Pills and capsules in medical vial

by John Bruggemann

CFP, Wealth Advisor

Most clients are familiar with the various tax-advantaged vehicles we all utilize – IRAs and 401K plans for retirement and 529 accounts for college savings. However, many are not familiar with a tax-advantaged savings plan focused specifically on healthcare expenses, which is a Health Savings Account, or HSA.

Many employers offer Flexible Spending Accounts (FSA) to their employees, which are similar to an HSA in three ways: contributions to both are on a pre-tax basis, both share the same list of “qualified medical expenses” and both have contribution limits. Both an HSA and an FSA are great ways to set aside pre-tax dollars for healthcare expenses.

As similar as they are, there are some significant differences between the two plans. The biggest difference between is that not everyone qualifies for an HSA. Only those with a High Deductible Health Plan (HDHP) are eligible for an HSA. To qualify as an HDHP, the minimum plan deductible must be $1,400 for an individual ($2,800 for family) and the maximum out-of-pocket amounts must be at least $7,000 for an individual ($14,000 for a family). These figures are for 2021.

A second significant difference between the two has to do with the ability to roll over unused funds into the next plan year. For an FSA, most plans limit this rollover to no more than $500. So, if you did not use $750 of your FSA by December 31, 2020, only $500 will be carried over into 2021 and you ’lose’ $250 of YOUR money. An HSA allows plan participants to roll over ALL un-used balances into the following calendar year. Furthermore, HSA funds can be invested in the same way IRA funds are invested and will grow tax free. An HSA is an excellent way to save for healthcare expenses in retirement.

Just like an IRA, there are contribution limits to an HSA. For 2021, these limits are $3,600 for an individual and $7,200 for a family. HSA contributions can be made through a pre-tax payroll deduction if the employer offers an HSA. If an employer does not offer an HSA as a benefit option, an HSA can be set up at most financial institutions. Any qualified distribution is tax free.

Why do I recommend a Health Savings Account? Generally speaking, most younger adults are healthy and have little need for anything more than a low-cost health insurance plan, which is characterized by a high copay, a high deductible and a higher maximum out-of-pocket limit. It is also necessary to be enrolled in a HDHP to qualify for an HSA. Since any unused balances can be rolled over to the following year, an HSA is an excellent way to prepare for an unexpected medical emergency. For those close to retirement – and we all know medical expenses will come into play at some point later in life – an HSA provides a tax advantaged vehicle to prepare for such expenses.

Feel free to reach out to your ACM wealth advisor if you have any questions.

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