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What You'll Learn In Today's Episode
  • Health savings accounts (HSAs) allow employees to save funds tax-free for medical use. However, the catch is that they can only be spent on health care. Any other expenditures incur a penalty.
  • The penalty for HSA money used outside a medical capacity is 20%. That comes on top of any taxes someone already owes. It gets based on their AGI.
  • The rules change slightly when someone turns 65: From then on, the penalty no longer applies. At the same time, that year’s income tax still gets applied to all non-medical expenditures.
  • Eligibility and contribution limits are not the same thing. Remember, that joint HSA accounts do not exist, either. An individual can cover their spouse and family. Likewise, both spouses can jointly cover their family with their individual accounts. Regardless, an HSA only has one beneficiary.
  • Planning the finances of people in their 20’s, 30’s, and 40’s requires a different set of goals from those for someone at peak income. You have to balance the numbers with the reasoning behind them.
  • Some advisors fail to keep flexible with regard to younger clients’ goals. Instead, focus on finding out what’s important to clients at their current stage of life. Ask, for instance, what someone would regret having missed out on if their life suddenly ended.
  • One size doesn’t always fit all, so avoid cookie-cutter approaches. For example, if they’re going to want to start a business in 5 years, this has to be factored in. Go beyond headline tax planning.
  • Younger clients may not be as eager to hear about end-of-life planning. Regardless, it’s never too early to discuss it. You can help them prepare for retirement without dictating what they choose.

Executive Summary:

Welcome back to the Retirement Tax Services Podcast! Steven’s focus today is health savings accounts (HSAs). As a matter of fact, the topic has come up recently among advisors he works with. Money goes into an HSA pre-taxes. Note that as long as expenditures are for medical expenses, the balance is never taxed.

HSAs: Forget AGI Phase-outs

There are no income limitations for HSAs. In other words, if someone’s AGI reaches a certain level, the amount that they can contribute doesn’t get limited.

However, if someone younger than 65 uses HSA funds for non-medical expenses, there is a penalty. In fact, 20% will be added on top of any taxes already owed. That gets based on their AGI.

Even after age 65, that year’s income tax gets applied to all non-medical expenditures. But, the penalty no longer applies.

The good news is that the solution is simple: As long as spending is limited to medical uses, HSA funds never get penalized or taxed.

Use discretion on how much a health savings account is funded over a lifetime. That is to say, remember the limitations on how that money can be spent.

Health care costs may not lower anytime soon. Consequently, HSAs can be lifesavers. At the same time, the IRS does not allow those funds to be spent tax-free on anything else.

A health care savings account can be funded by an employer or an employee. Regardless, once a contribution hits, it belongs solely to the account holder.

If a client leaves the company eventually, their HSA remains their property. Meanwhile, a flexible spending account or health reimbursement arrangement doesn’t. Those stay behind.

Note that HSA funds can also be invested. Consequently, some administrators will have a minimum balance required beforehand. That requirement can run as low as $1,000.

As a result, a typical account holder doesn’t miss any growth potential for their funds. This provides a potential advantage.

Eligibility vs. Contribution Limits

Eligibility sometimes gets lumped together with contribution limits. But even so, these are completely different from one another.

Before we discuss qualifications, remember: Joint HSA accounts do not exist. No one can have a joint one, even if they are married.

An individual can cover their spouse and family. Likewise, both spouses can jointly cover the family with their individual accounts. Nonetheless, the HSA is always in one person’s name.

There are 3 things necessary for someone to qualify for an HSA:

1) A qualified high deductible health plan (HDHP). Make this clear to clients. The acronym “HDHP” sometimes shows up under benefits elections when choosing coverage at a new job.

2) No disqualifying accounts. In other words, no additional coverage. If a spouse has the client listed for health coverage, this would have to be changed first.

3) No 3rdparty tax returns claiming them as a dependent. Hopefully, this is self-explanatory. At the same time, if a client is in their 20’s or younger, verify it.

Remember the distinction between eligibility and contribution limits. Don’t get confused, should clients happen to.

For self coverage, the 2021 contribution limit is $3,600 per year. This includes deposits from both the employer and the employee.

Your Action Items

  • Include HSAs in annual beneficiary reviews. Remember that they are individual accounts. Consequently, make sure that the beneficiary is designated.

  • Review clients’ tax returns annually. HSA contributions are reported on Line 12 of Schedule 1 for 2020. Contribution eligibility details will be on Form 8889.

  • Follow us on Facebook and LinkedIn. We’ve got content to help you start well and continuously improve your tax strategies.

Steven has much on HSAs in today’s Retirement Tax Services Podcast. Tax-related questions are always welcome at

Thank you for listening.


Steven Jarvis:

Hello everyone and welcome to the next episode of the retirement tax services podcast, financial professionals edition. I am your host, Steven Jarvis CPA, and in this show, I teach financial advisors how to deliver massive value to their clients through tax planning. On today’s episode, I want to talk about health savings accounts or HSAs. This has come up a few times recently with advisors I work with. So I thought it’d be great to do an episode, get into the details a little bit of this particular tax advantage account. Now we love all of the different tax advantage accounts that are out there, but one of the really cool things about HSAs is that not only do we get to put money in on a pretax basis, but if we use those funds for medical expenses, we never end up paying taxes on the balance. So there’s a lot of really cool things about HSAs where we go through some of the details of what we’re looking at, as we work with clients on these. Right out of the gate, one of the things that’s really cool about HSA is compared to other tax advantaged accounts is that there’s no income limitation.

There’s no phase out when your AGI gets to a certain level, regardless of your income, if you’re otherwise eligible, and we’ll get into that in a second, you’re not going to be limited on the amount you can contribute because of the amount of money that you make. So I mentioned that as long as we use it for medical expenses, that we never end up paying taxes on this balance. So that of course immediately prompts the question of, well, what happens if we don’t use it for medical expenses? And this is where one of the drawbacks HSAs can come in is that if before the age of 65, if we use our HSA funds for non-medical expenses, there’s a 20% penalty on top of whatever income tax we would owe in that year, on that amount, based on our marginal ordinary income tax rate, regardless of age, even after you get to age 65, we’re still going to pay income tax on the funds that we used them for nonmedical expenses.

But as long as you’re using them for medical expenses, this is money that will never be taxed. So of course, we want to use some discretion on how much we fund these over our lifetime, because there’s limitations on how we can use them. But you don’t see any headlines about how medical costs are going down in this country. So this can be rather advantageous for a lot of individuals. So HSA accounts can be funded either by an employee or, or the employee themselves, but once it hits your account, once it’s your HSA, it’s your money. Even if the employer contributed some of it, it’s your funds. Even if you, that company, the money is still yours, which is in contrast to a flexible spending account or a health reimbursement arrangement, some other health-related tax advantage accounts. So an HSA is your money, which is one of the advantages of doing that. And you can also invest the funds in your HSA when you are accumulating and not using those funds. Some administrators will have a minimum balance. You have to have to be able to invest the funds, but this can be as low as a thousand dollars. And so that’s another advantage potentially of having your funds in an HSA. You’re not necessarily missing out on growth potential for those funds.

Eligibility For HSAs [3:35]

Okay. Let’s talk about eligibility. And a lot of times eligibility and contribution limits get lumped together. And this causes confusion because they are two completely different determinations. So we’ve got to start with eligibility and then we’ll talk about the contribution limits. So there are three criteria for an individual to be eligible for an HSA. It’s really important that we specify for an individual to be eligible because HSAs are always individual accounts. Again, we’ll talk separately about the contribution limits for self coverage versus family coverage, but you cannot have a joint HSA account, even if you are married.

So it’s possible that you can have a single HSA account in one of the spouse’s names and you’re getting family coverage and contributing and using those funds for the whole family. Or you can have spouses that each have their own self coverage and have their own separate HSA accounts, but you will not have joint HSA accounts. Okay. So three criteria for individual eligibility: first criteria is that you have to be covered under a qualified HSA high deductible health plan, which is abbreviated HDHP. When you’re making your benefits elections, as you start a new job, you might see that in the different coverage options of that HDHP, that typically indicates a HSA eligible plan. But we want to make sure that we’re really clear on whether the plan we’re selecting is HSA eligible because the IRS sets the requirements for what meets the definition of an HDHP or high deductible health plan and there’s requirements around the amount of the deductible, the out of pocket maximum, and also the types of services covered, whether you’ve met your deductible or not.

So we don’t want to just look at, “Hey, does this plan meet that deductible limit?” We really want to make sure we’re talking to the benefits administrator and knowing for sure that the coverage that we’re selecting is HSA eligible if that’s what we’re after, that’s our goal. So the first criteria is are you covered under a qualified HSA high deductible health plan? The next is that you do not have disqualifying coverage, which would be that you have additional coverage, for example, under a spouse’s plan. So if you as an individual, have self coverage, that’s a high deductible HSA eligible plan, but your spouse has family coverage that also covers you. Then you would be disqualified from being able to fund an HSA. And then the last criteria is that you cannot be claimed as a dependent on another person’s tax return. So for individuals, obviously the eligibility is determined on the individual For married couples, this eligibility determination is done on each spouse.

Contributions To An HSA [6:12]

Once we’ve determined that one or both of the spouses are eligible, then we can move on. Okay. Now how much can we contribute? Like I said, and I’m going to continue to reinforce eligibility and contribution limits are separate determinations. So for self coverage, so if you were an eligible individual and you only have self coverage, the contribution limit for 2021 is $3,600 for the year. And all of these contribution limits are for both employee or employee contributions combined. So if you have an employee or that contributes $2,000 to HSA every year, then as an individual, if you only have self coverage, you would only be able to contribute that other $1,600 to get that a total of 3,600, the employer does not get their own contribution limits separate from the employee. So for self coverage, $3,600 for 2021, for family coverage, it’s $7,200. And if you are over the age of 55, there’s a thousand dollars catch-up that gets added to those limits. So this distinction between eligibility and contributions is really important. And we’re going to reinforce why in just a minute, as we talk about, as your clients get close to Medicare age.

So family coverage that $7,200 contribution limit for the year that isn’t determined on whether both spouses are eligible, you can have one spouse that’s eligible under those three criteria. And as long as the coverage they have is for family, whether that covers a spouse or dependent children, if it’s family coverage, then the contribution limit is the $7,200. With both spouses they’re eligible. You can either have each spouse create their own HSA account and contribute the $3,600 covered by the self coverage. Or you can have family coverage. And up to the 70 to 200, the IRS is not going to allow you to try to get clever and have each spouse get family coverage, and then try to contribute over $14,000.

That’s not going to work, but we just need to remember that the eligibility and contribution limits are separate determinations. If both spouses are over the age of 55, that catch-up is tied back to whose account it is. So if only one of the spouses is eligible, even if they have family coverage and can contribute the $7,200, if both spouses are over the age of 55, they’re only getting $1,000 of catch-up. Now, if there are two spouses who are both eligible, who both have individual coverage, that self coverage, and they have their own individual agents say accounts, they can both use that catch-up but they would have to have their own separate accounts. If I have an HSA account in my name, I can’t make a catch-up contribution for my wife, is how that works.

Okay. We’ve hit it a couple of times, but the, so the HSA is our individual accounts. You can not have joint HSA accounts. You can designate a beneficiary. So of course I am married situations. This could potentially be your spouse or a child. You can still designate a beneficiary, but they will not be joint accounts. So on that topic, you want to make sure that a beneficiary has been designated. We don’t want accounts out there with no beneficiaries. And we want to make sure that this is included in your annual review of your client’s beneficiaries for all of their accounts. Now, if you listen to The Perfect RIA podcast, which retirement tax services is all in conjunction, in collaboration with The Perfect RIA, you’ve heard them talk about beneficiary reports, being a value add you can do for your clients each year. And if you’re a member of the Invictus program through the perfect RIA, you’re getting access to the tool that Matt and Micah are using to do that beneficiary value add, which is really cool.

But whether you have access to that tool yet or not, make sure that if your clients have HSA accounts, those are included in that annual review of beneficiaries for your clients to make sure that’s the same up-to-date and in line with their wishes.

How Does It Work For Married Clients Approaching Medicare Age? [10:08]

Okay. I mentioned it a little bit earlier, but for clients reaching retirement age, reaching that Medicare age, there can be some confusion around how Medicare kind of interacts with HSA plans and how that situation works. Especially if spouses have reached Medicare age at different times. So let’s start with an individual. If you’re an individual who has a high deductible health plan has been HSA eligible and then becomes eligible for Medicare. And when we start receiving Medicare benefits, Medicare itself is not HSA eligible. So once you are on Medicare, you are no longer eligible to contribute to an HSA account. Now, the year that you transitioned between an HSA eligible account and not having an HSA account, there’s some rules about how that transition works and what your eligibility is in that particular year.

So that’s something to make sure you look into in the year that happens, but where this gets a bit more complicated is if you have one spouse who reaches Medicare age and the other spouse has not. So you still have a spouse who is potentially covered by an HSA eligible plan. And while some of the FAQ’s out there, especially put out by the IRS can sound a little confusing because they don’t really give a clear example as to how this works at the end of the day, this goes right back to the criteria and contribution limits we talked about before they don’t change the rules just because Medicare’s involved. So what this means is that as long as you have an eligible individual, that means one of the spouses is still covered by an HSA high deductible health plan. And if they were to have family coverage, they would still be able to contribute up to the $7,200 with the thousand dollars catch-up even though their spouse is covered by Medicare. Because being covered by Medicare is an eligibility issue, not a contribution limit issue. So most certainly can have a situation where one of the spouses is covered by Medicare. The other spouse is still eligible and has family coverage, and potentially is contributing up to that $8,200 because they’re over the age of 55. So that’s really beyond the HSA 1 0 1 that really gives you the framework for evaluating whether this is something that clients should consider. Um, and certainly they’re eligible whether they should be funding an HSA account. This is certainly an evaluation that has to be done on an individual basis, whether this is the right choice, especially if you are making a health insurance coverage determination, because typically the high deductible plans they’re eligible traits, HSAs will have lower premiums. That’s part of the, kind of the trade-off of your, your deductible and your out of pocket maximums might be higher, but you’re eligible for an HSA.

So depending on the family or individual medical situation, and kind of just some of the preferences and expectations around how health insurance is used, you wanna make sure that those are all being considered, as you decide, whether funding an HSA is the right choice for you or for your clients. Can we want to make sure we’re really understanding our client’s goals before we’re being forceful or really we should never be forceful with these recommendations before we spend the time going down this path of here’s all the different criteria and how this could play out. I wanna make sure we understand the goals of the client, whether this fits their goals, not just whether this would be a good tax strategy for them.

Action Items [14:06]

All right. So for action items, make sure that you include HSAs and your annual beneficiary review. Again, their individual accounts, not join accounts. So we want to make sure there are beneficiaries designated, but to make sure that you’re reviewing your client’s tax returns each year, which of course means that you’re getting your client’s tax returns each year. For HSA contributions, they’re reported in 2020 on schedule, one of the 10 40 and for 2020 that flying 12 of schedule one. And the details of the eligibility of the contributions are determined on form 88, 89. So those are things to look out for as you’re reviewing the tax return for clients, whether you’re looking to see if they’re already contributing to an HSA, or if they are contributing, whether that’s being handled appropriately. All right, last action item. Be sure to go out and follow retirement tax services on LinkedIn and Facebook for our latest content so you can stay up to date and interact with us. We love to hear from our listeners, get feedback and input on other topics that we cover. Thanks for listening. Good luck out there. And remember to tip your servers, not the IRS


The information on this site is for education only and should not be considered tax advice. Retirement Tax Services is not affiliated with Shilanski & Associates, Jarvis Financial Services or any other financial services firms.

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