HSA Strategies Offer Tax Savings and Opportunities to Invest in Alternative Assets
HSA/HDHP coverage rose to 10 million participants in 2010 and it’s anticipated healthcare reform will drive this number higher. Are your clients missing out on the HSA Triple Tax Advantage?
According to the just released annual census by America’s Health Insurance Plans (AHIP) of U.S. health insurance carriers the trend in increasing participation in consumer directed health care plans (CDHP) is continuing, rising to 10 million participants as of January 2010. The number of participants in healthcare savings plans/high-deductible health plans HSA/HDHP has grown by 2 million in each of the past two years the census has been conducted. With the passing of the new Healthcare Bill, the number is expected to increase significantly in the coming years as participants and business owners explore healthcare coverage options.
HSA/HDHPs are recognized as effective tools to lower health care premiums, provide participants with control over their plan and investment as well as offer tax savings.
Triple Tax Advantage
A Health Savings Account (HSA) encourages individuals to save for future health care expenses while enabling the consumer to benefit from lower premiums and the ability to manage and control their own health care choices. An HSA coupled with a high deductible health plan, adequately funded and self-directed can provide your clients with what is commonly referred to as the Triple Tax Advantage:
- Any earnings on the money in your HSA grow tax-free
- Funds contributed to an HSAs are pre-tax or tax-deductible
- Withdrawals for covered qualified medical expenses are tax-free
Opportunity for your clients:
As your clients approach their enrollment season for their health insurance plan and review their overall compensation package, recommend reviewing the potential tax savings by enrolling in an HDHP with an HSA vs. a more traditional plan option. An HDHP is generally a health plan that satisfies certain requirements for deductibles and out-of-pocket expenses. For self-only coverage for 2010, the qualifying HDHP must have (1) an annual deductible of at least $1,200 and (2) an annual limit on total out-of-pocket costs (this includes the deductible, co-payments, and other amounts, but not the premiums paid the participant) for covered benefits of no more than $5,950. For family coverage, the qualifying insurance must have (1) an annual deductible of at least $2,400 and (2) an annual cap on total out-of-pocket costs of no more than $11,900 (Rev. Proc. 2009-29). The HSA is set up once these qualifications have been met.
HSA owners can also use the HSA account similar to a flexible spending account for items beyond the medical expenses associated with the HDHP, including over-the-counter expenses and other medical/vision/dental costs as approved by the IRS. Note: the new healthcare reform bill proposes over the counter medications (except for insulin and medications that are prescribed by a physician) will no longer qualify as a medical expense for purposes of reimbursement and tax-free distributions. Unlike an FSA, the funds in the HSA do not follow the year end “use it or lose it” rule and may be rolled over from year to year.
Large-group Coverage Now the Fastest Growing
Two years ago small businesses with less than 50 employees was the fastest segment growing in enrollment but this past year, large-group coverage rose by 33 percent. The small-group coverage grew by 22 percent. The AHIP study also reported that 90 percent of enrollees in HSA/HDHP plans within this segment were in PPO plans. Benefits of PPO plans include both in-network and out-of-network benefits, with lower co-payments or coinsurance requirements for in-network services and enrollees may have access to negotiated discount arrangements with health care providers through these plans.
Opportunity for your small business clients:
Clients owning a business can reduce health care costs for both the business and employees while providing more affordable healthcare in their retirement years with an HSA. The HDHP with HSA option may be the answer for companies that have not been able to offer affordable health insurance to employees in the past and with the Healthcare Bill, may be required to do so. Contributions by the employer are not subject to payroll taxes.
More Ways Than One for Clients to Fund and Grow Their Accounts
Despite a growing number of Americans participating in HDHPs, only a small percentage are opening and adequately funding their HSAs. According to the Atlantic Information Services HSA Directory and Resource Guide, the average HSA deposit is just north of $1,300 dollars. This current level of funding isn’t enough to cover the minimum deductible of most plans.
Educating your clients on how an HSA works to their advantage. Share with your clients the importance of not only opening an HSA but of funding the account as close to the limits as possible to maximize their potential tax savings. While payroll deductions is the most popular, the IRS provides an opportunity for a one-time transfer.
One-time IRA transfer/rollover into HSA account allowed:
To help fund HSAs, the IRS Sec. 408 (d)(9) allows eligible individuals to make a one-time qualified HSA funding distribution from an IRA or Roth IRA to their HSA. Individuals can transfer up to the annual contribution amount without the funds incurring any distribution penalties or included as part of their gross income. Any transferred amount would be counted toward their annual contribution limit for that year relative to the HDHP coverage type (family or self only) and the individual’s age at the end of the contribution year. If an individual makes a one-time transfer to fund a self-only plan and later in the same year converts their HSA coverage to a family plan, they may make one additional transfer to fund as a second contribution. Note distributions from HSAs that are not used for qualified medical expenses are subject to a 10% additional tax. The new healthcare reform changes will increase the tax to 20% of those distributions effective for distributions made during the tax years starting in 2011.
This IRS ruling may be an ideal solution for those clients who have a traditional IRA and would like to transfer the funds into a tax-free environment (vs. tax-deferred earnings) and build their HSA. The IRS has two notices providing guidance on funding and contributions for HSAs:
- Notice 2008-51 provides guidance on HSA funding distribution from an IRA or ROTH IRA to the HSA
- Notice 2008-52 provides guidance on contributions being made to HSAs
HSAs provide clients with greater control of investment options:
While HSAs are funded to cover deductibles and healthcare expenses that are not covered within their plan, unused balances can continue to grow tax-free in the HSA account. The IRS allows any unused balances to be self-directed into alternative investments such as real estate, precious metals, oil and gas, promissory notes, livestock and more. Clients often select asset classes they have expertise or knowledge in to achieve higher returns than traditional stock market options.
New healthcare legislation will require financial advisors to explore additional tax and retirement planning strategies for their clients. Leveraging the tax benefits of an HSA will grow not only your client’s portfolios, but your business as well.
To access the complete AHIP study and additional resources on HSA and self-directing with alternative assets, CPAs, advisors and attorneys may join the online financial network and resource center at www.trustetc.com/pronetwork for more information on HSAs and self-directed investment options.
Disclaimer: Equity Trust is a passive custodian and does not provide tax, legal, or investment advice. It does not endorse or recommend any contributor, company, or specific investments. Any information communicated by Equity Trust Company is for educational purposes only and should not be construed as tax, legal, or investment advice. Whenever making an investment decision, please consult with your legal, tax, and accounting professionals.