“I only spent $50 toward my deductible with my HSA and still saved $250 in taxes”

Posted on February 16, 2012 by Scott Van Horn

Here at Tango, we hear the confusion every day, in calls to our call center, during implementation kick-off calls with clients, throughout open enrollment meetings, and in news articles about Health Savings Accounts (HSAs):

“I should target to fund my HSA up to my medical deductible or out of pocket, right?”
“Shouldn’t my HSA only be used for claims I send to my insurance company.”
“I can’t use it for my LASIK surgery, isn’t that correct?”

As the Director of Client Services, I’m proud of how my team of HSA experts busts these myths and help our clients gain the tax break they deserve. In a previous post, we explained 3 common HSA management styles that we see with our clients: Savers, Planners, and Non-Planners. But how do Tango employees manage our HSAs ourselves?

I’m a bit of a hybrid of two of them: I’m a Saver by the numbers (I max out my contribution) but I don’t plan ahead and like to reimburse myself when I have expenses, like a Non-Planner. It’s not that I ignore my health expenses or don’t keep track of them – I just keep finding eligible expenses that aren’t covered by my medical insurance.

I’ll share a little secret that I learned after using my own HSA, if you’re like many people who only use your HSA for expenses that go towards your medical deductible you’re missing out on so many other qualified expenses! Over the past three months I only spent $50 toward my medical deductible with my HSA and still saved $250 in taxes.

Here’s a quick tally of my non-medical insurance spending of the past three months:

Eye doctor appointment, a year of contact lenses, and prescription glasses: $510
Out of network dental visit with x-rays: $185
Non-covered prescription medication: $80 per month
Acupuncture: $110 per month

Total for three months: $1,045 with tax savings (conservatively at 25%) of $261.25. I hadn’t planned on any of that and still have a long way to hitting my medical deductible.

So how did I do it? My main strategy is rather than basing what medical expenses I record on my medical insurance coverage, I base them off what the IRS considers health spending. My adult braces, all my dental procedures, every band-aid, my weekly disposable contact lenses (and their solution), my over-the-counter allergy medication, for which I have a prescription documented during my free physical, my mileage to and from the dentist and doctor…the list goes on and on. The result is that I save more tax money on items I would be purchasing anyway.

Here’s what I did and how you can too:

I read the Publication 502 because the amount of time spent grazing over the categories pays off with the tax savings.
I don’t think much about whether I have enough money in my HSA, I focus more on the expenses.
When I go to Target or Walgreens, I use the “Health Spending Item” total on the receipt as a guide since they are targeted to FSA users. Starting in 2011, every item had to be programmed to align to the IRS Publication 502 – so if the receipt says it’s eligible, I’m confident it truly can go through my HSA.
I don’t really care about how much is in my HSA, just whether I record it on my Tango Health Spending Journal so I can pay myself back whenever it’s convenient.

If you’re having a hard time figuring how much you should put in your HSA, think more about what expenses you’ve had since you opened your HSA. And find a good way to keep track of those expenses – I use a SmartPhone to take a picture of the receipt so I remember everything when I finally get around to recording them in my Health Spending Journal.

Now seriously, go see our list of eligible expenses to get you started!

When Employees Don’t Open Their HSA, They Cost Themselves and You $$$

Posted on January 26, 2012 by Tango Health

Earlier we shared 3 of the common ways people manage their Health Savings Accounts (HSAs), but unless your employees actually open their HSA, their management style is a moot point.

In 2011, the Employee Benefit Research Institute reported that enrollment numbers for High Deductible Health Plans (HDHPs) grew from 14% to 16% – but yet industry averages show that a paltry 55% of the HSA-eligible population actually open an account. If you’ve ever met a Tango employee, you know this statistic is like the sound of nails on a chalkboard.

You might be asking: “Why should I even bother to make sure that my employees are opening accounts?” The answer is pretty simple: the tax savings. If your employees aren’t opening their accounts they can’t use them and if they aren’t using them then they are throwing away valuable tax savings for themselves and for your company. That in turn lowers their engagement and satisfaction with employee benefits.

The lost tax savings results from the fact that in most states, individuals and their employers can’t earn tax-free treatment for medical expenses until they open and fund their HSA. For example, let’s suppose an individual (we’ll call her “Jane”) decided to enroll in her company’s HDHP. Jane was covered on the HDHP as of January 1^st but she didn’t open and put money in her account until January 17^th. Her account was opened in a state requiring funding for HSA establishment, so she won’t be able to reimburse herself for medical expenses paid before January 17^th.

Calendar view of when Jane opened her Health Savings Account.

How to Encourage Your Employees to Open Accounts

So why aren’t people opening and using their HSAs? Our Client Services team says they routinely hear from employees that the way HSAs have been explained doesn’t fit their lifestyle, and they have not been made aware of variety of ways and HSA can be used. Another reason is many people don’t really understand how HSAs work because they were covered quickly and superficially in their open enrollment meeting. If the person explaining HSAs doesn’t totally understand them, then employees (not to mention their spouses) have little chance of doing so.

Below are some tips on how you can help your employees understand the importance of opening and using their HSA:

Explain the tax savings. HSA contributions go into accounts pre-tax, so employees who pay a cumulative 25% tax rate can save up to $775 for self-only coverage and $1,562 for family coverage in tax savings. Also, make sure they know that while most people don’t expect to have a car accident, things can happen – better to have the HSA open to qualify for tax savings.
Give multiple examples of how to manage an HSA. Helping employees understand the 3 main ways an HSA can be used gives them more to pick from and increases engagement. The management options include the ability to fund the HSA retroactively for qualifying expenses spent from another source – as long as the HSA has been established in accordance with state law.
Understand the rules in the state of your HSA custodian. If you are in a state which requires opening and funding for HSA establishment, check with the custodian to see if they auto-fund the account with $1 or 1¢ – and if they don’t, do so as a company or advise employees to do so.
Increase your knowledge of HSAs. HSAs are still fairly new to most HR professionals so they don’t understand them. If you don’t fully understand how they work neither will your employees. Did you know you could reimburse yourself for “gas money” spent driving to your doctor? Take some time to brush up on some common eligible expenses.
Let someone else do it for you. At Tango, we offer educational materials to help our clients and their employees become more HSA savvy. During open enrollment, play or link to our 5-minute nifty video that explains HSAs in a simple and fun way.
Debunk the myths. Many people confuse HSAs with FSAs (Flexible Spending Arrangements). Check out some of the common HSA myths and clear up the rumors early in open enrollment.

Regardless of their financial situation, if your employees are enrolled in an HDHP with an HSA they need to be sure they open an account – even if they don’t plan on funding it beyond the first cent. It’s a very simple step that will help them avoid headaches in the future and will save them some money. And who doesn’t want to save money?!

Engaging All Employees: 3 Ways to Manage Your HSA

Posted on January 18, 2012 by Tango Health

It’s the beginning of a new year and we suspect you have some ambitious resolutions!

While many resolutions don’t last because they’re too ambitious, here’s a simple one to share with your employees that they’re sure to keep – saving more money on taxes by getting the most out of their Health Savings Account (HSA).

Let employees know that maxing out their HSA contribution will take only 5 minutes of work and will result in up to $775 in tax savings for anyone who pays a cumulative 25% tax rate. That’s like earning a quarter for every dollar they contribute. And that’s a resolution worthy enough to top anyone’s list!

Of course not every employee can afford to contribute the maximum to their HSA throughout the year, but those who don’t can still reap the tax savings. They just need to take a few minutes to set up their account and have a strategy for managing it.

3 Common HSA Management Styles

We see a lot of different styles for managing HSAs but they generally fall in three categories: Savers, Yearly Planners and Non-Planners.

Savers

Savers take full advantage of the HSA tax benefits and use their HSAs like long-term investment accounts. They pay for health expenses outside of their HSA using after-tax dollars and may reimburse themselves at any time (even years later) from their HSA account. They often contribute the maximum allowed by the IRS for the following reasons:

Their contributions end up being 25-35% greater than the money they would otherwise get in their paycheck because they’re NOT paying taxes
The interest they earn on their balance is not taxed
They can invest the amount they put in the HSA and all returns are not taxed
If they need the money for a medical emergency or to meet their deductible they have access to it
If they keep track of medical expenses as they go, they can make withdrawals to recover those either before or after age 65 completely tax-free
All the money in the account can be withdrawn without penalty when they turn 65
When they withdraw the money after the age of 65 they may pay lower income taxes on it than if they got the money today in their paycheck (assuming their income decreases)
If they use the money on health expenses at any time for the rest of their lives, they won’t pay taxes – no other investment vehicle lets them drive away WITHOUT taxes

Yearly Planners

Yearly Planners have a different approach to their HSA. They have a good understanding of how much they typically spend on health care each year, and they contribute only as much money as they anticipate needing, or in some cases just enough to hit their deductible, because:

They mainly use their HSA card to pay for their health expenses
They see the primary benefit as not having to pay taxes on the money for their medical expenses
They don’t have to do an above the line deduction on the end of year taxes
If they contribute through payroll, they save FICA payroll tax in addition to income tax
If they contribute less than their expenses, they can do more during the course of the year even if the medical expense is already paid and just pay themselves right back
If they contribute more than their expenses, they can roll money over for the following year

Non-Planners

The Non-Planners modus operandi is to not plan. But that works too. They open their HSA, but contribute no money to it. Their primary concern is maximizing cash flow from each and every paycheck and typically:

They pay for health expenses as they arise with after-tax dollars
The might not get untaxed interest on their savings
With Tango they can reimburse themselves after the expense has occurred so they don’t even need to carry a balance

There’s a key to all this money making and tax-shirking…opening the HSA. It only takes a few minutes but most employees don’t know that this simple step (free if the company pays for their account fees) is absolutely required by the IRS before they can contribute or start counting medical expenses as tax-free.

From all of this, take away one simple message: “Employees, open your accounts no matter your financial situation. You’ll thank me later.”