Health savings accounts offer another way to help investors save for retirement.
An HSA is a tax-favored account that works with an HSA-qualified high-deductible health insurance plan. HSAs can be a powerful health care planning tool, but they’re frequently overlooked as an effective way to help save for retirement.
How HSAs Function
Despite being available to the public for over 12 years (and even longer via its predecessor, the Archer Medical Savings Account) the particulars of the HSA remain elusive to many. Adoption rates of high deductible health plans were relatively low and the overall usage of HSAs was correspondingly low, but times have changed. With the cost of care for both employers and employees rising, many employers are looking to accomplish several tasks. Not only are they searching for strategies to mitigate rising insurance costs, but also continue to offer desirable benefits packages in an effort to gain and retain talent.
Key Features of HSAs
HSAs create tax preferences in three distinct ways, pretax contribution, tax-free growth and tax-free distributions. Let’s take a look at each item:
Pretax Contribution
– Fund with pre and post-tax employer and employee contributions
– Lowers the current year taxes by reducing taxable income
Tax-Free Growth
– Distributions for qualified health care expenses are tax free
– Investments held in the HSA can grow on a tax-deferred basis, much like an IRA
– Roll over to another provider when changing jobs — can also move to another provider at any time (provided the HSA is not an ERISA plan) • Tax-free distribution to pay for qualified medical expenses
– Penalty-free withdrawals for any expense after age 65 (subject to ordinary income taxation)
– Transfer to a spouse or other beneficiary upon death
Taxation and Penalties
-Withdrawals are subject to taxation plus a 20% penalty for nonqualified health care expenses
-Penalty is waived when an individual
– Is 65 or older
– Is disabled
– Has died during the year
IRS Contribution Limits for 2019
Individual: $3,500
Family: $7,000
Catch up: 55 years and older: $1,000; spousal catch up of $1,000 as well (if placed in a separate HSA under their name)
Contributions can be made up to April 15 of the following year, provided the account was open and qualified in the previous year (similar to IRAs)
Who Can Contribute
Must participate in a high-deductible health plan
Minimum deductibles for their health insurance plan
– Individual: $1,350
– Family: $2,700
How To Use It
Qualified expenses include…
– Most health care-related expenses, as defined by IRS publication 502
– Plus premiums for
-Medicare Premiums for Parts B, C and D (but not Medigap policies) and other health care expenses for individuals aged 65 or older
-Long-term care insurance
-COBRA coverage while on unemployment
What You Can’t Use It For
– Unlike a 401(k), you can’t take loans against your HSA
Advantages for Employers
While the HSA account holders have many advantages, they are not the only groups to benefit. Employers are seeking top talent across all skill levels and realize that a robust benefits package, most often led by strong health care benefits, can be a key factor in attracting and retaining talent. The Society of Human Resource Management data shows that employers continue to have difficulty recruiting employees at all levels and that difficulty is on the rise. In the “dual mandate” of attracting talent and reducing costs, 22% (the majority) said that offering consumer-directed health plans is the most successful way to help control the cost of health care.
Another consequence of an employer offering the high-deductible health plan/HSA combination is its potential to:
Improve Retirement Outcomes
– HSA can be a more tax-efficient way to save for retirement health care costs because of the triple tax benefit
Potentially save the employer in health care insurance expenses
– May allow earlier retirement if assets are available to help cover expenses prior to Medicare eligibility
– May help lower the cost of providing health insurance when a high-deductible health insurance plan is the best option for an employer
– May free up company assets for other benefits or human resources expenses
HSAs are much more than a tax-preferred checking account for current medical expenses. While HSAs are useful for current medical expenses, their flexibility and features mean they are useful for long-term savings as well.
-Saving and investment vehicle for health care costs in retirement
-Funding current expenses while keeping future needs in mind
-Immediate funding of health care and insurance expenses in a tax-efficient manner
#LoveMyHSA
Until Next Time…
Thank you for reading and sharing.
P.S. If you would like to schedule a quick conference call to discuss adding options to your company’s current plan design call 630-799-8350 or email info@crosspointwealth.com
