Implementation of the Affordable Care Act provisions is in full swing, and the use of high deductible health plans (HDHPs) is on the rise—a trend that will only continue as the so-called “Cadillac tax” on expensive employer-sponsored health insurance comes into play.
As the workforce ages, however, more clients who are approaching retirement age may see their health coverage change to include HDHPs. While some might view this change as a negative development, in reality, this evolving system can open the door to powerful planning strategies—and combining HDHPs with health savings accounts (HSAs) can allow clients to take advantage of a tax advantaged savings technique to maximize the value of those high deductible plans.
Special considerations apply in coordinating Medicare and Social Security benefits with an HDHP/HSA strategy, however, so it’s important that advisors look at the planning puzzle from all angles when pitching the plan to clients who are close to retirement age.
The HDHP/HSA Strategy
HSAs were created as a supplement to HDHPs and, as HDHPs become more prevalent, clients should be made aware of the importance of taking advantage of an HSA to control out-of-pocket health expenses. HSAs can be funded by the employer or the employee, or by both—but the client must also be covered by an HDHP in order to qualify to fund an HSA.
For 2015, an HDHP is a plan with an annual deductible of not less than $1,300 for self-only coverage or $2,600 for family coverage. Annual out-of-pocket expenses in an HDHP cannot exceed $6,450 for self-only coverage in 2015 ($12,900 for family coverage).
To offset the cost of an HDHP, an individual (or his employer) is permitted to contribute $3,350 in pre-tax dollars to an HSA in 2015. For family coverage, the limit is increased to $6,650. The funds are contributed pre-tax, and they can also be withdrawn tax-free if used to pay for qualified medical expenses (which covers a wide range of expenses, from aspirin to premium costs). However, once a client reaches age 65, he or she can withdraw HSA funds for any reason without penalty, though those funds will be taxed at the client’s ordinary income tax rate.
Much like a retirement account, earnings on the account value also grow tax-free. Importantly, the funds in an HSA do not expire from year to year, so your client can build up a substantial account balance over the years to help cover the cost of health coverage—or supplement retirement income if the client is lucky enough to escape large medical bills.
HDHP Considerations for Older Clients
Once a client enrolls in Medicare Part A, it is important to note that he or she is no longer eligible to contribute to an HSA. Despite this, the funds that have already been contributed to the HSA can remain in the account and can be withdrawn tax-free.
What many clients don’t know, however, is that when a client begins collecting Social Security benefits, he or she must automatically sign up for Medicare Part A, and thus must cease making HSA contributions. If the client wishes to continue working after age 65, however, he or she can defer Social Security benefits and thus defer Medicare Part A enrollment in order to continue contributing to an HSA.
Another consideration involves the Social Security Administration provision of six months’ worth of back pay on the client’s benefits, which can cause the client to be subject to penalty taxes on his or her HSA contributions unless those contributions end six months prior to Medicare enrollment.
If the client’s spouse has contributed to an HSA and enrolls in Medicare Part A, the client can open his or her own HSA and continue to contribute as long as he or she remains covered by an HDHP.
A combined HDHP/HSA strategy can prove valuable for clients of all ages, but when it comes to implementing the strategy for an older client, special considerations must be accounted for in order to take full advantage of the strategy.
Originally published on Tax Facts Online,thepremier resource providing practical, actionable, and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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