Health Savings Accounts are part of a broader trend of individuals and families becoming more involved in their own health and retirement, as compared to the mid and late part of the 1900’s which saw companies taking care of their employees through pensions and other services. The Health Savings Account was approved by Congress in 2003 and is an excellent way to prepare for current and future medical expenses. A Health Savings Account can be a great way to save on taxes and reduce the total cost of medical expenses. Properly understanding a Health Savings Account allows people to sleep better at night knowing what benefits they have available to take care of themselves and their families. Avier works with clients so that their Health Savings Account integrates with their long term financial plan.
What is a Health Savings Account (HSA)?
A Health Savings Account, commonly referred to as an HSA, is a tax advantaged medical savings account available to individuals with high deductible health insurance policies. HSA contributions are not subject to federal income tax, have an annual contribution maximum, and unlike Flexible Spending Accounts (FSA) or Health Reimbursement Arrangements (HRA), contributions within the account are retained year to year and are owned by individuals just like a regular brokerage account. Funds can be stored over time to help protect against a medical emergency.
Although HSAs are owned by an individual, employers can make contributions to their employees’ HSA. These funds are immediately available for use. HSAs, like IRAs, can be invested in a variety of funds through a custodian or self-directed management approach.
Owners of HSAs that terminate their HSA eligible health care plan retain the ability to use the remaining funds in their HSA, but lose the ability to deposit further funds. This means that employees that leave a company can take their Health Savings Account with them if they move to a different employer.
What can Health Savings Accounts Pay For?
HSAs can be used on many medical expenses that are not covered by insurance such as vision, dental, orthodontic, chiropractic, medical equipment and copays.
Policyholders do not need trustee or insurer approval for use or withdrawal of HSA funds; however, HSA funds can only be used on over the counter medication with a doctor’s prescription. HSAs are very flexible and can be used on a number of different medical expenses.
Why Contribute to a Health Savings Account?
For individuals and families with access to an HSA, saving on a pre-tax basis into an HSA can result in significant tax savings – potentially thousands of dollars. Contributions to HSAs have a similar impact on taxes as contributions to a Traditional 401k. The amount of money contributed by an employee to a HSA reduces the amount of taxable income received in the eyes of the IRS during that tax year.
This means that Health Savings Account users see their funds go further to pay for medical expenses as compared to paying out-of-pocket. As distributions from HSAs are a non-taxable event if made for medical purposes, HSAs allow owners to pay for medical costs on a pre-tax basis. This effectively means that individuals do not pay income tax on the portion of their earnings that is contributed to an HSA and used to pay for medical expenses. For example, for an employee in the 24% bracket, this means they get to use $1 of their wages as $1 rather than being taxed on their wages, receiving $0.76 per dollar and then paying for their medical expenses.
HSAs encourage saving for future health expenses and offer the flexibility to use current year contributions used for future expenses. For those with low general health costs who regularly contribute, HSA funds can accumulate over the years and grow well past their original contributions and be used as a retirement account when medical costs are higher.
Avier works with clients to use HSAs strategically as part of a sound financial plan. Consistent contributions to an HSA within a broader financial plan can lead to a more robust retirement plan. We look forward to seeing how we can help you.
Sources:
https://www.irs.gov/pub/irs-pdf/p969.pdf
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-sets-2018-hsa-contribution-limits.aspx