A recent report from the Employee Benefit Research Institute (EBRI) said that people who have enrolled their savings account under the Health Savings Account (HSA) program, are missing out on some of the tax benefits afforded by the health care plan.
The institute strongly suggests for HSA holders to consult with a tax firm that can best explain to them, how to maximize the tax advantages afforded by an HSA. Below are some important tax benefits to consider when deciding to enroll under this savings scheme.
HSA Contributions Can Reduce the Amount of Tax Due on Salaries or Earnings
First off, contributions made to the special account during the year reduces the taxable income for that same year.
How so? Put simply, employees who pay HSA contributions to grow their HSA balance, are setting aside pre-tax money; or that portion of their salary that will not be included in the computation of tax that will be withheld from their salary.
This goes without saying that the higher the amount of contribution that will go to one’s HSA, the higher the reduction on taxable salaries or income. Still, there is a limit to how much pre-tax earnings can be set aside for an HSA during each year.
An Unused HSA Balance Can Be Carried Over and Accumulated Throughout the Years
The EBRI is of the notion that one of the reasons why many are not maximizing their HSA contribution is because they think HSA works in the same way as the Flexible Savings Account (FSA) plan . Although an FSA is also designed to help individuals meet future health care costs, contributions to this fund must be used during the year. Otherwise, whatever balance remaining in an FSA account will be forfeited by year end.
The key takeaway of an HSA is that unlike an FSA, unused contributions remain intact because its main purpose is to help individuals build a retirement fund. Although still bound by the condition that they must remain linked to a high-deductible health insurance plan, being one of the requirements for an HSA eligibility.
Keep in mind that non-medical use of an HSA fund, will be subjected to a 20% penalty. Nonetheless, the use of an HSA fund balance other than for medical expenses becomes allowable, when the account holder is aged 65 or older. This means HSA holders do not have to worry about penalties for non-medical use once they turn 65. .
An HSA can Be Invested for Further Growth
The most important advantage of saving under an HSA plan is that unused money that will be carried over as funds for future-year medical costs, can be invested and allowed to earn tax-free. That way, HSA holders have the opportunity to grow unused contributions to a comfortable retirement fund that will see them through during old age and/or retirement.
If by some misfortune an HSA holder dies and still has money left in his or her account, the HSA account is transferable to his or her surviving spouse. The HSA of the deceased will then become the HSA of the spouse and will continue to have the same tax-free benefits or advantages.
Regarding HSA transfers to beneficiaries, tax experts often give advice to HSA holders to name their legal spouse as beneficiary. Mainly because when a transfer is made to a beneficiary other than the legal spouse, the HSA becomes part of the taxable estate of the deceased HSA holder.