The recent showdown on the edge of the fiscal cliff left unchanged one relatively small part of the tax code: health savings accounts.
It’s small in the context of the federal budget, but not in the potential benefit for owner-operators. As many as half of the 40,000 owner-operator clients of financial services provider ATBS could benefit from an HSA tax break, estimates Matt Amen, ATBS vice president.
To use an HSA, a person needs a high-deductible health plan. Because some owner-operators are unable to afford traditional insurance with low deductibles, an HDHP is often a good fit.
An HSA pays off by cutting your taxes. It allows you to save pretax income into the account, just as many owner-operators do with Individual Retirement Accounts. When you need to pay medical expenses toward covering your deductible, you withdraw pretax HSA money.
Let’s say you meet a $5,000 family deductible and are in the 15 percent tax bracket. Your taxable income is reduced by $5,000. Multiply that by 15 percent, and you’ve whacked $750 off your tax bill.
One advantage of the HSA over traditional health insurance is its flexibility. A typical over-the-road owner-operator incurs much of his medical expenses while away from home. “A lot of it is where he’s not going to see a doctor,” Amen says. “Or it’s out of network if he is seeing one.” Even over-the-counter medication qualifies for HSA dollars. “Full insurance coverage isn’t going to allow you to take those expenses,” he says.
Nor will “mini-med” programs, which some owner-operators use, he said. These health plans aren’t that helpful, offering low maximum annual benefits, such as $2,000.
Another HSA advantage is the account doesn’t have to be emptied by yearend. The balance rolls over every year and earns tax-deferred interest. If you have a balance after age 65 and can rely on Medicare, HSA funds can be used for nonmedical expenses.
To start an HSA, Amen says, find an insurance company that offers them. If you don’t already have an HDHP, you’ll need to get one.
“In funding an HSA, you want to build up enough to pay for the deductible,” Amen says. For 2013, contribution limits will rise to $3,100 for an individual and $6,250 for a family. Those 55 and older can contribute more under a catch-up provision.
“For anybody who is entrepreneurial and good at money and managing a budget, like an independent contractor should be, an HSA is a good fit for them,” Amen says.
Interested in detail on the health-related aspects of the fiscal cliff deal? Read what Boston.com has to say.