Which strategy is better? Paying your $50 doctor’s visit deductible with before-tax or after-tax dollars?
If you said “before tax,” check if your employer offers an HSA (Health Savings Account) program. HSA’s are the tax-friendly way to pay your medical bills because dollars are deducted directly from your paycheck before taxes are calculated. Contributions made by you and your employer are excluded from gross income and become tax-free when used to pay qualified medical expenses. This is a great tool to cover your family’s health care costs because not only is the money tax-free, but it is already set aside for you when it comes time to pay your medical bills.
A few things to be mindful of: limitations and HSA requirements are adjusted for inflation each year. This could affect your minimum deductible for your health insurance plan, your annual out-of-pocket expenses and the amount you can contribute to an HSA. If you’re not in compliance with the restrictions in place for any particular year, then you can say goodbye to the HSA tax savings for that year.
To contribute to an HSA, you must be covered under a high deductible health plan. For 2020, the health plan must have a deductible of at least $1,400 for self-only coverage ($1,350 for 2019) or $2,800 for family coverage ($2,700 for 2019).
The health plan must also have a limit on out-of-pocket medical expenses that you are required to pay. Out-of-pocket expenses include deductibles, copayments and other amounts, but don’t include premiums. For 2020, the out-of-pocket limit for self-only coverage is $6,900 ($6,750 for 2019) or $13,800 for family coverage ($13,500 in 2019). According to the IRS, only deductibles and expenses for services within the health plan’s network should be used to determine if the limit applies.
You can contribute up to $3,550 in 2020 if you have self-only coverage or up to $7,100 for family coverage ($3,500 and $7,000, respectively, for 2019). If you’re 55 or older at the end of the year, you can contribute an extra $1,000 in 2020 (same as in 2019). However, your contribution limit is reduced by the amount of any contributions made by your employer that are excludable from your income, including amounts contributed to your HSA account through a cafeteria plan.
For more information on HSA’s and how to offer them to your employees, give us a call!