Health Savings Accounts (HSAs) were introduced in 2003 with the passing of the Medicare Prescription Drug, Improvement, and Modernization Act. HSAs are intended to give Americans more control over their health care and provide access to coverage that is more affordable, flexible, and portable. HSAs must be used in conjunction with High Deductible Health Plans offered by many insurance companies.
HSAs have a triple tax advantage in that:
- Funds contributed to an HSA account are not subject to federal income tax. They are contributed on a pre-tax basis or as an above-the-line deduction.
- Interest and Earnings in the account are not taxed.
- When withdrawn for qualified medical expenses (at any time) the distribution is not taxed.
HSAs can be an important pre-tax savings tool. Another wonderful way to save on a pre-tax basis! When reviewing your financial plan we consider all tax advantaged tools available including HSA accounts. It is a strategy we look at in our financial planning process. HSAs can be invested in the stock market to help grow the account vs sitting in cash. As with all investments in your portfolio it is important to calculate the time horizon of the funds and invest appropriately. Similar to retirement planning, if you have a known short or intermediate term expense, we advise that those funds remain in cash or a money market. Longer term funds can be invested in a growth portfolio that match your risk tolerance.
It is important to plan out estimated health expenses properly to decide which funds can be invested in the market. Determining the time horizon on the funds will dictate the investments within.
Very often we see clients with large sums of money in HSA accounts sitting in cash, not knowing those funds can be invested. Often it makes sense to invest a portion of those funds for growth.
Here is a summary of HSA facts to date:
2020 Contribution Limits are as follows: Family $7,100, Individual $3,550
To be eligible for an HSA, individuals must meet the following requirements:
- Have a qualified high-deductible health insurance plan in place
- Have no other health care coverage (with a few exceptions)
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
Also, in the event of disability or upon reaching age 65, funds can be withdrawn for any purpose, without penalty (though ordinary income tax is payable on the amount withdrawn if it is not used for medical expenses). Contributions to an HSA can’t be made after obtaining age 65.
Qualified medical expenses are those that are allowed as tax deductions under § 213(d) of the Internal Revenue Code. They include expenses for both medical and dental services and are explained in IRS Publication 502, “Medical and Dental Expense.” The list is long.
Non-Qualified Expenses, such as cosmetic surgery for example, would be subject to a 20% penalty.
Call us today to see whether an HSA account fits in your financial plan.