The Many Benefits of a Health
Savings Account (HSA) +
Good Time to Start Planning and
Organizing Your Taxes
of Updating Beneficiary Designations
of us have more than enough to do. We're on the go from early
in the morning until well into the evening - six or seven days
Thus, it's no surprise that we may let some important things
slide. We know we need to get to them, but it seems like they
can just as easily wait until tomorrow, the next day, or
A U.S. Supreme Court decision reminds us that sometimes
"whenever" never gets here and the results can be tragic. The
case involved a $400,000 employer-sponsored retirement
account, owned by William, who had named his wife, Liv, as his
beneficiary in 1974 shortly after they married. The couple
divorced 20 years later. As part of the divorce decree, Liv
waived her rights to benefits under William's
employer-sponsored retirement plans.
However, William never got around to changing his beneficiary
designation form with his employer.
When William died, Liv was still listed as his beneficiary.
So, the plan paid the $400,000 to Liv. William's estate sued
the plan, saying that because of Liv's waiver in the divorce
decree, the funds should have been paid to the estate. The
Court disagreed, ruling that the plan documents (which
called for the beneficiary to be designated and changed in a
specific way) trumped the divorce decree. William's
designation of Liv as his beneficiary was done in the way the
plan required; Liv's waiver was not. Thus, the plan rightfully
paid $400,000 to Liv.
The tragic outcome of this case was largely controlled by
its unique facts. If the facts had been slightly different
(such as the plan allowing a beneficiary to be designated on a
document other than the plan's beneficiary form), the outcome
could have been quite different and much less tragic. However,
it still would have taken a lot of effort and expense to get
there. This leads us to a couple of important points.
|If you want to
change the beneficiary for a life insurance policy,
retirement plan, IRA, or other benefit, use the
plan's official beneficiary form rather than
depending on an indirect method, such as a will or
It's important to keep your beneficiary designations up to
date. Whether it is because of divorce or some other
life-changing event, beneficiary designations made years ago
can easily become outdated.
One final thought regarding beneficiary designations:
While you're verifying that all of your beneficiary
designations are current, make sure you've also designated
secondary beneficiaries where appropriate. This is especially
important with assets such as IRAs, where naming both a
primary and secondary beneficiary can potentially allow
payouts from the account to be stretched out over a longer
period and maximize the time available for the tax deferral
benefits to accrue.
Benefits of a Health Savings Account (HSA)
Health Savings Account (HSA) represents an opportunity for
eligible individuals to lower their out-of-pocket health care
costs and federal tax bill.
Since most of us would like to take advantage of every
available tax break, now might be a good time to consider an
HSA, if eligible.
An HSA operates somewhat like a Flexible Spending Account (FSA)
that employers offer to their eligible employees. An FSA
permits eligible employees to defer a portion of their pay, on
a pretax basis, which is used later to reimburse out-of-pocket
medical expenses. However, unlike an FSA, whatever remains in
the HSA at year end can be carried over to the next year and
beyond. In addition, there are no income phaseout rules, so
HSAs are available to high-earners and low-earners alike.
Naturally, there are a few requirements for obtaining the
benefits of an HSA. The most significant requirement is that
an HSA is only available to an
individual who carries health insurance coverage with a
relatively high annual deductible. For 2015, the
individual's health insurance coverage must come with at least
a $1,300 deductible for single coverage or $2,600 for family
coverage. For many self-employed individuals, small business
owners, and employees of small and large companies alike,
these thresholds won't be a problem. In addition, it's okay if
the insurance plan doesn't impose any deductible for
preventive care (such as annual checkups). Other requirements
for setting up an HSA are that an individual can't be eligible
for Medicare benefits or claimed as a dependent on another
person's tax return.
Individuals who meet these requirements can make
tax-deductible HSA contributions in 2015 of up to $3,350
for single coverage or $6,650 for family coverage. The
contribution for a particular tax year can be made as late as
April 15 of the following year. The deduction is claimed in
arriving at adjusted gross income (the number at the bottom of
page 1 on your return). Thus, eligible individuals can benefit
whether they itemize or not. Unfortunately, however, the
deduction doesn't reduce a self-employed person's
self-employment tax bill.
When an employer contributes to an employee's HSA, the
contributions are exempt from federal income, Social Security,
Medicare, and unemployment taxes.
An account beneficiary who is age 55 or older by the end of
the tax year for which the HSA contribution is made may make a
larger deductible (or excludible) contribution. Specifically,
the annual tax-deductible contribution limit is increased by
An HSA can generally be set up at a bank, insurance
company, or other institution the IRS deems suitable. The
HSA must be established exclusively for the purpose of paying
the account beneficiary's qualified medical expenses. These
include uninsured medical costs incurred for the account
beneficiary, spouse, and dependents. However, for HSA
purposes, health insurance premiums don't qualify.
Now is a Good Time to Start Planning and Organizing Your Taxes
may be tempted to forget all about your taxes once you've
filed your tax return, but that's not a good idea.
If you start your tax planning now,
you may avoid a tax surprise when you file next year.
Also, now is a good time to set up a system so you can keep
your tax records safe and easy to find. Here are some tips to
give you a leg up on next year's taxes:
action when life changes occur. Some life events
(such as marriage, divorce, or the birth of a child) can
change the amount of tax you pay. When they happen, you may
need to change the amount of tax withheld from your pay. To do
that, file a new Form W-4 (“Employee's Withholding Allowance
Certificate”) with your employer. If you make estimated
payments, those may need to be changed as well.
records safe. Put your 2014 tax return and
supporting records in a safe place. If you ever need your tax
return or records, it will be easy for you to get them. You'll
need your supporting documents if you are ever audited by the
IRS. You may need a copy of your tax return if you apply for a
home loan or financial aid.
organized. Make tax time easier. Have your family
put tax records in the same place during the year. That way
you won't have to search for misplaced records when you file
If you are self-employed, here are a couple of
additional tax tips to consider:
your child. Doing so shifts income (which is not
subject to the “kiddie tax”) from you to your child, who
normally is in a lower tax bracket or may avoid tax entirely
due to the standard deduction. There can also be payroll tax
savings; plus, the earnings can enable the child to contribute
to an IRA. However, the wages paid must be reasonable given
the child's age and work skills. Also, if the child is in
college, or is entering soon, having too much earned income
can have a detrimental impact on the student's need-based
financial aid eligibility.
the hobby loss rules. A lot of businesses that are
just starting out or have hit a bump in the road may wind up
showing a loss for the year. The last thing the business owner
wants in this situation is for the IRS to come knocking on the
door arguing the business's losses aren't deductible because
the activity is just a hobby for the owner. If your business
is expecting a loss this year, we should talk as soon as
possible to make sure you do everything possible to maximize
the tax benefit of the loss and minimize its economic impact.
Remember you can call our
offices if you have any questions about these or any other accounting, tax,
financial planning or insurance related issues, at 313-388-0300.
Regards, Philip Schreiber, CPA
Schreiber Advisors, PC