Health Savings Accounts

The recent CARES act allowed for a special mid-year adjustment to benefits elections to allow employees to adjust how much they spend on medical insurance and fund their medical cost savings plans. Given that studies estimate that couples over age 65 could spend over $350,000 on medical costs – including Medicare – during retirement, funding Health Savings Accounts (HSAs) can help save for these costs and are vastly underutilized by most of us. They benefit from a triple tax-free status for qualified expenses and are offered without income limits to any individual or family covered by a high deductible health plan (HDHP).

What is an HSA?

It is a pre-tax savings account intended to cover health care expenses. Funds that go into the account grow tax free and also allow tax free withdrawals as long as proceeds are used to cover health care costs.

Who qualifies to fund an HSA?

Any individual or family that is under the age of 65 and has an HDHP as their primary medical insurance. An HDHP for 2020 is defined as a health plan with a minimum deductible of $1,400 (individuals) and a minimum of $2,800 for families. Out of pocket maximums must be less than $6,900 for individual plans and $13,500 for family plans. Out of pocket maximums do not include health care premiums. Many health care plans now fall into this range.

If your employer offers an HSA plan as part of your benefits package it is more convenient for pre-tax contributions. However, even if your employer does not offer an HSA, if you are covered by an HDHP, you can fund your own HSA with all of the same benefits.

What is the maximum contribution allowed to HSAs?

In 2020, individuals can put a maximum of $3,550 and families can add $7,100. Individuals over 55 can add $1,000 annual catch up contributions. The pre-tax benefit of this is massive since this is what is called “above-the-line” in tax terms: the contribution directly reduces your taxable income, just like a 401(k). It is much more valuable than a deduction which may not be realized in savings.

What happens once the money is in an HSA?

There are a few options with the money that has been contributed to an HSA. Of course, you can use it for qualified medical expenses: doctor’s visits, copays, prescriptions, Medicare premiums (Parts B and D) and LTC insurance premiums are among the costs that qualify. Note that normal health care premiums are not considered qualified.

A better plan, if you can afford it, may be to let the contributions collect until you are retired and you can them use them for medical costs. Many plans offer investment menus similar to a 401(k)for longer term investments. A reminder that any of the gains or interest earned inside of an HSA is not taxable.

How does money come out of an HSA?

As mentioned before you can use the funds anytime for qualified medical expenses without any tax due.

When you reach the age of 65, it becomes even more flexible. You can still take tax-free qualified distributions, but you can also withdraw money for any reason and only pay normal income taxes on the withdrawals.

With the potential triple-tax benefit, ever-rising health care costs and the flexibility of withdrawals, HSAs are an important tool for both current expenses and long-term retirement planning.