Tax-Smart Health Care Strategies

Making Health Care Part of Your Tax and Financial Strategy

Health care is one of the largest expenses many individuals, families, and business owners face.

But health care expenses shouldn’t necessarily be viewed simply as bills that have to be paid.

Depending upon your circumstances, there may be opportunities to structure health insurance premiums, medical expenses, and employee health benefits in ways that are more tax-efficient.

The key is understanding which strategies are available, and how they fit into your overall financial plan.

EXPLORE YOUR OPTIONS

Health Savings Accounts

One of the Most Tax-Advantaged Accounts Available

For individuals who meet the eligibility requirements, a Health Savings Account (HSA) can provide a unique combination of federal tax advantages.

Contributions

Eligible contributions may be deductible or made on a pre-tax basis.

Growth

Money held within the HSA can potentially grow tax-deferred.

Withdrawals

Distributions used for qualified medical expenses can generally be received federal income-tax free.

This combination makes an HSA much more than simply an account for paying today’s medical bills.

It can potentially become an important part of a long-term financial and retirement strategy.

LEARN ABOUT HSA PLANNING

Don’t Automatically Spend Your HSA

Many people contribute to an HSA and then immediately use the money whenever a medical expense occurs.

There may be another approach.

If your financial situation allows you to pay current medical expenses from other resources, you may choose to leave HSA assets invested.

That gives those assets additional time to potentially grow.

Over many years, an HSA could become a significant pool of tax-advantaged money available for future qualified health care expenses.

This can become particularly valuable as you approach retirement, when health care may represent an increasingly important part of your budget.

Think of an HSA as potentially serving two purposes:

TODAY

A tax-advantaged way to pay qualified medical expenses.

TOMORROW

A long-term pool of assets that may help fund qualified health care expenses during retirement.

What Can HSA Money Be Used For?

HSA distributions can generally be used tax-free for a broad range of qualified medical expenses for the account owner and certain family members.

Depending upon the circumstances, qualified expenses may include things such as:

• Medical deductibles and copayments

• Prescription medications

• Dental care

• Vision care

• Prescription glasses and contact lenses

• Certain mental health services

• Certain qualified long-term care expenses

• Certain Medicare premiums

• Other qualifying medical expenses

Eligibility and the definition of qualified medical expenses are governed by federal tax rules and can change.

VIEW CURRENT IRS HSA INFORMATION 

Your HSA Doesn’t End When You Retire

One of the most attractive characteristics of an HSA is that unused money generally remains yours.

There is no requirement to spend the entire balance each year.

That means someone who consistently funds an HSA and allows a portion of the account to remain invested could potentially enter retirement with another significant financial resource.

After age 65, qualified medical expenses can generally continue to be paid from the HSA federal income-tax free.

Money withdrawn for other purposes is generally taxable, but the additional federal tax that normally applies to nonqualified withdrawals before age 65 generally no longer applies.

That creates an interesting degree of flexibility.

Your HSA can potentially become:

A Tax-Free Health Care Resource

for qualified medical expenses

OR

An Additional Retirement Resource

if money is ultimately withdrawn for other purposes and applicable income taxes are paid.

Health Reimbursement Arrangements

A Potential Strategy for Business Owners

Health Savings Accounts aren’t the only way to make health care more tax-efficient.

Certain employers may also be able to establish a Health Reimbursement Arrangement (HRA).

An HRA is generally funded by the employer and can reimburse eligible employees for qualifying health care expenses under the terms of the arrangement.

Depending upon the type of HRA, eligible expenses may include health insurance premiums and other qualified medical expenses.

Several different HRA structures exist.

QSEHRA

An Alternative for Certain Small Businesses

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) may allow an eligible small employer that does not offer a traditional group health plan to reimburse employees for qualifying medical expenses and individual health insurance coverage.

The employer determines the benefit it wishes to provide within applicable federal limitations.

The business funds the arrangement, and qualifying reimbursements may receive favorable tax treatment when applicable requirements are satisfied.

For the right small business, this can potentially provide an alternative to purchasing and administering a conventional group health insurance plan.

Annual reimbursement limits and other requirements are established under federal law and may change periodically.

[ VIEW CURRENT QSEHRA RULES ]

Individual Coverage HRA

Giving Employees More Choice

Another option for certain employers is an Individual Coverage Health Reimbursement Arrangement (ICHRA).

Rather than providing employees with one traditional group insurance policy, an employer may establish an ICHRA that reimburses eligible employees for qualifying individual health insurance coverage and potentially other medical expenses.

This approach may allow:

The Employer

to establish a more predictable health-benefit budget.

The Employee

to select individual health insurance coverage appropriate for his or her circumstances.

ICHRA rules can be complex, particularly when coordinating eligibility, employee classifications, health insurance coverage, and potential premium tax credits.

Proper plan design is important.

Self-Employed Health Insurance

Don’t Overlook a Potential Deduction

Business owners and self-employed individuals may also be eligible for a federal income-tax deduction for qualifying health insurance premiums.

Depending upon the circumstances, qualifying coverage can potentially include:

• Medical insurance

• Dental insurance

• Vision insurance

• Certain qualified long-term care insurance

Coverage for a spouse and qualifying family members may also be included.

The rules can vary depending upon business structure, income, other available health coverage, and how insurance premiums are paid.

Special considerations also apply to owners of S corporations.

EXPLORE BUSINESS OWNER HEALTH STRATEGIES

Health Care and Retirement Planning

These Decisions Don’t Exist in Isolation

A health care strategy can affect much more than your medical expenses.

It can potentially influence:

• Income taxes

• Business deductions

• Employee compensation

• Retirement savings

• Investment decisions

• Medicare planning

• Long-term care planning

• Retirement income

• Estate and legacy planning

That’s why health care shouldn’t necessarily be planned independently from the rest of your financial life.

Consider an HSA.

Someone approaching retirement might have several different places from which to pay a medical expense:

Cash

Taxable Investments

Traditional Retirement Accounts

Roth Assets

HSA Assets

The question isn’t simply:

“Where can I get the money?”

A better question may be:

“Which source should I use?”

The answer can have implications for taxes, investment growth, future retirement income, and the assets ultimately left to your family.

Health Care Planning for Business Owners

For a business owner, the conversation becomes even broader.

Health care expenses may involve:

Your Personal Coverage

How should you structure health insurance for yourself and your family?

Your Business

Can health care expenses be handled more efficiently through the company?

Your Employees

Would an HRA or another employee health benefit make sense?

Your Retirement

Should an HSA be treated as a current spending account or accumulated as a longer-term retirement resource?

Your Taxes

How do these decisions interact with your overall tax strategy?

Looking at each decision separately can mean missing opportunities created by coordinating them.

The Objective Isn’t Simply a Bigger Tax Deduction

A good tax strategy isn’t about spending money simply to generate deductions.

It’s about looking at expenses you already have and asking:

“Could this be structured more efficiently?”

Health insurance and medical expenses are a good example.

You’re likely going to incur health care expenses regardless.

The opportunity is to determine whether those expenses can be coordinated with your:

Business

Taxes

Investments

Retirement

and

Long-Term Financial Strategy

more effectively.

Everything Is Connected

A decision about health insurance can affect your taxes.

A tax decision can affect your retirement contributions.

A retirement decision can affect your investment strategy.

And your investment strategy ultimately determines how much money may be available to support the life you’ve planned.

That’s why we believe financial decisions should be considered together rather than in isolation.

Could Your Health Care Expenses Be Working Harder for You?

If you’re a business owner, self-employed professional, or individual looking for a more tax-efficient approach to health care expenses, we can help you evaluate how these strategies may fit into your broader financial plan.

Let’s Take a Look at Your Current Strategy.

Important Disclosure

This material is provided for general educational and informational purposes only and is not intended as individualized investment, tax, legal, accounting, or health insurance advice. Tax laws, contribution limits, eligibility requirements, and health plan rules are subject to change. The applicability of any strategy depends upon individual circumstances. Consult appropriate tax, legal, insurance, and financial professionals before implementing a strategy.