If your company offers a high-deductible health plan with a Health Savings Account (HSA), tax season can be a perfect opportunity to communicate with your employees about the three levels of tax advantages that these accounts offer to ensure that they are using them to their fullest.
- Contributions to an HSA are tax-deductible.
- Account earnings such as interest and dividends for amounts over $2,000 that are invested, are tax-exempt at the federal level.
- Withdrawals are tax-free as long as the funds are used for qualified medical expenses.
Furthermore, do your employees know…
- contributions are made on a pre-tax basis, effectively lowering their taxable income and the amount they owe Uncle Sam?
- the tax-free withdrawals for qualified medical expenses can be used this year or banked for use in later years, like retirement – extending the tax-free benefit?
- what a “qualified medical expense” is and the tax consequences for using an HSA for ineligible expenses? If employees use the money for non-medical expenses before age 65, they will have to pay a 20% penalty plus income taxes on those withdrawals. However, the penalty goes away after age 65, but retirees will still have to pay taxes if the withdrawals aren’t used for eligible medical expenses.
- that if they have not maxed out the 2014 allowed contribution for their personal situation (single or family coverage) that they have an option to make HSA contributions up until the April 15th tax filing deadline to reduce their tax bill or increase their tax refund.
- that unlike deductible IRA contributions, HSA do not have income limitations. Furthermore, unlike Health Care FSAs, they are not penalized by the “use it or lose it rule.”
Using tax time to help your employees understand and better utilize their benefits like an HSA can be a win-win for both the employer and employee. Too often employees make their year-long benefits decisions with a rushed frame of mind in order to meet the Open Enrollment deadline. Thereafter, they may also lose sight of some of the important characteristics of the HSA that could pay off for them now and in the future.
If you see the value in regularly communicating to your employees, we can help – starting with a whole array of Tax Time Talk topics that tie back to other benefits like retirement planning and increasingly popular, financial wellness. Contact us today if you’d like to chat.