Tax Plan Carefully with HSA Recommendations
Health Savings Accounts (HSAs) have gained popularity among employees due to their triple tax advantages: pretax contributions, untaxed investment earnings, and penalty-free withdrawals for qualified medical expenses. However, tax professionals must be aware of the potential pitfalls and restrictions when incorporating HSAs into their clients' tax planning strategies.
Eligibility for HSAs is limited to individuals enrolled in qualifying high-deductible health insurance plans. Clients should carefully evaluate their medical needs and potential out-of-pocket costs before opting for an HSA. For those with chronic medical conditions or who anticipate high healthcare expenses, an HSA may not be the most suitable option. The high deductible plans needed for HSA participation will likely fall short of those clients’ coverage needs.
While HSAs offer numerous benefits, such as portability between employers and the ability to use funds for non-medical expenses after age 65 (subject to income tax), they also come with contribution limits and potential fees. We can help educate our clients on the annual contribution limits set by the IRS and help them optimize their contributions based on their financial situation and healthcare needs. Limits to HSA contributions generally are less than traditional retirement vehicles such as IRAs and may only wanted to be considered when other options are already being maximized.
When advising clients to consider an HSA for tax planning, be aware of the "captive consumer model" associated with some HSAs, as highlighted by the Consumer Financial Protection Bureau. Low interest rates on cash balances and various fees, such as monthly maintenance, account closing, and printed statement fees, can erode the tax benefits of HSAs. As advisors, we can guide our clients in selecting HSA providers that offer competitive interest rates and minimal fees.
Another area where tax professionals can add value is by encouraging clients to take full advantage of the investment opportunities within their HSAs. This is an area that can provide more impact from a tax planning perspective. Many account holders treat HSAs as specialized checking accounts rather than investment vehicles. By educating clients on the long-term benefits of investing HSA funds, we can help them build a more robust healthcare nest egg for retirement in addition to other traditional accounts.
To optimize the investment potential of HSAs clients should maintain a cash balance sufficient to cover one year of maximum out-of-pocket expenses and invest the remaining funds. Collaborating with financial advisors can help clients select investments that align with their risk tolerance and long-term financial goals can add value to the HSA planning as well.
While HSAs offer significant tax benefits, we must navigate the eligibility requirements, contribution limits, fees, and investment options to help clients make informed decisions. By providing comprehensive guidance and collaborating with financial advisors, we have the opportunity to add value to clients who may otherwise be falling into some of the HSA pitfalls.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
Subscribe to the TPN Newsletter!
Like what you're reading?
Subscribe to our FREE newsletter and we'll deliver content like this directly to your inbox.