Health Savings Accounts 2.0

By Jeff Deiss

CFP, AEP, Wealth Advisor

We’ve written about Health Savings Accounts in the past, which you can reference here and here.  An HSA is a great way to create a nest egg for healthcare expenses in retirement.

The basics are that HSA account holders can contribute up to $3,600 individually or $7,200 as a family for 2021 as long as you are enrolled in a high deductible health plan (HDHP).

For a health plan to be eligible as an HDHP, it must have minimum individual and family deductibles of $1,400 and $2,800, respectively, and maximum individual and family out-of-pocket amounts (deductibles and co-payments) of $7,000 and $14,000.

HDHPs have grown in popularity given that they generally offer annual premiums that are 36% lower than low-deductible plans (think of raising the deductible on your auto insurance policy in order to lower the annual premium).  As a result, HDHP enrollment has grown by 43% over the past five years, to the point that 51% of the U.S. workforce was enrolled in a HDHP in 2019.

These statistics (from State Health Compare and the CMS) beg consideration for opening or funding an HSA if you can afford it while you are working in order to sock away some funds to use for medical expenses later in life.

HSAs offer triple tax benefits in that the contribution is deductible for income tax purposes (federally and most states), the account balance grows tax-free and withdrawals are not taxed as long as they are used for qualified medical expenses.

Unlike a Flexible Spending Account (FSA) that may be offered through an employer, HSA balances carry over year to year and can be invested to grow for years.

There a couple of additional HSA perks to add to our previous postings.

  • The first is the ability to take advantage of once-per-lifetime funding option from an IRA or an inherited IRA known as a Qualified HSA funding distribution (QHFD). You can fund a HSA with “pre-tax” funds from an IRA or, if you use an inherited IRA, then the tax-free transfer can count toward your inherited IRA required minimum distribution.  A QHFD must be a direct trustee-to-trustee transfer and not a rollover, you must be enrolled in a HDHP for 12 months after the transfer, and the usual contribution limits apply (any QHFD amount will count toward your total contribution for the year).  If you’re eligible and looking for cash to maximize an HSA contribution for the year, then you may want to consider an IRA.
  • The second is the ability to make a family contribution for adult children. If you have an adult child who is not a dependent for tax purposes, but it still covered by your family healthcare plan, then you can set up an HSA plan for them and fund it with the full family contribution of $7,200.  Your child will receive a tax deduction for the contribution and it’s a great way to start them funding an HSA.
  • Another perk is the ability to double up on “catch-up contributions” if you and your spouse are 55 are older. If this is the case, you can open a separate HSA account for your spouse in addition to your own to contribute an additional $1,000.
  • If you employer offers an HSA through a company cafeteria plan (not an FSA), then you can make contributions as a payroll deduction on a pre-tax basis. Both the employer and employee save on payroll taxes in this case.
  • Lastly, and a bit of one-off, if you change jobs during the year and enroll in a HDHP by December 1 as a result, you can still contribute and deduct a full year’s contribution for the year. You have until the tax filing deadline (generally April 15 of the following year) to make the contribution and you just need to make sure you remain in the HDHP for the next 12 months.

We keep coming back to the HSA as it remains one of the best retirement planning tools available.  As always, if you have questions, please reach out to your ACM Wealth Advisor.

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