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Health Savings Account (HSA) - Does it make "Cents" for my family?

February 8, 2010

Recently the topic of a Health Savings Account, otherwise known as an HSA, came up. HSA's are not new and there are several requirements to an HSA that are beyond the scope of this discussion. Let's look at the HSA pros and cons in one particular case.

THE FACTS in this case are as follows:

Jack Smith, employee of ABC, has his health insurance paid for by ABC.

Jack's wife and 2 children, Jill, Thing 1 and Thing 2, have health insurance through the employer group plan, but Jack pays for it through deductions from his paycheck. The deductions from Jack's paycheck are through a Premium Only Flexible Spending Account, meaning that the amounts taken from Jack's paycheck avoid Social Security, Medicare tax and Federal Income Tax.

ABC company does not have any additional FSA opportunities and does not sponsor an HSA.


Let's start the analysis on what it is Jack and Jill spend and what the insurance company pays on their behalf to providers. To do this, they look at the Explanation of Benefits (EOB) from the insurance company for the last twelve months. The EOB will outline the provider charges, contractual adjustments (write-off), insurance payment to the provider, patient copay and patient responsibility if any.  This will give them a general idea of what they would be responsible for at the provider's office.

For example, Jill pays a copay of $30 at the time of the visit. The provider then bills insurance $100. Jill's EOB outlines the provider charges $100, contractual adjustments (write-off) of $45, insurance payment of $25 to the provider, the $30 patient co-pay and $0 patient responsibility. 

Under a High Deductible Health Plan (HDHP) required in order to establish an HSA, the amount that the participant will be required to pay will vary depending on each HDHP.  The contractual adjustments in a HDHP will probably not be the same as the current group health insurance that is offered through the employer. BE SURE TO ASK!  Let's assume that for simplicity sake, Jill will be responsible for the full $55 paid to the provider (the $25 and the $30) until the deductible is met.

THE OPTIONS - Let's compare the options...

Let’s understand the nuts and bolts, i.e., the costs and savings.

CURRENTLY - Jack is having $450 per month taken from his check. ($5,400 per year) This money is pretax, meaning Jack does not pay social security or Medicare tax (7.65%) as well as federal income tax (15%).  Combined, this tax savings is 22.65% or $1,223, which basically says the yielding a net cost of the health insurance of $4,177.  If Jill wanted to find individual coverage for she and the kids, can she find a policy that is comparable for less than $348 per month?  If so, the logical conclusion is to take the money.  

It is money out of Jack's check and the family still has some coinsurance / deductible amounts.  The importance of measuring the tax savings is to measure true dollars against dollars in the options that exist.  If Jack were to take the wages instead of the family coverage, the family has fewer dollars to pay for outside coverage because of the tax costs.  In this case, Jack has $4,177 per year after the Social Security and Medicare Tax are paid.  The Federal Income Tax will not been calculated yet because the HSA contributions will be deductible and the HDHP premiums will more likely than not be deducted for Federal Income Tax purposes. (for the most part, while they are "deductible" as an itemized deduction, the likelihood of actually deducting them is slim) 


Not having an employer provided option, Jill and the kids are considering leaving the family coverage through the employer plan, taking the cash,  buying health insurance through an HDHP and investing the difference in an HSA.  What does their cash flows look like if they were involved in the HSA? From a cash flow perspective, they would buy insurance and an accident rider for $275 per month that has a $7,000 deductible. 

The Smith's have $5,400 additional annual income since they choose not to participate in the plan at Jack's office, which is reduced by $413 to $4,987 in cash after Social Security and Medicare Taxes ($416 per month).  Jill pays $275 per month to the insurance company for the HDHP. That is $3,300 per year, but, as mentioned earlier, federal income tax is owed on that money, which at 15%, is $495.

What do the Smith's have to fund the HSA?  The cash the Smith's have $1,192 left to fund the HSA, or $99.33 per month ($5,400 – 413 - 3,300 - 495). The resulting contribution of $1,192 to the HSA is the funds available to pay for the various medical expenses and meet the deductible. 

Note that the 2010 maximum family contribution to the HSA for the year is $5,950.


The first question I have is how long will the $1,192 last you? 

In the EOB analysis, if the patient copay, and patient responsibility  and insurance payment combined are less than or equal to the $1,192, then the HSA is a good option.

If last year was an anomaly for medical costs and you expect the coming year to improve, or you believe the accident rider will cover a significant portion of the costs identified in the EOB analysis, then it could be a good option.

If your costs will exceed the $1,192, you have a lot more to think about.


OTHER TAX BENEFITS - You could receive a tax benefit for other out of pocket medical expenses that you are currently paying.  Pain relievers, cold medicine, other over the counter drugs could be eligible as HSA expenses.  Effectively, you could increase your contributions to the HSA, pay for those over the counter drugs through the HSA and reduce your overall federal income tax. 

CASH FLOWS Part I - Money can only be drawn from an HSA if there is money there.  If you are making $100 per month contributions and you are two months in, having accumulated $200 and the doctor visits and related prescriptions are cost you $350, you have to find the cash outside the HSA to pay for them since there is not enough money in there.  When the money is funded, you can withdraw it for those other medical expenses that you paid for out of pocket, but be sure you maintain receipts! 

CASH FLOWS Part II - There is a one time option to fund the HSA with a direct transfer from an IRA.  There are several reasons that you might choose to do this.  One reason is the concern addressed in Cash Flows - Part I above.  I can think of other reasons to make it  happen as well.  If you anticipate an increase in medical expenses in the coming year, it is a one time opportunity to convert retirement funds to currently usable funds.  I am not a big fan of taking retirement funds out of service, so I encourage discipline and planning if this is a consideration for you.


January 5, 2010


The accelerated recapture provisions of the first time homebuyer credit are still a very new area in the internal revenue code.  Based on my read of the law, the couple who claimed the credit on a married filing jointly tax return will be deemed to have taken the credit 50% each for credit recapture purposes.  IRC36(f)(5) 

The accelerated recapture rules limit the amount of the recapture to the lesser of the unrecaptured credit or the gain on the sale of the home after reducing the adjusted basis by the unrecaptured credit. IRC36(f)(3)

There is no form to calculate this recapture and it will probably come out in a few years as another area of taxpayer abuse.  Currently it appears to be the honor system to report the recapture correctly.  The 1099-S provisions exempt reporting sales of principal residence assuming the title company gets a signed certification. 

If the IRS does not have a 1099-S to track the sale, then how will they track who is required to recapture the credit?  Who knows. 

The other caveat that I should share with you is that if the house is transferred to a spouse incident to a divorce, the recapture provision tracks to the spouse who received the property under IRC 36(f)(4)(C).   If spouse A wanted to keep the property as their residence and spouse B transferred all rights to A, then the recapture burden then transfers and falls on spouse A.
This is my interpretation to IRC Section 36 and the provisions there under and therefore is subject to be modified upon additional information or guidance from the IRS or other authoritative sources.
In the following discussion, I have assumed that a client filed a joint return and received the maximum $7,500 credit.  In the case of a jointly filed return, half of the credit will have been deemed to be allowed to each individual under IRC 36(f).  Therefore, the recapture should fall to each individual equally.  In addition, the recapture will be limited to the amount of the gain on the sale of the residence, calculated as the sales price less the adjusted basis less the unrecaptured portion of the credit.
Example Facts –

Purchase date 11/1/08

Purchase price $100,000

Closing Costs eligible to increase basis $2,000

Credit allowed and claimed on a 2008 married filing jointly tax return $7,500

2009 Tax return will be field as married filing separately

Each taxpayer will be required to recapture their respective portion of the FTHB Credit or (7500x6.666667%x50%) or $250. 

2010 The home is sold for $105,000

Closing costs eligible to increase basis on the sale of the home are 4,000.

Adjusted basis in the home is $99,000 (Purchase Price + Purchase Closing Costs + selling closing costs – FTHB credit claimed jointly + both credit recapture claimed individually) or (100,000+2,000+4,000-7500+250+250). 

Each of their adjusted basis would be 50% or $49,500 for recapture purposes and each of their selling prices is 50% or 52,500 ($105,000 x 50%). Each will recapture the credit up to $3,000… the lesser of the gain or the unrecaptured credit… 3,000 or 3,500 (7500x 50%)-250).

December 1, 2009

Homebuyer Credit Expanded and Extended

The Worker, Homeownership and Business Assistance Act of 2009, signed into law on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous Acts.

Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. For qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 return.

The new law also:
• Authorizes the credit for long-time homeowners buying a replacement principal residence.
• Raises the income limitations for homeowners claiming the credit.
News release 2009-108 has the details, as do two new IRS videos in English and Spanish.
Members of the military, Foreign Service and intelligence community serving outside the U.S. should also be aware of new benefits in the law that apply particularly to them.

Following is general information for first-time homebuyers who settled on a new home on or before Nov. 6, 2009.

For 2008 Home Purchases

The Housing and Economic Recovery Act of 2008 established a tax credit for first-time homebuyers that can be worth up to $7,500. For homes purchased in 2008, the credit is similar to a no-interest loan and must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.

For 2009 Home Purchases

The American Recovery and Reinvestment Act of 2009 expanded the first-time homebuyer credit by increasing the credit amount to $8,000 for purchases made in 2009 before Dec. 1. However, the new Worker, Homeownership and Business Assistance Act of 2009 has extended the deadline. Now, taxpayers who have a binding contract to purchase a home before May 1, 2010, are eligible for the credit. Buyers must close on the home before July 1, 2010. [Added Nov. 12, 2009]

For home purchased in 2009, the credit does not have to be paid back unless the home ceases to be the taxpayer's main residence within a three-year period following the purchase.

First-time homebuyers who purchase a home in 2009 can claim the credit on either a 2008 tax return, due April 15, 2009, or a 2009 tax return, due April 15, 2010. The credit may not be claimed before the closing date. But, if the closing occurs after April 15, 2009, a taxpayer can still claim it on a 2008 tax return by requesting an extension of time to file or by filing an amended return. News release 2009-27 has more information on these options.

General Information
Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer's principal residence.
• Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

The credit is claimed using Form 5405, which you file with your original or amended tax return.

Questions and Answers

More information is available in the question and answer section.

Page Last Reviewed or Updated by the IRS: November 25, 2009


November 13, 2009
H.R. 3548 became PL 111-92 when it was signed into law.  It is formally known as the Worker, Homeownership, and Business Assistance Act of 2009.  The highlights include changes to unemployment benefits, extension of the increase in unemployment insurance premiums that employers are required to pay, extension of the first time homebuyer credit, allowing existing homebuyers who meet several requirements to get a reduced first time homebuyer credit when they purchase a home, changes to the net operating loss carry back provisions for small businesses, increases in the penalties applicable to Partnership and S-Corporations that fail to file returns, a requirement that tax preparers to file all individual, estate and trust tax returns electronically, and changes to the required corporate estimated tax payment.
As the law relates to existing homeowners, the substance of what I wrote about previously is the same.  See below the November 6, 2009 information.

November 6, 2009 (Revised November 9, 2009)

It appears that legislation is going to the President for his signature that extends the first time home buyer credit to May 1, 2010.  The new first time homebuyer is still eligible for the full $8,000 credit if married filing jointly or $4,000 if married filing separately. 

This new legislation also allows current homeowners that want to buy a new home to participate in the credit as well

As with all federal legislation there are limitations and caveats that must be complied with to take advantage of the tax credits.  H.R. 3548 contains the details and may be subject to change.  Here are the guts of H.R. 3548 as it relates to existing homeowners....

  • Existing Homeowner's - An existing homeowner will be considered a new homebuyer if they have owned a home and have lived in it as their primary residence for five consecutive years, meaning date to date, within the 8 year period of when they purchased the second residence.

    HR 3548, Section 11(b)(6) reads as follows: "(6) EXCEPTION FOR LONG-TIME RESIDENTS OF SAME PRINCIPAL RESIDENCE- In the case of an individual (and, if married, such individual's spouse) who has owned and used the same residence as such individual's principal residence for any 5-consecutive-year period during the 8-year period ending on the date of the purchase of a subsequent principal residence, such individual shall be treated as a first-time homebuyer for purposes of this section with respect to the purchase of such subsequent residence."  The existing homebuyer credits are reduced to $6,500 for married filing jointly and $3,250 for married filing separately filers.  The new first time homebuyer is still eligible for the full $8,000 credit if married filing jointly or $4,000 if married filing separately.

  • Effective Dates - For the existing homeowner exception being added, it is intended to apply to homes purchased after the enactment of the legislation.

  • How Much - The existing homebuyer credits are reduced to
    $6,500 for married filing jointly and $3,250 for married filing separately filers.