High Deductible Healthcare Plans (HDHPs) used to be for people who were willing to receive fewer health insurance benefits to get a lower payment.  If you were okay having to pay for routine medical expenses out of pocket and only wanted insurance to cover the occasional big ticket items, you could elect to have a high deductible, which resulted in less risk for the insurance company and, ultimately, a lower payment for you.  Historically, this was chosen by either the wealthy who could afford the risk, or by those who were healthy and didn’t feel like they had a lot of risk.

But now we are seeing more and more companies moving to HDHPs as their only offered health insurance plan.  This is due to increasing health insurance costs and the need to provide options that are more affordable.  What was once a less expensive plan with risk shifted to the customer by choice, is now often the only plan.

One benefit of having an HDHP is that you typically gain access to a Health Savings Account (HSA), which allows you to save pre-tax money in an account to use for qualified medical expenses.  The gist of this arrangement is that it saves you money on your health expenses.  I won’t get into the economics of this and how it will drive up medical costs, I’m only addressing a tax concern in this blog.

If you aren’t paying attention, you could cost yourself thousands in taxes if you don’t enter your HSA correctly into your tax return

In most cases, the IRS does a good job of getting companies to send you information to drop into your tax return, keeping it easy for us.  Among these tax forms, you will typically receive a W2 that shows your earnings and withholdings, a 1095-C showing your health coverage, and a 1099-SA showing the distributions from your HSA.  But in the case of HSAs, these forms don’t have the information you need!

We, as taxpayers, use IRS form 8889 to enter information about our HSA.  You’ll notice that there is a place to enter how much you contributed to your HSA (line 2), a place to enter how much your company contributed to your HSA (line 9), and a place to enter how much of your distributions were qualified (line15). Entering this information is trickier than you think.

Issue with Contributions::

On the W2, under box 12, your employer states how much money was contributed to your HSA (labeled as category ‘W’).  But when you read the fine print in the form’s instructions, you find that this value bundles the amount that you contributed to your HSA with the amount your employer contributed to the HSA.  If you put this number into line 9 of your form 8889 (like some tax software tools automatically do), you will miss the entire deduction of your contribution to your HSA.  This could be a lot of money!

To avoid this, you need to reference your final paystub from the tax year to see the summary of year-to-date contributions to your HSA.  The total amount you contributed should be there.  Otherwise, use an end of year HSA statement to find this number.  This is the amount YOU contributed.  Then the difference between that number and item W on your W2 is the amount YOUR EMPLOYER contributed.  These are the numbers that go into line 2 and 9 on your 8889.

Issue with Distributions::

The 1099SA form shows how much was distributed from your HSA, but it doesn’t say whether it was used for qualified medical expenses.  Even though most of us have to show proper evidence of qualified medical expenses to get the distribution, I suppose there are ways to get the money for other reasons.  So, review the meaning of qualified medical expense in IRS Publication 969 to see if your expenses meet the definition.  If they do, make sure you enter the amount of qualified medical expenses on line 15.  If you don’t the full amount of distributions (line 14a) will be taxable, potentially increasing your overall tax.

These two issues are caused by inadequate information on the tax forms provided by employers and health providers, presumably because the IRS approved tax forms aren’t asking for the information.  Keep an eye out for these issues or you may find yourself paying thousands more than you need to in taxes.

 

 

About the Author:

Greg Caramanica is the managing member and COO of Arlington Wealth Planning, LLC, a Registered Investment Advisor located in Arlington, Virginia.  Mr. Caramanica is a CERTIFIED FINANCIAL PLANNER™, providing financial planning , insurance, and tax services.