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November 07, 2006
Year-End Health Savings Account Tax Strategies
2007 is just around the corner, and there are several issues to consider if you currently have a Health Savings Account (HSA), or are planning on getting one in the near future.
100% of the deposit you place in your HSA is deductible on your federal income taxes. All but four states also make HSA contributions tax-deductible on state income taxes. If you are looking to reduce your 2006 tax burden and put away more money for retirement, your HSA is the first place you should put your money if you have not yet maximized your contribution.
The maximum you can contribute to your Health Savings Account in 2006 is the lesser amount of your deductible, or $2,700 for singles and $5,450 for families. Individuals who are 55 or older may contribute an additional $700. Note that contribution limits are pro-rated, based on the number of complete months during the year in which you have a qualifying HSA health insurance plan.
You have until April 15 (or later if you file for an extension. Update 8/20/2007: this information is incorrect. You cannot extend the deadline for your HSA contribution by filing an extension.) to make your 2006 contribution. If you do not fully fund your account for the current year, you cannot make a catch-up contribution for 2006 after this deadline. However, you can reimburse yourself in later years for qualified expenses incurred in 2006, even if you do not have the funds in your account to reimburse yourself at this time.
In 2007, the maximum annual HSA contribution will go up to $2,850 for individuals and $5,650 for families. Individuals 55 or older will be allowed to contribute an additional $800.
To maximize your tax benefit for 2007, it is important to have your HSA-qualified health coverage in place no later than January 1.
In order to pay for a medical expense from your HSA, it must be a qualified expense. Some of these qualified expenses include dental expenses, eyeglasses, chiropractic visits, over-the-counter medications, and sometimes even nutritional supplements.
Now is a good time to make sure you have an accurate record of your medical expenses for the year. Make sure you separate the expenses for which you have reimbursed yourself from your HSA from those that you paid for out-of-pocket. You'll want to keep receipts for all medical expenditures paid from your HSA with your 2006 tax records. Place the "non-reimbursed medical expenses" in a separate file, keeping them with the concurrent year's tax records in whatever year you decide to reimburse yourself.
The penalty for over-funding your HSA is a whopping 6%. You have until April 15, 2007 to withdraw excess funds for the 2006 tax year to avoid the penalty. Your HSA administrator may notify you of any over-funding, but they are under no obligation to do so. It is your responsibility, so make sure you check into this if you think your may have over-funded you account.
The minimum deductible for HSA-compatible health insurance plans in 2006 was $1,050 for individuals and $2,100 for families. In 2007 this will increase to $1,100 for individuals and $2,200 for families. If you currently have an HSA-qualified plan with the lowest eligible 2006 deductible, that deductible will automatically go up on January 1 to the new minimum.
Strategies to Maximize Your Tax Benefits
There are basically three different strategies you can take when deciding how to fund your health savings account.
1. Put no money in the account, except when you incur a medical expense. This strategy allows you to legally "launder" any money used to pay medical expenses. In other words, by depositing money into your HSA, then immediately withdrawing it to reimburse yourself for medical expenses, you are making your medical expenses all tax-deductible. You may want to use this strategy if you are on a tight budget and want to keep your cash outlay as low as possible.
2. Fully fund the account, or at least put in as much as possible based on your budget. Take money out of the account any time medical expenses are incurred, and let the rest grow tax-deferred. This strategy will maximize your tax deduction, while making your HSA funds available to pay any non-covered medical expenses before your deductible is met.
3. Fully fund the account, but pay all medical expenses from a non-HSA account. Reimburse yourself for medical expenses at a later date. This strategy will allow you to maximize your tax deduction, and will also allow you to maximize the tax-deferred growth of your HSA. You can then reimburse yourself, tax-free, at any time in the future for medical expenses incurred over the ensuing years.
To maximize the potential growth of your funds, you may want to make your 2007 deposits as early in the year as possible. Any growth in your account is tax-deferred, like an IRA. If possible, you should plan to make your deposit the first week in January.
Posted by Wiley Long at November 7, 2006 09:18 AM
Comments
Just got out of a benefits meeting where the HR person said 2007 HSA contributions must be made by 12/31/07. Has the deadline changed for 2007 contributions? I thought you had until the filing date (e.g. April 15). Thanks.
Posted by: John Dutemple at November 7, 2006 06:21 PM
Hi John,
The HR person was mistaken. The deadline for regular and catch-up HSA contributions is your federal income tax return due date, excluding extensions, for that taxable year. The due date for most taxpayers is April 15.
Posted by: Wiley Long at November 9, 2006 12:43 PM
My wife has insurance with the company she works for. "No HSA"
My daughter has insurance with Cobra, that I pay.
I the spouse/father have an HSA account included with my insurance at the company I work for.
Can I pay medical expenses my wife incurrs with the HSA account?
Can I pay the insurance premium to Cobra with the HSA account?
Posted by: Ted Lumpkin at November 10, 2006 02:56 PM
Hi Ted,
Yes, you can pay for medical expenses incured by your wife, from your HSA. If your daughter is a legal dependent, then as I understand things, yes you can also use the funds to pay her Cobra premiums.
Cheers,
Wiley Long
Posted by: Wiley Long at November 11, 2006 10:33 AM
Hi
I am wondering if there is any advantage to having SEPARATE HSA's for me and my wife. She has an HSA option thru work,and they contribute, and I am thinking of setting one up at the small company I own. Both could get contributions from the employer...no?
Bob
Posted by: Bob at November 27, 2006 08:27 AM
Hi Bob,
Yes, you are correct that having separate HSAs would enable both employers to contribute to the HSA. In 2007 the individual contribution limits will be $2850, as compared to $5650 for a family. If you have separate HSAs and are over age 55, you can also make a catch-up contribution of up to $800, split between the two of you however you choose.
Wiley Long
Posted by: Wiley Long at November 29, 2006 02:57 PM
Hi Wiley,
We are looking to set up HSA's for my boss' children. I presume that you cannot set up the HSA in early 2007 and contribute before 4/17/07 and take the deduction for 2006?
Thanks
Posted by: Will Johnson at April 10, 2007 05:43 PM
Yes Will, you are correct. If the HSA was not started until 2007, you can only take the deduction in 2007. However, you cannot set up an HSA for children.
Posted by: Wiley Long at April 11, 2007 12:09 PM
Single individual, started high deductible Health Insurance on 8/1/06. Did not open a savings account. Filed for extension on 2006 Taxes. Accountant said I could open HSA now and fund with $1125 for 2006 and $2850 for 2007. The HSA administrator I am considering opening an account with said I can no longer fund for 2006. Who is correct?
Posted by: Patty at July 30, 2007 10:47 AM
As we understand it, your accountant is correct. You must make the contribution by the deadline date regardless of your own personal extension.
Posted by: Wiley Long at August 8, 2007 06:48 PM
RE: Patty's July 30, 2007 Post
Wiley's Aug 8, 2007 reply
Wiley...
Now I'm even more confused. Did you mean to say that my accountant was NOT correct? And, if I can NOT make a contribution for 2006 what exactly does the following sentence mean?
"You have until April 15 (or later if you file for an extension) to make your 2006 contribution." (This is the first sentence in the fourth paragragh of your Nov 7, 2006 blog). Why does it say "or later if you file for an extension"?
Thanks for your help in clarifying this for me.
Patty
Posted by: Patty at August 13, 2007 08:41 PM
Hi Patty,
Sorry for further confusing things. Yes, I meant to say that your accountant is NOT correct. There has been conflicting information put out on this, including by some of the largest insurance companies. HSA contribution rules are relatively similar to IRA rules whereby contributions for the prior tax year must be paid in prior to April 15th of the subsequent year. In other words, the contribution must have been made prior to April 15, 2006 in order to be deductible for 2005.
The November 7 blog was incorrect and an update has been posted. Thank you for alerting us to this error.
Posted by: Wiley Long at August 20, 2007 01:03 PM
Hi Al,
I'm afraid you cannot be covered under your plan in addition to his HSA-qualified plan without invalidating the HSA. Thus, his plan will have to cover him only, and he will be limited to the $2850 contribution.
Posted by: Wiley Long at November 19, 2007 03:03 PM
Hi,
I had an HSA and HDHP in 2007 at work, but I changed jobs in the middle of the year. My new employer does not offer an HSA, so for the last 4 months of 2007 I had traditional health insurance.
Am I eligible to add money to the HSA account, now that I am not covered by the HDHP? I know that the yearly limit is reduced because I was only covered by the HDHP for nine months of the year. Can I make a contribution before 4/15/2008 for 2007?
Sam
Posted by: Sam at March 11, 2008 03:00 PM
Hi Sam,
I'm afraid you must have an HSA-qualified Health Plan (or HDHP) in place in order to make contribution to your HSA.
One option you may want to consider would be to opt out of your employers insurance coverage and see if they will give you additional money to do so. Some companies will give you the option of insurance or additional money. Then you could use that money to purchase your own HDHP and you could continue to make contributions to your HSA.
Thanks,
Wiley
Posted by: Wiley Long at March 12, 2008 01:01 PM
Based on the IRS website, it states that you may not take an HSA distribution for expenses that occur prior to establishing the HSA, but our benefits person is saying that you can. We are being told that we can start our HDHP on May 1st, but wait to set up the HSA until later in the year or anytime before 4/15/2009.
If we start the HDHP on 5/1/2008, establish and start funding our HSA on 10/1/2008. Can we take distributions to pay for expenses occured between 5/1/2008 and 10/1/2008?
Here is the IRS link. http://www.irs.gov/publications/p969/ar02.html#d0e988
Posted by: James at April 24, 2008 02:17 PM
Hi James
You can only take distributions to reimburse yourself for expenses that were paid for after your HSA account is open. So, as long as you have not paid the provider of services until after your HSA account is open, then you can take distributions for expenses incurred before the account was open.
Maybe your benefits person was thinking about how long you can wait to "fund" you HSA.
Posted by: Wiley Long at April 29, 2008 11:05 AM
I have a high deductible plan associated with my HSA. My high deductible plan leaves me facing full market rates with providers even though my insurance company has negotiated considerably lower rates for the claims they pay. This seems unfair. I'm chewing up my HSA paying thru the nose for my healthcare. How do I get the same rates my insurance company pays? Any advice on this situation?
Posted by: JFRock at May 19, 2008 04:53 PM
Hi Jimmy,
You need to always submit a claim to your insurance company even though you have not yet met your deductible. You insurance company will then send you the bill and you will get the negotiated rate.
Posted by: Wiley Long at May 20, 2008 10:23 AM
I made my 2007 contribution on 4/14/08, shortly before filing my 2007 return. I transferred the money electronically from my bank acct to my hsa acct. I have just received a 5498 showing no contributions for 2007. The bank holding my hsa automatically assigned my contribution to 2008 and is refusing to reassign it to 2007.
Is there any legal basis for their refusal? If I can't get this corrected, I will have to refile my tax return at considerable cost.
Based on this experience, it seems clear that electronic funds transfers are not advisable for funding an HSA, as they don't provide for a notation as to the year. However, I have never heard anyone say this.
Posted by: Gayle at June 10, 2008 11:29 AM
Hi Gayle,
I'm afraid my only advice in your case would be to seek professional tax advice.
Posted by: Wiley Long at June 15, 2008 05:53 PM