Does a High Income Preclude You from the Full Benefits of a Health Savings Account?
William G. (Bill) Stuart
Combining gamification and education to optimize employee benefits performance.
This column is an excerpt (Question 38) from a book to be published later this year to help guide account owners, employers, benefits managers, and administrators understand Health Savings Account compliance issues. The format consists of a common question, an explanation in easy-to-understand English (often with an appropriate example), and a citation from government documents to support the answer. The book is designed to inform. It is not a legal document, and the contents should not be construed as legal advice.
Question: My high income precludes me from participating in some tax-advantaged programs, like Individual Retirement Arrangements. Can I open and fund a Health Savings Account?
Answer: Yes, if you satisfy all Health Savings Account eligibility requirements. Income is not a factor in determining your eligibility to open and fund an account. You, Jeff Bezos, Keith Richards, Warren Buffett, and Bill Gates all have the same opportunity to open and fund a Health Savings Account. So would Michael Jackson, if he were still alive (his estate has earned more than $2 billion since his death, according to Forbes magazine).
IRS Notice 2004-2:
Q-2. Who is eligible to establish an HSA?
A-2. An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not enrolled in Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person’s tax return.
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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.
HSA Question of the Week is published every week, alternating every other Wednesday with HSA Wednesday Wisdom and every other Monday with HSA Monday Mythbuster.
HR, Total Rewards, Employee Benefits Subject Matter Expert
1moWhoa! There is soooo much more here. Let's adjust the perspective from one of eligibility to one of opportunity. There is no tax favored benefit which offers greater tax preferences or greater utility than the Health Savings Acount - values that are further enhanced as income increases. A higher income worker (who may someday become a higher income retiree) can gain a significant financial advantage from saving and investing in a Health Savings Account (HSA). Done right, contributing to a HSAs, whether via a cafeteria plan or an above the line tax deduction, is an opportunity for: (1) Financially efficient / lower cost executive benefits, (2) Income averaging when in higher federal/state marginal tax brackets, and (3) Tax favored funding for post-employment medical expenses (potentially 60% or more financially efficient than pre-tax 401k contributions with the same impact on take home pay). Those are all in addition to the "traditional" utility an HSA offers - compared to taxable savings - in terms of current and future out of pocket medical, dental, vision, hearing and long term care expenses, funding long term care premiums, post-age 65 income replacement and survivor benefits.