With Tax Day looming, don’t forget the power of HSAs
With April 15 right around the corner, taxes are top of mind for all of us. Many don’t realize that one incredible — and all-too-often misunderstood — way to slash taxes is through a health savings account.
HSAs have become much more popular in the past few years, but often employees don’t seize the substantial tax benefits that come along with them. In fact, according to PwC, only 46% of those eligible for HSAs are even contributing to one.
With Tax Day fast approaching, it’s the ideal time to reboot the conversation with employees about HSAs and the array of tax advantages they offer. And for those last-minute tax filers, there is actually still time to squeeze a little more out of their HSA benefits for the 2018 tax season. Here is everything employers — and their employees — need to know.
Communicate the triple tax advantage
HSAs are, rightfully, thought of as a way to reduce soaring healthcare costs. Yet HSAs also are the most tax-advantaged savings account available — and can help employees save for retirement more effectively than any other option. In my view, HSAs are superior to the 401(k).
However, HSAs and taxes are complicated, which is why the majority of employees don’t understand that an HSA account actually provides a triple-tax advantage that can help employees keep up to 37% more of their income — a benefit that compounds every year until you draw the funds. Few understand that an HSA is essentially a 401(k) that you can draw from at any time for a qualified medical expense.
Here’s the triple-tax advantage spelled out:
· Employees can make contributions pre-tax, which lowers their taxable income. (They also can contribute with after-tax dollars, and deduct the amount from their tax returns.)
· Employees can then invest or accrue interest on their capital tax-free.
· Withdrawals for qualifying medical purchases are also tax-free — an increasingly valuable proposition given Americans borrowed $88 billion to pay for these expenses last year. Employees also can take out withdrawals for any reason once they turn 65 (though they do pay taxes on those withdrawals).
When you consider that the highest income tax bracket is 37%, HSAs can help you put that money to work for you. It’s no surprise that employees who leverage the HSA’s triple tax advantage often find that their HSA can become even more valuable than their 401(k) or IRA.
There’s still time to contribute
In an understandable attempt to avoid complex (and potentially costly) math, many of us wait until the last minute to file our taxes. Fortunately, there’s still time for employees to make post-tax contributions to their HSA for the 2018 tax season — all the way up to the filing deadline of April 15. That’s right, if you are under the annual maximum of $3,450 ($6,900 for a family) for 2018 contributions, you can still add more cash to your HSA in 2019 for last year’s tax year.
Retooling for 2019
One upside of Tax Day is it provides an ideal opportunity for employees to recalibrate their strategy for the next 12 months. We’re already a quarter of the way through 2019, so it’s important for employees to start contributing to their HSAs now in order to reap the benefits next tax season. Employees who max out their contributions early can start collecting tax-free interest or investment returns in their HSA and kick off the beautiful cycle of compound earnings for years to come.
The vital role of HR advisers
HSAs are often misunderstood because: they’re complicated. We bandy about terms like “pre-tax” and “contributions” that make many employees’ eyes glaze over. But HR advisers can make a real impact on the success of their HSA program by coming back to three core ideas:
· Remind young and/or healthy employees that healthcare costs are the top worry for American families (and only get worse as they get older) — and HSAs are designed to address this.
· This is the best savings account ever invented — with tax benefits that can save up to 37% on your tax bill multiple times over. An HSA is not “use it or lose it” benefit as so many employees still incorrectly assume. After maximizing an employer 401(k) match, the HSA should be where employees deposit their savings.
· There’s still time to seize the value associated with last year in the next two weeks.