This article is intended for smaller self-storage operators as well as managers who purchase their own health insurance or who, for economic reasons, have insurance with high deductibles. For the rest of you, tune in to this column in February for something more relevant for those who have low-deductible health insurance provided as an employee benefit.
The Health Savings Account (HSA) was created by the U.S. Congress in December 2003 and is essentially a custodial account into which you or your employer can deposit money to pay for certain health-related expenses. It is similar in some ways to an IRA in which you deposit funds that you invest or have invested on your behalf.
The HSA can be set up at a bank or other financial institution or a health-insurance company for the specific limited purpose of paying for costs of healthcare. When used properly, it can save you hundreds of dollars in taxes, as it allows you to pay many medical fees and insurance deductibles with pre-tax dollars. Congress believes if people spend their own money on medical expenses, they will be more conscious of costs and spend less. The tax benefit is the added motivation.
How It Works and Who Is Eligible
First, let me explain how an HSA works. Assuming you qualify, you make deposits to the account, either in a lump sum or installments. The deposits must be cash, as opposed to other assets like stock. Your employer can also make contributions to your HSA as an employee benefit. In this case, payments are tax-deductible for your employer and are not taxable to you. Therefore, this might be an excellent benefit to request of an employer if he does not or cannot provide health insurance. It’s also a great way to supplement high-deductible insurance.
Who is eligible for an HSA? First, you must be an individual or family covered by a “high-deductible” health-insurance plan. Second, you may not be covered by any other health plan that is not a high-deductible policy (there are minor exceptions). Third, you cannot be eligible for Medicaid. Fourth, you cannot be claimed as a dependent on anyone else’s tax return.
A “high deductible” is characterized as one of at least $1,000 per person or $2,000 per family. This amount may include co-pays but not the premium itself. A high-deductible policy can sometimes cost as little as half of its low-deductible counterpart. An HSA may encourage you to save money on your premiums by opting for a higher deductible and saving the “difference” in the account.
The premium for your health insurance cannot be paid out of the HSA, but costs associated with diagnosis, treatment, and prevention of illness or injury can. Eligible expenses include doctor visits, prescription drugs, over-the-counter drugs, vision care, dental care, orthodontia, laser eye surgery, long-term-care insurance premiums, long-term care and even COBRA insurance premiums. One word of caution: Prescription-drug benefits that cover a portion of drug costs before you meet your deductible may affect your eligibility for the plan.
Benefits and Limitations
While insurance premiums must be paid independently, virtually everything else you need for healthcare purposes, including deductibles and the expenses previously mentioned, can be paid for out of the HSA. Contributions can be made with “pre-tax dollars,” which are not included in the calculation of gross income subject to taxation at the end of the year. Another benefit is interest on deposited funds is not taxable, nor is the money you pay out of the account for eligible expenses. As an added bonus, any dollars left at the end of each tax year can be used to increase the account reserve for the future.
However, there are limitations. In 2004, the maximum you could deposit into an HSA was equal to your individual or family deductible (which, by definition, must be at least $1,000 and $2,000 respectively) but could not exceed $2,600 per individual and $5,150 per family. This amount is scheduled to adjust every year.
For example, if you are single and have a $1,000 deductible, you or your employer can contribute up to $1,000 to the account to cover medical expenses not covered by your health insurance. If you do not incur enough expenses to use up your savings, you can roll over the balance to use in following years or use the money for other uncovered medical items, such as medications or the laser eye surgery you always wanted. If you actually spend that $1,000, what you have saved yourself is the amount of tax you would have paid on that money if it had been included in your gross income, plus any applicable interest. On the other hand, there are penalties for withdrawing the money for nonhealth-related items, including imposition of the previously avoided tax and a 10 percent additional fee.
When you view an HSA this way, a little shrewd planning can save you money in taxes. It can also become a tidy little reserve mechanism for other medical-related expenses or an elective procedure. Any way you slice it, you save money at essentially no cost.
This article is a simple explanation of a complicated subject. As with any Congressional creation regulated by the IRS, there are rules and tests that should be reviewed before opening an HSA. Please consult with an attorney, tax advisor or financial advisor before acting. However, those of you who set up an HSA may find your wallet feels a little thicker come tax time next year.
Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, call 513.721.5151.