Written By: Jen Pieson
In the past few years we’ve seen a significant increase in the number of Health Savings Accounts offered to our clients. HSAs used to be fairly unusual, but now they are popping up left and right at benefits enrollment time. Are HSAs a good idea? What should you expect if you’re enrolled in one?
HSAs are specialized accounts that allow you to save money for certain medical expenses and are completely free from federal taxes. (There is actually a rare triple-tax savings involved, which I discuss later.) Unlike their earlier cousin Flexible Savings Accounts (FSAs), HSAs do not refresh at the end of the year (there is no “Use it or lose it” clause). With an HSA, your money will collect and roll over year after year, and you can continue to use this money well into retirement. HSAs are portable; if you change jobs or change insurance plans, your HSA can move along with you to your new job or plan.
Now. Who’s eligible? An HSA is used in conjunction with a “High Deductible Health Plan (HDHP).” In 2019, HDHPs must have a deductible of at least $1,350 for an individual (self-only) or $2,700 for a family (there are maximums on these amounts, too, to the tune of $6,750 for an individual or $13,500 for a family. These maximums include all in-network out-of-pocket expenses, including deductibles, coinsurance, and copayments). HDHPs typically have lower monthly premiums than traditional insurance plans, but of course since the deductible is higher, you will pay more out-of-pocket money before your insurance company starts to pay anything. As long as your health insurance plan is “High Deductible,” and that plan does not pay for anything (except preventative care) until you have met your deductible, you can use an HSA. If your employer does not offer to coordinate an HSA on your behalf, you can open one at an outside institution.
Once you decide to enroll in an HSA, you will determine how much you wish to contribute for the year. Annual maximums on HSA contributions for 2019 are as follows: $3,500 for a self-only HSA and $7,000 for a family HSA. If your employer contributes as well, the total of their contributions plus yours must be at or under the maximum. There is also a catch-up provision of $1,000 additional dollars (if you’re over age 55).
For example, Allan has an HDHP with a family deductible of $4,000. Allan makes $60,000 per year. His employer contributes $2,000 to Allan’s HSA. Allan may contribute up to $5,000 to reach the maximum of $7,000 for 2019. Since Allan’s contribution is free from federal taxes, his taxable income is essentially lowered from $60,000 to $55,000. Allan turns 55 next year; then he can contribute up to $8,000 instead of $7,000.
Once your HSA is established you will receive a debit card to be used at the doctor or pharmacy. Alternatively you can pay for services out-of-pocket and reimburse yourself from your HSA later (as long as you keep receipts and a good record of your spending). You can use your HSA to pay for any and all “Qualified Medical Expenses,” which is determined by the IRS (Publication 502, Medical and Dental Expenses). This list can change occasionally, so it’s always a good rule to double-check what expenses are considered qualified, but the list is pretty long.
In addition to your contributions being pre-tax, your money grows tax-free and can come out tax-free (as long as it is used for eligible expenses). Some people use their HSA as a retirement savings device; they contribute as much as they can now, and simultaneously pay for their current medical expenses from their cash flow, allowing their HSA to grow. There are no required minimum distributions (RMDs), which differentiates HSAs from some other types of retirement savings. Once you are over age 65 and enrolled in Medicare you can no longer contribute to an HSA, but you can continue to use the nest egg that you have built up. If you pull money out of your HSA for non-eligible expenses, you must pay income tax on that amount (plus a penalty if you’re under age 65).
If you have any questions about HSAs and whether or not they’re right for you, please contact your financial strategist. We’re happy to talk you through the ins and outs of this tax-advantaged opportunity for savings.