Looking for a way to provide your high income, high net worth clients with additional tax-advantaged investment vehicles? One of the most overlooked tools is the health savings account. For HSA participants there is no??? income limit, contributions are tax-deductible, earnings are tax-deferred and qualified withdrawals are tax-free. It doesn’t get better than that.
On Dec. 20, 2006, President Bush signed into law the Health Opportunity Patient Empowerment Act of 2006 (HOPE), part of the Tax Relief and Health Care Act of 2006, further enhancing tax-advantaged health care savings.
HSAs are experiencing spectacular growth rates. At the end of 2005, the America’s Health Insurance Plans survey found 3.2 million people had chosen HSAs–a seven-fold increase in utilization over the prior year. With assets topping $1 billion in savings balances (according to the Inside Consumer Directed Care Feb. 24, 2006 newsletter) this market is nothing to sneeze at.
Is an HSA right for your client? Generally, if the client does not have substantial ongoing medical expense outlays, and can not only contribute funds to the HSA, but also leave them untouched to accumulate, the HSA is likely to be a dynamic addition to the financial plan of the high net worth client.
To be eligible for an HSA, the individual has to meet certain criteria, chiefly that their only health insurance is in the form of a so-called high deductible health plan (HDHP). Don’t be distracted by the words “high deductible.” Annual deductibles can be as low as $1,100 for individual-only coverage, or $2,200 for a family. HDHPs also must cap the annual out-of-pocket maximum at $5,500 for self-coverage and $11,000 for family coverage. Preventives (including certain prescriptions) can be handled outside the deductible in some plans.
Contributions to an HSA can be made by the employer and excluded from income, by the account holder and deducted from income or by third person (e.g., a parent) and deducted from income by the account holder. This last option presents an attractive incremental wealth transfer gifting opportunity. There is not an earned income requirement, but contributions must cease when the individual enrolls in Medicare.
Other ways to get money into the HSA through 2011 is to do a rollover from an FSA or an HRA, which does not count against the annual contribution cap. Contributions can be made through a cafeteria plan and escape both income and employment tax. Additionally, a one-time HSA jumpstart rollover can be made from an IRA, up to the annual contribution cap.