Common mistakes in HSA that can cost clients
Here are some common mistakes that Health Savings Account (HSA) holders can make that can cost them money:
- Using HSA funds for non-qualified expenses
HSA funds can only be used to pay for qualified medical expenses, which are those that primarily diagnose, treat, or prevent a medical condition. If funds are used for other purposes, the account holder will pay income tax on the withdrawal plus a 20% penalty, unless they are 65 or older. The IRS may also review the HSA outlays, which could lead to a more in-depth review of the client’s tax return.
- Not having an HSA-eligible high-deductible health plan (HDHP)
Account holders cannot contribute to an HSA if their deductible is too low or if they switch from an HDHP to a lower-deductible plan.
- Contributing too much
In 2024, the maximum contribution limit is $4,150 for individuals and $8,300 for families.
- Missing investment opportunities
HSA funds can be invested for long-term growth, and account holders can balance cash and investments, and choose low-cost options.
- Not taking advantage of employer contributions
Account holders should inform their accountant about their HSA contributions and take advantage of any employer contributions that may be available.
- Impact of non-spouse heirs who may be in line to receive assets
They could avert a potential tax bill to the beneficiaries by draining the accounts of assets to pay medical bills, assigning their HSA to a spouse in their estate plan or considering the use of trusts or charitable gifts. It’s 100% taxable. It basically becomes an IRA, but it’s an IRA that’s just immediately distributable to the person who inherits it.
- Another cautionary area revolves around Medicare
It is an allowable use of the assets for premiums but a potential snag for any clients expecting to work when they’re 65 or older. Customers at that age will have to pay taxes on any outlays that aren’t for a medical expense, but they aren’t subject to the penalties. In addition, experts recommend that HSA holders cut off any contributions from themselves and their employers for at least six months before applying for Medicare.
To avoid future mistakes, account holders can keep detailed records of their HSA transactions and expenses, including receipts for qualified medical expenses and accurate contribution and distribution records. These records can help identify errors and provide documentation in case of an IRS audit. Account holders can also seek professional guidance from a tax advisor or financial planner if they are unsure how to correct a mistaken distribution or navigate HSA rules.