RTS #027 Don’t skip the “small” stuff

By now, you know we are all about consistently doing the small things over time to help reduce a client’s lifetime tax bill. And if you’ve really been paying attention, you know that by that, we mean the lifetime of their wealth and not just their lifetime (if you take the IRS one year at a time, you lose!). One often overlooked opportunity for working-age clients and clients who aren’t yet eligible for Medicare is the Health Savings Account (HSA).

This is a phenomenal tool for getting a tax deduction in the current year, building an asset that can grow tax-free AND distributions that will be tax free if they are used for qualified medical expenses. This is fantastic news because medical expenses are commonly second only to taxes when we look at expenses in retirement. To be able to contribute to an HSA, the client has to participate in a qualifying high-deductible health plan (best way to know if they qualify is to have them ask their benefits department). These options are becoming more prevalent, so it’s worth revisiting for clients who might not have been eligible in the past.

Like so many areas of tax planning, it’s important to remember that decisions should not be made strictly for tax purposes. Depending on a client’s individual situation, a high deductible plan might not be their best option (think complicated medical circumstances, regularly having high medical bills, and hit deductibles and out-of-pocket maximums). But for clients who are eligible and a high deductible plan makes sense, an HSA can be a powerful tool.

For those clients, there are some things to keep in mind that we often see misunderstood:

• The annual contribution limit ($3,850 for individuals and $7,750 for families in 2023) is combined between the taxpayer and any employer contributions. A common missed opportunity is not realizing that if the employer does not max fund the account, the taxpayer can make up the difference.
• The contributions have to be invested to take full advantage of the opportunity. Just like a Roth or Traditional IRA, simply contributed the funds is only one step: make sure everything isn’t just sitting in cash.
• There is no requirement to use the funds in the year they are contributed. Employers often present HSA’s as a piggy bank for annual medical expenses. For clients with other cash flows to cover their medical expenses, there is the opportunity for those funds to grow tax-free for potentially decades.
• There is no time limit on when expenses can be submitted for reimbursement. If a client funds an HSA in 2023 and keeps their medical receipts, they could decide 20, 30 or 40+ years from now that they want to go back and submit the 2023 expense for reimbursement (this is important to educate clients on so they don’t feel there is a risk of funding an HSA and then ending up with “too much’ in it).
• HSA contributions and distributions are reported on IRS form 8889. One limitation of this form is that “Employer Contributions” on the form actually represents any contributions that were made through payroll, not just contributions funded by the employer, which can cause confusion.

What can you do about it?

If this isn’t already in your CRM, have someone on your team review client tax returns and mark down who has form 8889 (the IRS form used to report HSA activity). For 2022, the contribution limits were $3,650 for taxpayers with individual coverage and $7,300 for taxpayers with family coverage.

In addition to flagging clients who haven’t historically max funded their HSA you’ll want to also look for clients who are contributing and distributing from their HSA in the same year. That might make the most sense for their cash flow but is a missed opportunity for the HSA to be invested and grow tax free.

Of course, don’t forget about the dishwasher rule; let all of your clients know you’ve done this, whether you took action or not (“Great news! You’re all set for this year, but we will review it together again for 2024”). Depending on the other value adds and communications you share with clients, this might be incorporated into something you are already doing as opposed to a standalone touch point. Most important is that it is intentional.

Happy Tax Planning!