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All Contents © 2016The Kiplinger Washington Editors
Now that health care policies are legally required to cover certain services, insurers are intensifying efforts to rein in costs by shifting more of the burden to you. In addition to boosting deductibles, they are increasing cost-sharing for doctors' visits, drugs and procedures, and switching from fixed-dollar co-payments to coinsurance, which is based on the cost of care.
Stretch your health care dollars with tax credits, expanded savings programs, and new tools and benefits. Consider these 11 tax-smart ways to save on your care.
By Kimberly Lankford, Contributing Editor
| August 2014
If your health insurance policy has a deductible of at least $1,250 for individual coverage or $2,500 for families in 2014, you may be eligible to open a health savings account. An HSA lets you set aside tax-deductible money (or pretax money through an employer) that you can use tax-free in any year to pay your deductible and other out-of-pocket medical expenses. In 2014, you can contribute up to $3,300 to an HSA for individual coverage or up to $6,550 for families (plus another $1,000 if you are 55 or older anytime during the year). For more information, see FAQs About Health Savings Accounts.
You may be able to collect extra money from your employer if you sign up for an HSA. Some match your contributions, but others seed your account just for signing up. It isn’t unusual for employers to contribute $500 for single plans and $1,000 for family plans, says Jeff Munn, of Fidelity, which administers HSAs for employers. Your employer may contribute even more to your account if you participate in a wellness program or take a health-risk assessment.
If you have an HSA-eligible health insurance policy on December 1, you can make the full contribution for the year, even if you’ve had the plan for only a short time. But if you didn’t have an HSA-eligible policy for the full year, you must keep it for the entire following calendar year or pay a penalty, says Todd Berkley, president of HSA Consulting Services. Say you sign up for an HSA-eligible policy on July 1 and contribute the full year’s amount. If you drop the policy the following year, you will have to pay income tax and a 10% penalty on the difference between the amount you contributed and the amount you would have been eligible to contribute based on the number of months you had an HSA-eligible policy.
If you use your HSA to pay out-of-pocket medical bills right away, look for an administrator with low fees, low minimum requirements, and maybe a debit card that makes it easy to use the money at the doctor’s office. If you use other cash for current medical expenses and keep the money growing in your HSA for longer-term costs, look for an administrator that offers good investment choices (many let you invest in mutual funds or sometimes even stocks), and see if you can minimize fees by maintaining a minimum balance in the account. Compare HSA administrators’ investing options and fees at www.hsasearch.com. See Contributing to a Health Savings Account in 2014 for more information.
Because HSAs do not have a use-it-or-lose-it rule, you can keep the money growing in the account for the future and use it tax-free to pay for many medical expenses down the road, even in retirement. You can’t contribute to an HSA after you sign up for Medicare, but you can still use the money for, say, co-payments, deductibles, prescription drugs (including over-the-counter drugs with a prescription), vision and dental care, and a portion of your long-term-care premiums (the amount is based on your age). You can also use the money tax-free to pay your for Medicare Part B, Part D or Medicare Advantage premiums (but not for medigap).
Even though you can’t contribute to an HSA after you sign up for Medicare, you may be able to delay Medicare enrollment past age 65 and keep adding to an HSA instead—which could be a good strategy if you’re still working and your employer adds money to your account. Medicare Part A is free, so weigh your options to see which is a better deal. Delaying Medicare enrollment past 65 may not be an option if you work for a company with fewer than 20 employees or if you’re already receiving Social Security benefits.
If you have an HSA-eligible policy, you can roll money over from a traditional IRA to the HSA so you can avoid a tax bill when you withdraw money for medical expenses. You can make the tax-free rollover only once in your lifetime, up to the annual HSA contribution limit, minus any contributions you’ve already made for the year. You must be enrolled in an HSA-eligible policy for 12 months after making the transfer to avoid penalties.
If you don’t have an HSA-eligible high-deductible health insurance policy, contribute to a flexible spending account, if your employer offers one. You can contribute up to $2,500 to an FSA in 2014, and the money in an FSA escapes federal, Social Security and Medicare taxes (and in most cases, state and local income taxes, too). You can use these tax-free funds to pay out-of-pocket medical expenses throughout the year, and many employers now let you carry over $500 in FSA money from one year to the next. See Navigating New Rules for Flexible Spending Accounts for details.
The use-it-or-lose-it rule of flexible spending accounts used to be one of the biggest downsides to saving in these plans. If you didn’t use all of the money you set aside for eligible medical expenses by the end of the year, you’d lose it. But new rules permit employers to amend their plans to allow employees to roll over up to $500 in the account from one year to the next. Employers aren’t required to make the change, but a survey by Visa and WageWorks (which administers FSAs for employers) found that 53% of employers plan to offer an FSA with a carryover in 2014.
Notify your state health insurance exchange if your income changes. You can get a bigger subsidy if your income drops or avoid a surprise tax bill if your income goes up. If you’re close to the cutoff, make contributions to your 401(k) or HSA to reduce income used to calculate the subsidy.
Don’t unintentionally boost your income above the cutoff for the subsidy by, say, converting a traditional IRA to a Roth or withdrawing money from a traditional IRA or 401(k).
If you are self-employed and not eligible for health coverage offered by an employer or spouse’s employer, your premiums are tax-deductible on your income tax return (as long as they don’t exceed your self-employed income).
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