Staying on Track

Maximizing Health Insurance Tax Deductions

Individuals and business owners alike are concerned about the already high, and continually rising, cost of health insurance. But whether you are an employee, an employer, or a self-employed individual, there are a range of Federal tax deductions available to you, including breaks provided by Health Savings Accounts (HSAs) and similar tax-advantaged accounts.

For Individuals

If you are an employee with access to group health care coverage, you do not pay taxes on the contributions you make to your health insurance premiums. But what are your options if your company does not provide medical benefits or if you own a business?

A savings account that must be paired with a qualified high-deductible health plan (HDHP), HSAs allow individuals to save money tax free, and the employers of account holders can make tax-free contributions to workers’ accounts. As long as the funds are used to pay for out-of-pocket health care expenses, the money deposited in an HSA is never subject to Federal income tax. HSA contributions may be invested in a manner similar to retirement accounts, and investment earnings and interest accrue tax free. These accounts can be especially attractive for higher income individuals, as any funds not spent in a given year can be carried over indefinitely, and they may even be withdrawn penalty free in retirement for non-qualified expenses.

Because they are used in conjunction with HDHPs, the cost of insurance premiums for HSA policies can be much lower than for comprehensive health plans. In 2009, an HSA-qualified plan must have a deductible of $1,150 or more for an individual and $2,300 or more for a family. The 2009 out-of-pocket maximum, which includes the deductible and any potential co-insurance payments, is $5,800 for an individual and $11,600 for a family.

The statutory contribution limits for HSAs are set each year by the Internal Revenue Service (IRS). The limits for 2009 are $3,000 for an individual plan and $5,950 for a family plan. HSA holders aged 55 and older may, however, make annual catch-up contributions of $1,000. These annual contribution limits apply regardless of whether the deposits are made by the account holder or by his or her employer.

HSAs are always owned and administered by individuals, and account holders may keep any funds contributed to their HSAs even if they change jobs.

HSA funds, which are usually accessed through a debit card or checks supplied by the health insurance provider, may be used to pay for a wide range of health care expenses, including doctors’ visits, hospital stays, medical tests, dental care, prescriptions, over-the-counter drugs, medical equipment, and even long-term care insurance premiums. Withdrawals that are not made for qualified medical expenses are, however, subject to income taxes and, for those under the age of 65, a 10% penalty. Any funds remaining in an HSA at the time of the account holder’s death may be passed on to a spouse tax free or to another designated beneficiary, who must pay taxes on distributions.


For the Self-Employed

Whatever type of health coverage you select, you may be able to deduct your health insurance premium payments if you are self-employed. Provided you had a net profit for the year, you are generally entitled to deduct, as an adjustment to income, up to 100% of the amount paid for medical and qualified long-term care insurance on behalf of yourself, your spouse, and your dependents.

Under IRS rules, the insurance plan must be established under your trade or business, and the deduction may not exceed your earned income from that trade or business. You are not permitted to claim this deduction for any month in which you were eligible to participate in any subsidized health plan maintained by your employer or your spouse’s employer.

For Business Owners

If you are a business owner and wish to provide health care benefits to employees, you have a number of choices, including an HSA option coupled with a high-deductible plan or a number of group plans that feature more traditional forms of coverage, such as health maintenance organizations (HMOs) or preferred provider organizations (PPO). If you would like to offer employees a consumer-driven health plan similar to the HSA, but would prefer to maintain greater control over the funds contributed to employee accounts, you may wish to consider a Health Reimbursement Arrangement (HRA).

Regardless of the type of business you operate, you can always deduct 100% of the premiums paid on behalf of your employees. If the business is incorporated, all costs for your own insurance, as well as for your employees, are deductible.

The high cost of health insurance can have a profound effect on both individuals and business owners. While certainly not a solution to rising costs, be sure to maximize your tax advantages and deductions to help keep more of your hard-earned money in your own pocket. To learn more, contact your tax professional.