Becoming your own boss allows you to set your own salary, hours, location and even expectations. I’m sure you’re thinking life just couldn’t be any better but do you ever just sit back and reminisce about all the benefits you received as an employee such as Health Insurance and Retirement Plans?
A self-employed HSA not only helps you save money on your healthcare expenses, but also doubles as a financial wellness program and retirement plan. Historically, self-employed individuals and small business owners don’t typically save as much for retirement compared to those who are traditionally employed. Leveraging an HSA can help build your retirement savings as well as cut down on medical costs! In this article we will briefly cover the advantages of investing into a Health Savings Account.
How Does an HSA work?
Your HSA acts like a savings account that earns interest the same way a normal savings account does. Some health savings accounts let you invest the money in mutual funds right away—just like an IRA! Other providers require a minimum balance before you can start investing your HSA funds, so do your research ahead of time. Investing your HSA funds and letting that money grow over the long haul can help you start building up enough savings to cover medical expenses during your retirement years. You can look for HSA options by clicking here.
You need to be enrolled in an HSA-eligible high-deductible health plan (HDHP) that is designated as a “consumer-driven health plan” by the IRS.
Not currently enrolled but interested in enrolling? Visit https://www.healthcare.gov/ to see what plans are available to you.
For 2020, an HDHP must have a minimum annual deductible of $1,400 for single coverage and $2,800 for family coverage. The out-of-pocket maximum (which includes your deductible, copayments and coinsurance, but not your premiums) is $6,900 for singles and $13,800 for families. That’s the most you’ll pay for medical costs before your insurance covers 100% of the rest.
If you’re enrolled in Medicare or someone claims you as a dependent on their tax return, you won’t be able to open or contribute to a health savings account.
If you’re self-employed, you can’t contribute more than your net income from the previous year into your HSA, despite the IRS limits. It’s important to note that these contribution limits are not merely suggested amounts. There is a 6% penalty tax if you exceed them.
DO YOUR RESEARCH!
Not all HDHPs allow you to open an HSA, so be sure to do your research before you commit to a plan. The main distinction is that almost none of your medical expenses are deferred (besides standard well visits, etc.) until you’ve met your deductible. Many ACA (Afforable Care Act) plans, even the high-deductible ones, pay some of your medical expenses pre-deductible, so they aren’t allowed to be designated as HSA-eligible by the IRS.
Benefits of an HSA
Above-the-line deduction on Form 1040 for contributions made to HSA
Pay medical expenses with Tax-Free funds – As long as you use your HSA money to pay for qualified medical expenses, you won’t be hit with any taxes or penalties.
Tax-Deferred Growth inside account with multiple investment options – CDs, Mutual Funds, Self-Directed Brokerage
The ability to take advantage of tax-free growth makes the HSA a nice addition to your retirement portfolio. If you’re maxing out your 401(k) and IRA contributions and are looking for another place to invest, your HSA is a great place to start.
Unused amounts roll over from year to year, allowing you to stock pile savings.
The accounts are portable. HSA belongs to the individual, regardless of employment status. Start it up at one job and take it to next job. Keep it during periods of unemployment or self-employment – HDHP can be maintained under COBRA – COBRA premiums can be paid from HSA – Purchase some other HSA-qualified HDHP insurance.
HSA can also be used to pay for: – Long term care insurance – Medicare premiums
Upon turning 65, your HSA acts like a traditional IRA. At that point, you can take out money for anything you’d like, but you’ll pay taxes on it when you do—just like a traditional IRA.
Can S Corp or C Corp Business Owners Contribute to an HSA?
There are special rules applied by the IRS to specific business entities dependent on ownership of the business—whether owned by individuals or investors. Due to these rules, certain business entities face restrictions on HSA funding.
If you’re a 2% or greater owner of an S Corp, you’ll be affected by HSA funding restrictions. When it comes to employer contributions to an S Corp HSA, the business can’t provide owners with a tax-free contribution. Any contributions from the S Corp business to the owners’ HSAs are considered taxable income—you can’t make pretax contributions to your HSA. But while the S Corp HSA contributions are taxable to the owners, they’re also tax deductible to the business as a compensation expense.
For C Corp business owners, since the business is considered a completely separate legal entity, the IRS views owners the same as employees. If you’re a C Corp business owner, you’re eligible for your company’s HSA, including making pretax contributions to your HSA account. Just remember, all contributions must comply with current IRS regulations on employer HSA contributions.
Can an LLC have an HSA?
If you’re a single member LLC your HSA will operate the same as a self-employed sole proprietor. While you won’t be able to contribute to your HSA on a pretax basis, you will be able to make HSA contributions with after-tax dollars and then do a line item deduction on your Schedule C.
Pretax deductions may help qualify you for other income-based tax credits while your HSA contributions are invested and turned into income-producing assets.
What are Qualified Medical Expenses?
Here are just some of the most common qualified medical expenses you can use your tax-free HSA dollars for:
Doctor’s office visits and copays
Surgery (except cosmetic surgery)
Eye exams and eyeglasses/ contacts
Over-the-counter medicines such as acetaminophen, ibuprofen, menstrual care products and sinus medication
Telemedicine covered through 2021. Before the stimulus package passed, you couldn’t use an HSA to pay for video or phone consultations until you’d met your deductible. But with the new law in place, that rule has been relaxed. All HSA participants can now reach out immediately to doctors through telehealth options and pay for the visits with tax-free HSA dollars. This change is only temporary though. It’s set to expire December 31, 2021
It’s also important to know what doesn’t count as a qualified health expense, because you’ll pay income tax and additional penalties for using your HSA dollars for those things.
If you have a question about whether or not something is a qualified health expense, get in touch with your HSA provider to clear up any confusion.
Book an online consultation here or call now at 404-449-1528! At Credence Tax Services LLC, we use strategic approaches to maximize all opportunities to save our client’s money!