By John Jespersen
Financial Planning Focus: Do You Have a High-Deductible Health Plan?
Are you contributing to an HSA plan?
Are you spending your HSA contributions on medical expenses?
Does your HSA provider offer a good array of investment choices?
If the answer is yes, then our financial planning conversation must include the topic of Health Savings Accounts (HSAs). As mentioned last quarter, HSAs are tax-advantaged savings and investment accounts available for those with high-deductible health care plans.
HSA contributions are federal tax deductions in most states. There are also no federal taxes on investment earnings, and no taxes on withdrawals for qualified medical expenses. As a result HSAs are often referred to as triple tax exempt.
A recent hypothetical question came up regarding whether it is better for a 65 year old to have $100,000 in a 401(k) plan or a HSA. The easy answer is it depends. However, as a comparison, 401(k) retirement plans offer only a double tax benefit — no taxes on contributions and no tax on investment earnings. Withdrawals from 401(k)s in retirement are taxed as ordinary income. Withdrawals from HSAs as mentioned are not taxed if used for qualified medical expenses. So it stands to reason that if a 65 year old is incurring medical expenses, or does so at a later date, tax-free qualified medical expense withdrawals are definitely more beneficial for a 65 year old and certainly those even older. (Note: once an individual qualifies for Medicare, HSA contributions must cease, but prior contributions may continue to be invested and grow.)
This hypothetical example demonstrates that HSAs are a unique and powerful financial planning tool for constructing an important bucket-of-money for future health care expenses. For more tax related information consult with your tax advisor and/or review IRS Publication 969 – https://www.irs.gov/forms-pubs/about-publication-969.
If your employer provides a HSA plan your contributions may be deducted from your pay advice through pre-tax contributions. If you have your own HSA plan, the tax deduction will typically be post-tax deductible when your annual federal income taxes are filed. IRS Form 5498-SA is required to be sent by HSA trustees and custodians for annual HSA contributions. IRS Form 1099-SA is also sent for annual HSA distribution tracking purposes.
Spending Your HSA Contrbutions
There are many qualified HSA medical expenses. Several more than allowed in Flexible Spending Accounts (FSAs). Even Long-Term Care Insurance premium payments are considered to be qualified medical expenses. See IRS Publication 502 for a complete list of HSA qualified medical expenses – https://www.irs.gov/pub/irs-pdf/p502.pdf. And unlike FSAs, you don’t have to spend all of your annual contributions by year-end (or lose it) — your contributions may continue to grow through investment earnings. A HSA will also move with you if you change jobs.
Those who are actively using HSA accounts to manage day-to-day health care expenses need to understand the HSA triple tax advantages — which favor investing HSA assets rather than spending all of the contributions right away. Your financial planner and advisor can help you determine the right spend/invest balance for you, with long-term planning in mind.
There’s a reason why more and more financial professionals are focusing on helping clients save for health care costs. People are increasingly worried about how they’re going to meet their health care needs in retirement and whether that obligation will eat away at hard-earned savings.
Investing Your HSA Contributions
For 2019 the HSA maximum contribution limit set by the IRS is $3,500 for an individual and $7,000 for a family. It is not uncommon for HSA balances to now reach into the hundreds of thousands of dollars, since HSAs were initially established back in 2003. There has been plenty of time for contributions to be made, balances to build, and good investments to be made. Therefore, the next question to consider is whether your HSA provider offers a good array of investment choices.
As a general rule, it is a good idea to maintain HSA funds needed to pay for two to three years of potential out-of-pocket healthcare expenses. This money doesn’t simply have to reside in a low-interest money market fund in order to be reasonably accessible. In fact you want these funds to work as hard as reasonably possible for you and grow for future medical expenses. Go over the investment options within your HSA plan that your provider offers, and review this with your financial planner and advisor to determine the right investment allocation based on your time horizon and risk tolerance.
HSAs may be used as an excellent way to self-insure medical expenses, or to supplement healthcare costs now, as well as in retirement. Come visit us at Metcalf Partners to review whether an HSA is a right fit for your financial future.