,200 for family coverage (up $100 and $200, respectively, from 2023) and must limit annual out-of-pocket expenses of the beneficiary to $8,050 for self-only coverage and $16,100 for family coverage, an increase of $550 and $1,100, respectively, from 2023. As with contribution limits, deductibles and out-of-pocket expenses are adjusted for inflation annually.

Don’t hesitate to contact the office if you have questions about Health Savings Accounts.

San Jose: (408) 252-1800

Watsonville: (831) 726-8500

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