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• All the money in the account can be withdrawn without penalty when they turn 65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.”