Do you have a high deductible health plan? If so, the following plans can help you save money and pay for medical expenses, while lowering your taxes. Keep reading to see if one of these plans is right for you.
Health Savings Account (HSA):
An HSA is a tax-free account set up by individuals to help pay for qualified medical expenses. In order to qualify for an HSA you must be enrolled in a high deductible health plan and not be claimed as a dependent on another tax return. This plan is also not available for individuals covered by Medicare. For 2016, contributions up to $3,350 ($3,400 for 2017) for a single individual are 100% deductible or $6,750 (for both 2016 and 2017) for family coverage. That means that you can take the deduction on your tax return and then use the money tax-free when paying for qualified medical expenses.
Any individual who reaches age 55 by the end of the year can contribute an additional $1,000. Any excess contributions are includible in your annual income and are also subject to a 6% excise tax. If any distributions are taken that are not used for qualified medical expenses, they may be subject to a 20% excise tax on top of the increase in gross income. Any unused contributions at the end of the year are rolled to the next year and can accumulate tax-deferred earnings.
Medical Savings Account (MSA):
An MSA is similar to an HSA; it is a tax-free account used to help self-employed and small business employees pay for qualified medical expenses. This plan also requires you to be enrolled in a high deductible health plan. If the plan is funded by the individual, the contributions are deductible in arriving at adjusted gross income. If it is an employer funded plan, the contributions are not included in gross income, but there are limitations that apply to the employer.
The maximum contribution that can be made to an MSA is 65% of the deductible under the individual’s plan (75% of the deductible if it is for family coverage). This amount is calculated on a monthly basis and can be limited based on the months covered by the high deductible plan. Any excess contributions (and earnings on these contributions) must be paid back to the individual before the contribution deadline or there will be a 6% excise tax imposed on the excess.
***If you are an employer looking to establish Medical Savings Accounts for your employees, please contact us to discuss the limitations of these plans.
Flexible Spending Arrangement (FSA):
A flexible spending arrangement is a plan that allows employees to be reimbursed for medical expenses by their employer. These plans can be funded by the employer and can be in conjunction with other employer-provided benefits. An employee can also elect an amount to be withheld from their paycheck to be used as a contribution to the plan, this is known as a “salary reduction agreement.” The maximum contribution for 2016 is $2,550 for each the employer and the employee.
Individuals must be careful in determining how much to contribute annually; any excess contributions remaining at the end of the year are forfeited. It is possible for an employer to offer a grace period of up to 75 days in order for a covered individual to use the remaining contributions. Additionally, employers are now able to amend their plans to allow for a $500 rollover of unused funds. It is important to note, that the rollover amount does not impact the next year’s contribution limit. The employer may choose either the 75 day extension or the rollover, but not both, and an amendment to the plan rules will be required for each situation.
Section 125 Cafeteria Plan:
A cafeteria plan (which is also referred to as a “flexible benefit” plan or a “flex plan”) is an arrangement an employer may sponsor under which employees are permitted to choose between certain nontaxable benefits offered by the employer (for example, health insurance, life insurance, medical flexible spending plans, dependent care assistance, etc.) and taxable benefits (typically cash) without being taxed on the potential to receive cash. If you choose to sponsor a cafeteria plan, the plan must be set forth in a written plan document.
As the employer sponsoring the plan you can choose the types of benefits that will be offered under a cafeteria plan. However, the nontaxable benefits you offer have to fall under the category of “qualified benefits.” Qualified benefits under a cafeteria plan are certain benefits that are excludable from an employee’s income under a specific provision in the Internal Revenue Code.
A cafeteria plan can be funded with employer contributions, employee contributions or a combination of both. When a cafeteria plan is funded at least partially with employee contributions, employees authorize the contributions by signing salary reduction agreements. When employee contributions through salary reduction agreements are used to fund the plan, it will mean that the employee will report a lower taxable income, and consequently pay less tax. As for any contributions made by the company as an employer, the company will be able to deduct that amount from its taxable income as well.
Employees typically choose their benefits once a year. Specific rules govern when employees can make their benefit elections, the amount(s) allowed to be elected, and under what circumstances they will be permitted to change their elections. Recent regulations have expanded the group of events that may generate changes in employee elections; included are divorce, birth, adoption, marriage, death, and now when there is a significant increase or decrease in the cost of benefits or an improvement in the coverage provided.
Please contact your L&B professional for more information related to these plans or any other questions you may have.