Kevin T. Smith, CFP®, CTFA, CDFA™
Each year, employees are spending more and more from their paychecks on health insurance premiums. With these cost increases, we have seen many employers offer a High-Deductible Health Plan (HDHP) as a health insurance option for employees. This has grown the popularity of Health Savings Accounts (HSAs). However, an HSA can offer much more than just an interest-bearing account to help cover out-of-pocket medical costs. It should be considered as a very good long-term vehicle to cover future medical expenses.
First of all, an HSA is only offered in conjunction with an HDHP. Typically, you are eligible to enroll in one if you have opted for an HDHP as your plan-type during open enrollment for health insurance with your employer.
Automatic payroll deductions present an excellent way of forced savings into these accounts and offer a triple-tax advantage:
- Tax deduction
- Tax-deferred growth
- Tax-free withdrawal if used for medical expenses
For 2018, a person enrolled in individual coverage may contribute up to $3,450 whereas a person with family coverage may contribute up to $6,900. Additionally, if you are older than age 55, you may make an additional $1,000 catch-up contribution per spouse.
Some Additional Benefits
- Participants in an HSA are typically provided with a card linked to the account which allows you to pay for qualified medical expenses with ease
- HSAs may serve as a good option for higher income earners that max out their qualified retirement plans through work and are still looking for a tax deduction
- Funds not used in the account remain there and are continuously rolled over each year until they are used (unlike Flexible Spending Accounts)
- Check with your plan’s trustee, but investment options may include stocks, bonds, and mutual funds as opposed to simply an interest-bearing account
The Forest Through The Trees
Too often we are short-term thinkers, but the long-term advantages of HSAs should not be overlooked. Consider the fact that many of us will live roughly a third of our lives in retirement so it is important to consider potential healthcare costs during those golden years. For example, estimates of average medical expenses for a healthy 65-year-old couple range from $225,000 to $275,000.
If an individual or family is able to contribute significantly each year into their plan and build up a considerable savings in their account, this can be a great option to help cover some of the following costs both tax- and penalty-free:
- Long-Term Care Insurance Premiums: probably one of the most overlooked advantages (policy needs to be qualified per IRS standards)
- Medicare Parts B, C (Medicare Advantage Plans), and Part D (Prescription Drug Coverage)
- Orthodontics: any parent who has paid for a child’s braces knows that they are not cheap and not covered by traditional dental coverage
- Some over-the-counter medical items such as insulin, reading glasses, contact lenses, and wheelchairs (items that the IRS considers qualified medical expenses)
Any withdrawals from an HSA that are not used specifically for qualified medical expenses may be hit with a 20% penalty and subject to income tax. Once you turn 65 and begin receiving Medicare, you are no longer eligible to contribute to an HSA; however, there are no required minimum distributions and funds will remain in the plan until spent down.
Additionally, it is good to check with the trustee of your HSA to review your investment options. Remember, with our life expectancies lengthening, our medical expenses will follow suit. HSAs can provide an excellent way to alleviate some of these future medical costs in a tax-efficient manner. As always, I recommend including your accountant or tax preparer in the decision.
In summary, an HSA should be on your radar as much as your 401(k) and other employer-sponsored plans because it can be a terrific savings account to cover both current and future medical expenses.
For more information and “light reading” on HSAs, the IRS offers Publication 969.
Please see Fenimore disclosure.