Your employee benefits are important to your short- and long-term planning goals for you and your family. Often, sorting through the maze of choices and homing in on how these choices affect you personally can be confusing. Many people don’t have the time or interest to learn all the nuances of the benefits available to them, such as disability and life insurance, Roth vs. traditional tax-sheltered retirement savings programs, and Flexible spending accounts (FSAs) vs. Health Savings Accounts (HSAs). We can lend our expertise to help you understand the options available to you.
Today, we want to share information on the HSA. This program has grown in popularity as we see health care premiums skyrocket each year. This health savings account was created in 2003 when Congress passed a law to help individuals supplement out of pocket costs of qualified medical expenses. There are many tax advantages to saving in an HSA. First, the money contributed is done on a pre-tax basis. Second, the earnings on any interest or investment gains in the account grow tax-deferred, and finally, as long as the money is used for qualified medical expenses, you can take it out of the account tax-free. Qualified medical expenses are determined by the IRS. They can include services rendered by physicians, surgeons, dentists, and other medical practitioners as well as the costs of equipment, supplies, and diagnostic devices needed for the diagnosis, cure, mitigation, treatment, or prevention of disease. Additionally, you can treat some long-term care insurance and health insurance premiums while unemployed as qualified medical expenses for HSA distribution purposes.
In order to qualify for participation in an HSA, you must be enrolled in a High Deductible Health Care plan (HDHC). You can contribute to an HSA through a payroll deduction. The contribution amounts are subject to changes annually in order to keep pace with inflation; for 2020, the contribution limit for singles is $3,550, and for families, it’s $7,100. There is also an additional $1,000 catch-up contribution allowance for those age 55 or older. Another way to fund your HSA is to make a qualified HSA funding distribution (QHFD) from your individual retirement account (IRA). This tax- and penalty-free rollover allows you to fund your HSA immediately to pay for medical expenses. You can only do this once in your lifetime up to the annual HSA contribution limit, and you must continue to be enrolled in an HDHP for 12 months after the transfer.
Once your HSA reaches a certain value, you can then choose from a list of mutual funds to invest part of your account value for the possibility of better performance returns. These accumulated values can remain in force regardless of your employment status and can be rolled over from year to year, unlike FSAs. Many individuals accumulate quite a bit of money in these programs with the idea of supplementing health care costs after retirement. The idea is to have a higher deductible and pay lower premiums now with the understanding that you are building up a medical spending account to offset future medical costs with the HSA.
Another key benefit is that, if you wish, you can take withdrawals from your HSA for non-qualified medical withdrawals and avoid penalties, and you may do so once you turn age 65. You will, however, still owe taxes on the withdrawal.
It’s also important to consider your own personal or family’s health care needs when deciding on your options. These programs can be a great way to accumulate funds with tax-favored treatment, along with earning competitive investment returns. Open enrollment is right around the corner, and we recommend that you take the time to learn more about the benefits your employer offers. Don’t wait until the last minute to understand your options. We are here to answer any questions you have about life insurance, disability insurance, traditional 403(b)s, Roth 403(b)s, HSAs and FSAs and can help you design a strategy to maximize your employee benefits.
Caitlin Allard, Client Services Manager & Paraplanner, contributed content for this article
Judy Esau, ChFC, AAMS
President
Caitlin Allard
Candidate for CFP® certification
Client Services Manager | Paraplanner