The HSA Final Four Doesn't End until April 17 - or Later for Some

The month of April doesn't include just NCAA Final Fours and Frozen Fours. It also contains the dreaded deadline to file personal income tax returns. But this deadline gives us an opportunity to change the momentum.

Coach Kim Mulkey's Louisiana State Tigers and Coach Danny Hurley's Connecticut Huskies are on top of the college basketball world. But theirs isn't the only Final Four playing out in April.

Most Americans must file their personal income tax returns by April 17 - though some have an extension due to natural disasters in their geographic area. Taxpayers who file their taxes close to the deadline often rob themselves of the time needed to make defensive adjustments to reduce the amount that they owe in federal and state taxes.

Fortunately, it's not too late to run some simple plays that may reduce your tax liability. But don't try to run out the clock, hoping to drain a buzzer-beater from Caitlin Clark territory. Run a play now - as in today - to make sure you control the ball as time expires.

1. Make Last-Minute Contributions for 2022

You can contribute up to the deadline to file your personal income taxes. That means that you could have filed early, taken a deduction for a personal (outside your company's payroll system) contribution and then not made the contribution until your tax refund arrived.

OK, it's too late for that strategy. But if you have money lying around, you can file an amended tax return to reflect a deposit up to your 2022 contribution limit ($3,650 for self-only and $7,300 for family coverage, plus an additional $1,000 if you were age 55 or older at any time during 2022). You must then deposit the funds into your Health Savings Account by the due date of your tax return.

2. Jump Start Your 2023 Funding

What if you received a tax refund and want to deposit it into your Health Savings Account, but you don't want the hassle of filing an amended return. That's simple - increase your 2023 contribution. You could take your 2022 tax refund and deposit that amount into your account as a 2023 contribution.

Better yet, consider this strategy: Increase your payroll deductions and use your tax refund to pay your household bills with a lower net paycheck. Because you can change your payroll deductions prospectively at least monthly (check with your employer for more information about how to do so), you can make a one-time adjustment to a higher deduction per pay period for the remainder of 2023 or stack the higher contributions into a shorter period.

Example: You receive a $2,500 tax refund. You want to deposit $1,700 of that amount into your Health Savings Account.

Option 1: Change your payroll deposits to deduct an additional $100 (beyond what you're already contributing to your Health Savings Account) during each of the remaining 17 biweekly pay periods. Place your tax refund in a savings account and transfer $100 each pay period into your checking account to make up for the drop in net income. Better yet, increase your payroll deduction to about $125 per pay period, which will reduce your net paycheck by about $100 after deductions for federal income and payroll taxes and, if applicable, state income taxes.

Option 2: If the thought of transferring funds from one personal account to another every two weeks seems tedious, you can increase your payroll deductions by $850 for each of the next two pay periods (or $425 for each of the next four pay periods), then revert to your original deduction amount. You then must transfer fundsbetween personal accounts only two or four times. Again, you may want to increase your deductions by $1,000 for two periods or $500 for four periods, since the net reduction in your paycheck will be about $850 or $425.

3. Double-Check Distributions

You still have time to correct any mistaken distributions from your Health Savings Account in 2022. For example, perhaps you paid an invoice for a physician visit, then appealed the claim because the visit was improperly coded as a diagnostic rather than an annual preventive visit. Your insurer subsequently reprocessed the claim to eliminate your financial responsibility. That distribution then becomes a reimbursement of a non-qualified expense, subject to income taxes (plus a 20% additional tax as a penalty unless you're age 65 or older or disabled). You must report this activity on Form 8889, which you file with your personal income tax return.

To avoid the taxes and penalty, simply send the money back to your Health Savings Account administrator. You'll probably have to complete a form available online from the administrator. If you're not sure how to proceed, contact your administrator.

4. Review Your Strategy

This activity isn't time-bound. But since you're thinking about your Health Savings Account, why not explore the world of investing? Seriously. If you're among the quarter or so of owners with an account whose balance exceeds $2,000, now may be the time to think about investing a portion of your balance for long-term growth. You'll want to keep a portion of your money in cash (and most likely your administrator requires you to maintain a cash balance of $1,000 to $2,000) to reimburse current expenses without the risk of liquidating invested assets when the market is down. But with payroll deductions increasing your cash holdings every pay period, you may feel comfortable putting your money to work.

Of course, there's the risk of losing when you invest. But there's also the potential to increase your balance faster than leaving the money in an account earning a fraction of 1% interest. As inflation eats away at the spending power of your savings - and medical inflation historically rises at twice the rate of general prices - you can buy less and less every year unless you invest successfully.

The Bottom Line

The beauty of the Health Savings Account Final Four is that there aren't 63 losers and only one winner. You don't face a match-up nightmare or hostile crowd. You don't go home after experiencing a bad call or an impossible buzzer-beater. Since it's not a you-versus-them contest, everyone can win by following the simple plays drawn up on the chalkboard above.

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