Time to Put Your 2024 Health Savings Account Ducks in a Row

The clock is ticking on 2023. Take a few minutes now to make last-minute 2023 Health Savings Account plans and set a course for a successful 2024.

Whether your medical plan renews in January, July, or any other month, Health Savings Account contributions are tracked on the calendar year. It's important to know when you can no longer contribute for 2023 (spoiler alert: April 15, 2024, for most owners) and how much flexibility you have in setting and changing your 2024 funding levels.

Even though you're not locked into a binding Health Savings Account election, you can maximize your financial opportunity and minimize last-minute angst by spending a little time - perhaps the equivalent of a Yellowstone or Bosch Legacy rerun - to take the proverbial pencil to paper and determine how you want your Health Savings Account to look at the end of 2024. With a road map in place, you'll find it easy to navigate the route and realize quickly whether you've gone off course.

Below are some important pieces of the plan.

Confirm Your Beneficiary

Just as the switch in and out of Daylight Savings Time is an opportunity to replace the batteries in your smoke detectors, the beginning of a new calendar year is a good time to review your beneficiary designation. If you're married and want to name someone other than your spouse, your administrator may require your spouse to sign a form acknowledging this arrangement.

Remember, if you name your spouse as beneficiary, your account balance passes to your spouse as Health Savings Account assets. If your spouse has established her own account, she can receive your balance whether or not she's eligible to fund a Health Savings Account. If she doesn't own one, she can set up her own Health Savings Account without being HSA-eligible herself, then receive the funds. Either way, she enjoys the same tax benefits as she would if she'd funded the account herself. She can make tax-free distributions for qualified expenses, enjoy tax-free appreciation, and even make her own contributions if she's HSA-eligible.

If you name anyone else as your beneficiary, your balances aren't lost. But the account will be liquidated and funds distributed. The distribution will be included in your beneficiary's taxable income in the year that it's received. Your beneficiary will face no restrictions or loss of tax benefits no matter how the funds are spent.

Some of the saddest stories in employee benefits are tales about employees who don't update their beneficiary designations and pass away, leaving their life insurance to a now-former spouse rather than a new spouse and children. In most cases, Health Savings Account balances are less than life-insurance payouts, but you still wouldn't want someone else to receive your hard-earned balances because you failed to name your intended recipient.

Review Your 2023 Contributions

The good news is that you're not locked into an annual contribution or schedule of equal periodic contributions during the year. You can change your Health Savings Account contributions - up or down, start or stop - prospectively at any time, whether you make pre-tax payroll deductions or deposit funds from a personal financial account. You don't have to experience a qualifying event to change your contribution strategy.

That said, it's important to review 2023 and plan for 2024. You can fund your Health Savings Account for 2023 (up to $3,850 for self-only and $7,750 for family coverage) at any time up until April 15, 2024 (the due date for 2023 personal income tax returns). But if you want to avoid federal payroll (FICA) taxes and enjoy immediate income-tax relief, you want to increase your payroll deductions through your company's Cafeteria Plan.

If your employer accepts prospective changes monthly, it's too late to make the adjustment. On the other hand, if you can make prospective changes that go into effect during the next pay period, you have time - but you must hurry - to make the change effective with your final paycheck of 2023.

If you can't make the changes in time, don't worry too much. You can still deposit personal funds through April 15 of next year and inform your administrator that they're for 2023. You can deduct this amount on your personal income tax return to recoup federal and state (except California and New Jersey) income taxes paid on funds contributed.

You can't reclaim FICA taxes paid when you contribute personal funds. Don't let this fact discourage you, though. If you can contribute another $2,000 by April 15, you won't recapture the $153 that you paid in payroll taxes (or only $29 if your income is above $160,200). But if you're in the 22% federal marginal tax bracket, you'll save $440 in federal income taxes. If your state assesses an income tax of 5%, you save another $100.

Now's a good time to set your 2024 funding strategy as well.

Set Your 2024 Contribution Goal

You're not locked into an annual contribution amount. You can change your contributions - start or stop, increase or decrease - as your needs and financial situation change. Still, it's good to set a contribution level. And because you can adjust your contribution level downward, you can start the year with an aggressive goal, knowing that you can back down if it becomes unsustainable. It's much easier to reduce your contribution mid-year than to find funds in your personal budget to ramp up your deposits later in the year.

Set Your Savings Goal

Think of your Health Savings Account as an emergency fund for qualified medical, dental, and vision expenses (and often premiums if you lose coverage). You should strive to build the account during good times (when you earn steady income) so that you can manage an unexpected large bill or disruption in your income. You can start along this path by contributing more than you expect to need in 2024.

Set Your Investment Goal

If you've discovered the benefits of saving a portion of your income for retirement medical expenses in your Health Savings Account because the tax benefits are superior to traditional retirement plans, you want to develop an investment strategy. The administrators who manage about 95% of all Health Savings Account balances offer a menu of investments. It may range from several dozen mutual funds to a brokerage platform that includes most mutual funds and stocks. Check with your administrator to learn more about the cash threshold that you must maintain before you can invest, your investment options, and how to set up automatic investments so that new contributions are moved into equities.

Also, if you're an inexperienced investor, see what resources are available to you. Resources can range from fund information to registered investment advisors to guide you to financial professionals who assume responsibility for managing your investment portfolio. Be sure you understand the fees associated with these services.

Stay the Course

The easiest way to manage your finances - whether it's a Health Savings Account, retirement savings, or saving for a major purpose - is to develop and then work your plan. And the easiest way to work your plan is to automate it. That way, your plan is implemented without waiting for you to act and isn't sidetracked when your focus shifts temporarily. Be sure to monitor your account - monthly, bimonthly, quarterly, or semiannually, whichever time span meets your needs and preferences - to make sure you remain on track.

The Bottom Line

It's your money. It's your opportunity. Health Savings Accounts deliver unmatched tax savings and investment efficiency, with the flexibility to cover medical emergencies and unexpected bills without accessing more expensive sources of funds. Once you draft a plan, you can "set it and forget it," save for a periodic review and, if necessary, a course correction.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.