- More employers are moving to high-deductible health plans (HDHPs).
- For clients with HDHPs, a health savings account can be an effective way to pay for medical expenses.
- There’s a 20% IRS penalty for using HSA distributions incorrectly.
With the proliferation of high-deductible health plans, health savings accounts (HSAs) present a tax-friendly way to pay for qualified medical expenses.
To which your clients might ask … what does the IRS consider a “qualified medical expense?” The fun answer would be: “Dogs, jewelry, and needles.” When you’re met with silence and a blank stare, you can offer some clarification.
Expenses related to service dogs, medical alert/ID bracelets, and acupuncture are among dozens of allowable HSA expenditures. IRS Publication 502 defines what is considered a “qualified medical expense.” Highlights from the 27-page publication include:
- Artificial limbs and artificial teeth.
- Birth control pills.
- Chiropractic treatments.
- Drug addiction treatment.
- Fertility enhancement.
- Home improvements such as ramps or doorways to accommodate a wheelchair.
- Medical conferences directly related to a chronic illness.
- Stop-smoking programs (but not nicotine patches or gum).
- Tutoring or tuition costs for children with medical-related learning disabilities.
For clients 65 or older, be sure to point out that Medicare premiums are also on that list. Though clients can’t contribute to an HSA while enrolled in Medicare, they can still enjoy tax-free distributions when meeting IRS requirements.
Other key points to share:
- Premiums for Medicare supplemental policies such as Medigap are not considered as a qualified medical expense.
- HSAs enjoy a rare triple-tax advantage. They reduce taxable income; any investment growth is tax-free while funds remain in the account; and distributions aren’t taxed if taken correctly.
- Unlike traditional retirement accounts such as a 401(k) or IRA, HSAs aren’t subject to required minimum distributions (RMDs) at age 70½.
- The favorable tax treatment doesn’t carry over to non-spouse beneficiaries. In those cases, the HSA assets are treated as taxable income.
- There’s no penalty for taking HSA distributions for non-medical expenses after age 65. Those distributions are treated as ordinary income.
Things to Consider:
- Clients in a high-deductible health plan can open an HSA if one is not offered by their employer.
- IRS Publication 502 lists qualified medical expenses that can be paid with HSA funds.
- If clients are in a position to maximize their 401(k) and/or IRA contributions, an HSA is another long-term investment option.
Neither Transamerica nor its agents or representatives may provide tax or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors regarding their particular situation and the concepts presented herein.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, legal or financial advice or guidance. Please consult your personal independent advisors for answers to your specific questions.