Health savings accounts (HSAs) are powerful tools for managing health care costs and planning for the future. Understanding how HSAs work and why the IRS gives them such favorable tax treatment can make a massive difference for your clients. So, whether you have self-employed individuals managing their coverage or clients planning for future medical expenses, finding ways to save them money is an added value for your practice.

What is an HSA?

HSAs are tax-advantaged savings accounts for individuals enrolled in a high-deductible health plan (HDHP). Funds can pay for the account owner’s qualified medical expenses and those of their dependents. Neither the employer nor the insurance company owns the account; only the individual does. Unlike flexible spending accounts (FSAs), HSA funds roll over year to year and remain with you even if you change jobs or retire. In essence, HSAs offer a long-term approach to saving for health-related expenses.

To be eligible, an individual must:

• Be covered under a high-deductible health plan (HDHP) on the first day of the month
• Have no other health coverage (with some exceptions),
• Not be enrolled in Medicare, and
• Not be claimed as a dependent on someone else’s tax return.

The triple tax advantage of HSAs

What truly sets HSAs apart is what tax and financial planners often call the “triple tax advantage.” Here’s what that means:

1. Tax-deductible contributions

The money your client contributes to their HSA is generally tax-deductible, even if they don’t itemize any deductions on Schedule A, Itemized Deductions. Contributions to the account are made pre-tax through their employer but can be made by the account owner, their employer or anyone else on their behalf. For 2025, the contribution limits are:

• $4,350 for self-only coverage
• $8,750 for family coverage
• An additional $1,000 catch-up contribution if you’re age 55 or older

HSA contributions reduce your client’s taxable income, potentially lowering their overall tax bill. You can calculate their tax savings and explain how the funds can remain in the account beyond employment.

2. Tax-free growth

HSA funds can be invested, and any interest or earnings on those investments grow tax-free. This feature makes HSAs a powerful tool for short-term medical expenses and long-term savings that can be used in retirement. Most HSA accounts require a minimum balance before investing the remaining funds. If your clients can pay for their current medical expenses with other funds, their HSA contributions will grow tax-free yearly.

3. Tax-free withdrawals for qualified medical expenses

HSA funds can pay for qualified medical expenses, like copayments, dental care, vision needs and prescriptions. Qualified withdrawals are completely tax-free. This applies to expenses for the account owner, spouse and eligible dependents.

After age 65, clients can withdraw HSA funds for non-medical expenses without penalty, and only pay regular income tax, much like a traditional IRA.

HSAs as a financial strategy

• Portability: HSAs stay with the owner, even if they change jobs.
• No “use-it-or-lose-it” rule: Unused funds roll over year after year.
• Flexibility: Funds can be used for current expenses or saved for future healthcare costs, even in retirement.
• Estate planning potential: An HSA can transfer to a named beneficiary upon death.

Health savings accounts aren’t just a medical savings tool. They’re a powerful, tax-efficient way to plan for current and future healthcare expenses. If eligible, opening and contributing to an HSA could be one of your client’s most financially savvy decisions this year. For more information on HSAs, check out this NATP webinar or refer to IRS Publication 969, Health Savings Accounts and other Tax- Favored Health Plans.

After a long pause that relieved millions of borrowers during and after the COVID-19 pandemic, the Office of Federal Student Aid (FSA) is starting a new phase in its student loan repayment strategy. The FSA is set to restart the Treasury Offset Program to collect unpaid student loans from borrowers who are in default on May 5. While that might sound alarming, it’s essential to understand what it means for your clients with unpaid student loans.

This program, run by the U.S. Department of the Treasury, allows the government to collect on defaulted student loans by taking borrowers’ tax refunds and other federal payments. Your affected clients will likely receive an email from FSA within two weeks after May 5 explaining the upcoming changes and encouraging them to take action.

Here are a few actions you can advise your clients to take to avoid any issues:

1. Contact the Default Resolution Group: They can help determine borrowers’ options.

2. Start making monthly payments.

3. Join an Income-Driven Repayment (IDR) Plan, which makes borrowers’ payments more manageable by basing the amount owed on their income.

4. Consider signing up for loan rehabilitation to get out of default.

Later this summer, the FSA will begin administrative wage garnishment, meaning a portion of your clients’ paychecks may be automatically withheld to help pay off their loan debt. If this occurs, clients will receive formal notices. In addition, the Department of Education will allow guaranty agencies to initiate involuntary collection actions on loans from the Federal Family Education Loan (FFEL) Program, which ended in 2010.

All collection actions must follow the rules set by the Higher Education Act, which states that taxpayers will not face penalties unless notified first and allowed to address their default.

In response to these pressures, some employers are implementing innovative programs to provide solutions.

Converting PTO to student loan payments

One emerging employer-provided benefit for employees with student loans is to allow them to convert unused paid time off (PTO) into student loan payments. This could benefit some, but there are also tax implications (IRS Notice 2024-63).

It’s essential to know that PTO conversions are taxable income under IRC §61. The funds are treated as wages if PTO is cashed out to assist with student loan payments outside of a qualified plan. Consequently, this amount will be included in the employee’s gross income, reflected on their Form W-2, and may be subject to income tax withholding, FICA and FUTA.

Employees can still take advantage of the student loan interest deduction if they do a conversion, which is capped at $2,500 per year and subject to certain income limitations, as detailed in IRC §221. Remember that, while using PTO to make payments is a fantastic strategy, only the interest portion of those payments qualifies for the deduction.

Moreover, employers can offer PTO conversion options through a cafeteria plan in alignment with IRC §125, which allows employees to select between cash compensation and loan payments. A nondiscriminatory written document must outline the cafeteria plan to ensure compliance.

The SECURE 2.0 Act of 2022 introduced a new feature in §110 that allows employers to treat student loan payments as elective deferrals for matching contributions. This means employers can now offer matching contributions to retirement plans based on Qualified Student Loan Payments (QSLPs), even if employees are not actively contributing to the retirement plan. These matching contributions are tax-deferred, which helps grow retirement savings over time.

With the rise of PTO-for-student-loan-repayment options, your employer clients will likely have compliance questions. Here’s what to keep in mind to help them navigate this emerging trend:

• Anticipate increased employee interest in trading PTO to cover student loan payments, and prepare to respond with clear, compliant guidance.

• Establish a written, nondiscriminatory educational assistance plan to properly exclude these repayment amounts from wages and ensure compliance with withholding requirements (FICA, FUTA, income taxes).

• Exercise caution when implementing PTO conversions within cafeteria plans to avoid constructive receipt issues under IRC §451, which states that income is taxable when the employee has the right access to it, not just when it’s paid.

• Update retirement plan documents if your clients choose to match contributions based on employees’ qualified student loan payments (QSLPs).

• Refer clients to IRS Publication 15-B and Notice 2024-63 to maintain compliance with fringe benefit and retirement plan rules.

As the landscape evolves, NATP members can be trusted guides, providing valuable insights to help employers confidently offer these innovative benefits to their employees.

Question: Leo owns a small HVAC business and recently hosted a summer kick-off barbecue at his shop for his five technicians; he also participated. No customers or other management staff attended. Leo provided sodas, juice, burgers and brats for the event. Is the cost of the food and beverages fully deductible or subject to the 50% limit?

Answer: The entire cost of the food and beverages is 100% deductible under Reg. §1.274-12(c)(2)(iii). The barbeque qualifies as a social or recreational activity (such as a picnic or informal gathering) primarily provided for the benefit of non-highly compensated employees.

Although Leo attended, his participation does not affect the deduction as long as the event was not primarily for his own benefit and no other highly compensated employees were involved. If these conditions are met, the expenses are fully deductible, not limited to 50%.

To substantiate the deduction, Leo should maintain records detailing:

• The business purpose of the event
• A list of attendees
• Receipts for food and beverage expenses