The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 92 - Maximizing Healthcare Tax Benefits: HSAs, HRAs, and Strategic Planning
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We explore powerful tax strategies involving HSAs and HRAs with Dan Pavic to transform medical expenses into significant tax benefits and wealth-building opportunities.
• HSAs offer triple tax advantages: tax deduction for contributions, tax-free growth, and tax-free withdrawals for qualified expenses
• Health Savings Accounts allow for investment opportunities and unlimited rollovers, making them effective wealth-building tools
• Strategic HSA hack: pay medical expenses out-of-pocket, then reimburse yourself years later after funds have grown tax-free
• HRAs provide unlimited reimbursement potential versus HSA's $7,000 annual contribution cap
• Hiring your spouse creates a pathway for reimbursing family medical expenses through your business
• C-Corporations offer unique advantages for health reimbursements due to owner/entity separation
• You can combine HSAs and HRAs to maximize both unlimited deductions and tax-free growth
• HRAs can serve as affordable alternatives to traditional health insurance for employees
• Proper implementation requires formal documentation, compliant reimbursement procedures, and strategic entity structuring
Learn more from Dan at: Dan.Pavek@tasconline.com
Go to prosperlcpa.com/apply to explore how these strategies could fit your situation or email mark@prosperal.com for access to our upcoming workshop series on maximizing healthcare tax benefits.
Hey guys, I just had a really awesome conversation with Dan Pavic, and Dan is going to be collaborating with us to do some workshops for our clients and he will also be helping us to implement some tax deduction strategies relating to medical expenses and it can get a little overwhelming out there. So we were able to really get some clarity in the conversation on what's available for you and what are some accounts you can set up, and, in particular, we talked about HSAs and HRAs. Now, that was a great conversation, but unfortunately, my stinking virtual studio didn't record any of it. So this is what we're going to do I'm going to give you guys a recap of some of the biggest takeaways and some key items here and, in addition to that, I will also be posting the first part of our multi-part series for our clients when we do our workshop, exclusive to the clients, on maximizing the tax benefits available related to medical expenses, including health insurance. So before I jump in, if you are interested in any of what we do, go to prosperalcpacom, slash, apply to see where you can use our services. To see if you can use our services, we are opening up to some more entry-level entrepreneurs, as we do have some openings available at our tax prep and our entry-level staff. That can really give you some great resources as well, as you'll have access to me in group calls and workshops as well. Another thing I want you to know is we are going to make this multi-part series available to non-clients. Just reach out email mark at prosperalcpacom and for a nominal charge you will gain access to the recordings and workshops and templates and more resources to move forward Now, before I get into all the details.
Speaker 1:So some of you guys listening, and especially you guys who are our clients, you will stay tuned. You will see some invites on the calendars or you maybe already have where you can interface, live with Dan, and we are going to take action on these ideas. We're going to do a holistic look at your situation and see where we can incorporate this, what type of entity structure best complements this and what business should we take the write-offs, all sorts of variables. When we're doing holistic tax planning, we're looking at the medical related expenses and also looking at your sources of income, your W-2, your investments, your real estate, your stock portfolios, looking at the whole picture of what those items are and how can we really set this up. So we're optimizing our tax savings on all fronts.
Speaker 1:Now here are some key items that we talked about. We have our HSAs, our health savings accounts, and if you're a W-2 or an entrepreneur, you can put the money in up to $7,000 a year and you will see the best of both worlds when we talk about tax savings here, because you get to reduce your money. When it comes out, it grows tax-free and when you take the money out, as long as it's for qualified expenses, you do not pay taxes when you use the money. And the hsa I also really like because you can invest and it'll grow and compound tax-free, unlike some of these other reimbursement accounts. So it also is a wealth-building tool here, which is really exciting stuff.
Speaker 1:Additionally, we have our HRA health reimbursement accounts that we were discussing, and this is really good for sole proprietors and C-Corps where you want to see the benefits for your own medical-related expenses. So let me give you a breakdown and try to simplify this as much as I can so you cannot use your own fringe benefits to create the optimal amount of savings here, because what a health reimbursement arrangement is, the HRA is if you incur qualified expenses, the company reimburses you, the company gets the write-off and you don't pay taxes on it. Well, you can't do that type of exchange between you and yourself as an owner if you're a sole prop or an S-corp. So, as a work around, you hire your spouse, your spouse works for you. It could be for your own entity, your single member entity or even your real estate Schedule C income Sorry, schedule E income and what's going to happen is you pay your spouse and your spouse has the ability to take advantage of these benefits and you do a health reimbursement arrangement with your spouse, and now your spouse gets reimbursed for your spouse's family's costs, which may include the medical related expenses that they incur, paying for their own expenditures, their children or even you, which is their husbands. So that's a nice little work around here. It also can work if you have a C corporation and your C corporation. There's enough separation between you and your C corp, so your C corp can also reimburse you for these costs, even though you're working in the company and own the company. So what's going to be advantageous, especially for some higher income earners, is you're going to consider and some of us will be creating a C corporation that's a property management company that serves you, and now you have the ability to reimburse yourself If you can't pay your spouse to reimburse it, let's say your husband or your wife has no interest in what you're doing at all. This is a way where you can be involved and still run the business and still create these fringe benefits. I'll probably do a separate episode just on spinoffs and more advantageous entity structuring for the higher incomers, where it makes sense to do the C Corp carve outs.
Speaker 1:I see a lot of people abusing this idea because it just looks really cool on paper and you know there are some. You know you are moving money into the 21% tax bracket, but a lot of people find that they're. What I've seen is you have these fancy consulting companies, do this stuff, but then they leave their client with just a big binder and a bunch of questions and the client is like what the heck do I do with all these entities? And then you don't factor in double taxation of dividends on top of the income and it's just a big, big wacky mess. So all I'm going to say on that is if you're going to have a spinoff entity and it's a C-corp, hopefully you're in a position where you understand how to operate it and you likely want to be in a high enough tax bracket where you're going to see tax advantages of going to that level of complexity, managing, navigating double taxation.
Speaker 1:Anyways, back to the health-related expenses here. So when we hire our spouse or we have a C-corp, we can do these reimbursements. Now the reimbursement arrangement is going to be more beneficial than the HSA in certain circumstances. For instance, you're not going to be capped on what you can spend through it. So, unlike the HSA where you're capped at $7,000, there's no cap on it.
Speaker 1:Another thing you may want to consider here is if you have staff you have lots of employees this is another way where they can see a benefit, kind of like an additional form of compensation, where you're giving them money and they do not pay taxes on that. You could do the HRA in lieu of health insurance. So let's say you can't afford to give everybody full health insurance or some folks. You have a certain threshold where it's not going to make sense. You can do the HRA plans where you can reimburse them for a good chunk of their health-related costs to cover some or all of the health insurance that your employees are receiving. So here's a good way to either make it more affordable for your employees to have health insurance or pay for other health-related expenses. Or here's an opportunity for you to create more advantages and more perks and more incentives in a very tax-advantaged manner for your staff. And for some of you guys who don't have staff, remember, if you just have one or two rentals these ideas are going to be in scope because you have now a sole proprietor and you can hire your spouse Pretty cool. So some other things I want you to think about.
Speaker 1:One idea that Dan shared with us that was really interesting, that I had not considered is you can be reimbursed by your HSA for expenses incurred while you open that account, even if it's years later. So one example that Dan gave us, which is really cool let's say, over the course of five years you incurred $25,000 of medical related expenses, but you didn't pay for any of it out of your HSA. So you're putting $7,000 a year into the HSA, year after year after year, but you never took the money out of the HSA to cover those medical related expenses. After five years that money has been reduced your taxes when you put it in and it grows and it compounds in a tax advantage manner. It's investing and it's growing wealth and compounding in wealth because you're not spending it. Well, in year five or whenever, when you're finally ready to be reimbursed, you can have the HSA reimburse you for the costs that you had the qualifying costs that you had while having this HSA, even though it was as far back as five years ago. So the HSA reimburses you. You take the cash, but also not only do you have the reimbursement hit your account, but also this HSA has now seen the benefit of you of the tax-free growth of whatever is growing and compounding within this HSA Really cool stuff here.
Speaker 1:Now I've seen a lot of really creative and resourceful things with the HSA. I've seen folks do some things where they're. I've even seen a guy invest passively into a potato farm in his HSA. There's so much cool stuff. I've heard people even investing in real estate with HSA in his HSA. There's so much cool stuff. I've heard people even investing in real estate with HSA. So there's all sorts of unique and resourceful ways where you can take this account and use it in a way that is going to really provide some amazing wealth opportunities and grow over time.
Speaker 1:And then some of you may be thinking, well, this is great, but I don't want to be so sick that I'm going to need to spend this much on my medical related expenses. Well, you're going to find that there are ways that you can do this. There are ways where you can incur costs out of your HSA for, maybe, long term care when you get older and that can be insanely expensive and also other forms of insurance, and if you understand the law and how the rules work, you're going to find ways to take funds out of the HSA in a very tax-advantaged manner when you're spending it on qualified expenses. However, you want to keep in mind that if you take money out of the HSA and it's not qualified it is not spent on qualified medical expenses you will incur taxes and penalties. So this is just an instance where it's really good to have a resource to guide you on how to best plan for this and really making sure that you are staying compliant and using it for the right costs.
Speaker 1:So another thing that we touched on a few times in our conversation with Dan was on combining the HRA with the HSA and the answer. One of the most common questions that he gets is can I combine an HSA with an HRA? And the answer is absolutely you can have both. So now we see the benefits of an unlimited deduction coming out of the HRA and we also have an account that we can grow and compound. However, there are some nuances on what you take the money out and how you stack them together, but you can see the tax benefits and the wealth building benefits of having both accounts.
Speaker 1:And then another thing that we talked about here that can be a bit of a challenge for you guys. So imagine you're hearing these ideas and maybe you're walking around or driving in your car you say, oh, this sounds great, but I don't even know where to get started. This sounds so overwhelming. We got accounts, transactions and thresholds and rules. What are we going to do? Well, that's where you really want to have a strategic partner here, and Dan is going to be helping our firm in collaborating with this, and we're going to be running some projections and sharing some ideas in our mid-year planning with our clients, which is going to start in May.
Speaker 1:So what you want to do here is really make sure you have a great resource. You can again do holistic tax planning and also Dan is going to be our advisor to help us out on setting these accounts up having all the formalities in place, making sure that you have the proper documentation for incurring the expense and reimbursing the expense. How are you going to set up these reimbursement accounts with your staff and educate your staff, and how are they going to know how to use it? The bigger you are and the more you're spending, the more you're going to need a little bit of hand-holding here to make sure that all your ducks are in a row, you're staying compliant and you're implementing this effectively and to the greatest of your ability to create optimal tax savings. So I'm going to give you guys Dan's Cal link if you want to chat with him as well.
Speaker 1:But what I really want you to think about, especially if you're a client, we're going to have a three-part series and Dan and I are going to really riff together on some wonderful ideas on how this fits the picture for you guys, and for some of you guys, is it worth investing into a more sophisticated idea or structure or plan or entity spinoff? You know, when we evaluate what's the amount of tax savings, what's the wealth we can create over time, compared to the additional costs and fees, the additional complexity and time you may need to invest to understand and have this implemented, but at the very least, you guys should be aware of the fact that there are tons of opportunities here. We're just now scratching the surface in this podcast on what is possible, but one of the things that you should certainly think about is you should be discussing this, at the very least, discussing this with your tax advisor and making sure that they are aware of the medical related expenses you're incurring, especially if they're extraordinary. It may impact what your entity structure should be. It may change your decision between having a sole proprietorship, an S-corp or a corporation or multiple entities, and hopefully your advisor is knowledgeable and capable and ready to consider your medical related costs in the tax planning, looking at everything the holistic tax planning and the entity structure that they are creating for you, and you know how to carry out that structure and those incentives and knowing what you can write off as part of your overall holistic tax planning. So a lot of these.
Speaker 1:I threw a lot of this out there to you guys. And whether you have just one rental property or you have multiple, whether you're taking advantage of the short-term rental tax status, real estate professional tax status, if you're in a $0 tax bracket, this is still helpful because you're converting your medical expenses into business deductions that carry forward and have more value to maybe offset future cap gains or other taxable events. If you're in a really high bracket, you're going to see a greater immediate tax deduction from it and even if you're making not that much money, this could help you reduce your Social Security and Medicare taxes. So there's a lot of things that you can do here to optimize your taxes. When you're just aware of the tax treatment of your medical costs and what, can you navigate this system and take advantage of tax incentives in the tax law that are going to give you the most amount of tax savings over time, and especially when we combine this with the HRA and we can grow our wealth and compound our wealth in a tax-free manner, there's some really amazing stuff we can do to create an optimal amount of tax savings. So, again, if you want to learn more about this stuff and become one of our clients and we do have some offers that are maybe more affordable for some of you guys who maybe were a bit intimidated by our earlier models we have some more group and recorded type of resources Just go to prosperalcpacom slash, apply and we'll see what we can do for you. We do have some openings and we'll be happy to help. Additionally, if you're a client, stay tuned because we have some really wonderful workshops and resources coming your way. And again, just reach out If you have any questions on this stuff and stay tuned, we have some.
Speaker 1:I'll probably take the part one of our three part series and we'll add it to the podcast because I owe Dan a recording. Kind of messed that one up. So stay tuned. You'll hear me and Dan riff in the part one of our three-part series on this stuff and it's just really cool. If you're a tax accountant, you're really going to love this stuff because I know a lot of you guys are looking and taking our ideas. Anyways, I hope you guys enjoyed this episode. Send us your questions and share this with anyone who you think may appreciate this content. And have a great day and let's win the tax game together. Do it the right way. Have a wonderful day.