facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search

Health Savings Account Planning

I was recently invited to speak at the National Tax Conference in Washington, DC. I took advantage of the opportunity to hear from some of the leading tax experts in the country on current tax planning strategies. There was a session on Health Savings Accounts (HSAs) by Kelley Long, CPA/PFS that provided some excellent advice on maximizing the wealth-building aspects of these accounts. You can read more from her on this topic in this Journal of Accountancy article.

We’ve written about HSAs before, calling them a hidden gem that more people should use to help put away money for retirement. These accounts are “triple tax-advantaged” as contributions are tax-deductible, earnings grow tax-free, and distributions are tax-free as long as they are used for qualified medical expenses. We have many clients who utilize HSAs, and I personally fund my own each year. As we head into the end of the year, I thought it would be helpful to provide a review of HSAs, along with some of the planning tips I picked up from Kelley’s presentation.

Eligibility - You need to be enrolled in a high-deductible healthcare plan (HDHP) to be eligible to make HSA contributions. For 2023, a high-deductible health plan is defined as one in which the annual deductible is not less than $1,500 for self-only coverage or $3,000 for family coverage.

Planning Tip: If you are already enrolled in Medicare, you can no longer contribute to an HSA. If you enroll in Medicare during the year, you might be eligible for a partial HSA contribution. You must be extremely careful contributing around your enrollment date, as Medicare also has a 6-month lookback period.

Contributions - The maximum contributions for 2023 are $3,850 for self-only coverage and $7,750 for family coverage. There is an additional $1,000 catch-up available for individual over 55. The deadline to contribute is the due date of your return, so you have until April 15th, 2024, to contribute for 2023.

Planning Tip: The $1,000 catch-up for those over 55 can apply to both spouses, but the second spouse would have to set up their own HSA to make the $1,000 catch-up contribution.

Investments - Many people set up an HSA and contribute each year, but instead of investing the funds, they just leave them in cash. If you really want to maximize the benefit of an HSA, you want to set it up with a provider who offers the ability to invest your funds.

Planning Tip: Many HSA providers out there offer an investment account within your HSA. Morningstar reviews the best HSA providers each year, and you can find that here. I have my account with Lively, which connects directly with Schwab, where the rest of my investment accounts are held. 

Expenses - Qualified medical expenses are those expenses that would generally qualify for the medical and dental expense deduction. These are explained in IRS Publication 502, starting on Page 5.

Planning Tip: Some HSA provider apps (including Lively) will even have a built-in scanner to identify the eligibility of products. Some commonly missed eligible expenses include:

  • Medicare and COBRA premiums
  • Over-the-counter products
  • Expenses of ANY tax dependent
  • LTC insurance premiums and actual LTC expenses

Reimbursement Timing - You can use the HSA to reimburse any qualified medical expenses incurred from the time the first dollar is contributed to the plan; there is no time limit. This means if you keep a good record of your qualified medical expenses, you can allow the HSA to grow over many years and then take tax-free distributions in the future.

Planning Tip: Keep ongoing records and receipts for every medical expense incurred over the years. Many different apps out there will help you scan and organize your receipts, but remember you are responsible for keeping these records for the IRS. Your HSA provider might even have one built into their app, as Lively does.

Contributions for Adult Children - If you have a child aged 19-26 who is carried on your HDHP but is no longer your tax dependent, they can open an HSA in their own name and fund the account up to the family limit, which is $7,750 for 2023. They can take a tax deduction for this contribution, even if the parents gift funds for the account.

Planning Tip: Sometimes referred to as a “Super HSA”, some families can contribute well over the family limit to HSA accounts in any given year. If you have a 24-year-old and a 26-year-old who are still on your HDHP and are not tax dependents, you could contribute up to $23,250 ($7,750 x 3) to HSAs for 2023.

End-of-Life Planning - HSA accounts pass outside of probate, so it’s important to make sure you have the appropriate beneficiaries listed on your account. If your spouse is the beneficiary, they can maintain the tax-free status, but if the beneficiary is a non-spouse, it becomes an immediate taxable distribution. Your heirs would have up to one year to reimburse any eligible expenses you incurred before you passed from the HSA.

Planning Tip: Due to the immediate taxable event for non-spouse beneficiaries, an HSA might be a good option to fulfill charitable bequests after your death. 

As you can see, there are a LOT of complicating factors to consider when it comes to Health Savings Accounts and this article only scratches the surface! If you have an HSA and have questions or would like to learn more about them, feel free to schedule a time to discuss with me.

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.