Should I use a Health Savings Account?
People are living longer, and health-care costs continue to rise. According to a study done in 2019 by Health View Services, a provider of health-care cost projection software, a healthy 65 year-old couple retiring today would need close to $390,000 to cover two lifetimes of health-care expenses, including Medicare Parts B (doctors and providers) and D (prescription drug coverage). For those who aren’t retired, and are still plugging away in the workforce, medical costs will be a factor they can’t ignore either. According to HR Consultancy Mercer’s National Survey of Employer-Sponsored Health Plans 2020, employers expect a moderate health plan cost increase next year of 4.4%, on average, compared to 2020. A survey of 70 health insurance providers that make up about 80% of the commercially insured and self-insured market, conducted in the summer of 2020 revealed the following projections of per-person cost trends:
- Open-access preferred provider organization (PPO) and point of service (POS) plans: cost increases of 7.7 percent in 2021, up from 6.8 percent in 2020.
- PPO and POS plans: up 7.2 percent in both 2021 and 2020.
- Health maintenance organization (HMO) plans: cost increases of 6.6 percent in 2021, up from 6.3 percent in 2020.
- High-deductible health plans (HDHPs): cost increases of 7.2 percent in 2021, up from 7.0 percent in 2020.
You can expect to see moderate premium increases mainly for families and high-income workers and higher deductibles in 2021’s open enrollment. We have not seen the long-term impact of the pandemic from a cost standpoint yet. Many chose to forgo treatment or schedule appointments for safety reasons. We can only speculate at this point as this trend will drive wide variations in cost projections as we enter 2021. These reasons are driving many people into the arms of the HSA (Health savings account).
WHAT IS A HEALTH SAVINGS ACCOUNT (HSA)?
HSAs are tax – advantaged savings and investment accounts that pair with high-deductible health insurance plans. Contributions are tax deductible, qualified health-care expense withdrawals are tax-free, and you aren’t required to spend it within any specific time frame so that money can stay in your account from year to year.
According to www.healthcare.gov, for 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) cannot be more than $6,900 for an individual or $13,800 for a family.
HOW CAN AN HSA HELP ME?
- Withdrawals for qualified health care expenses are tax-free.
- Contributions are tax-deductible up to your annual maximum, which if you choose to do, can lower your taxable income.
- Money in an HSA can be invested, and the investment returns compound tax-free, increasing the value of the account. You don’t have to pay taxes on dividends, capital gains or interest income that occur within the account as money inside this vehicle grows tax deferred.
- Balances can be carried over from year to year.
- They are portable, so if you leave your job, you can take them with you.
- You can withdraw money for any reason, but it will be subject to a 20% penalty if you’re under age 65 and the funds aren’t used for qualifying medical expenses.
- Withdrawals can be made without penalty for any purpose after age 65 and will be taxed at your ordinary income tax rate.
- HSAs aren’t subject to required minimum distributions (RMD), so they are a powerful savings tool. So, you can save money in an HSA during your working years and invest it to grow in value. Then, take tax-free distributions to pay retirement medical expenses at a time when those expenses are likely to be higher.
- HSAs can be used as an estate planning tool. When you die, the account balance goes to the beneficiary you named. The tax treatment depends on who the beneficiary is. If the beneficiary is your spouse, the account will remain an HSA, and your spouse will be its new owner. Distributions on qualified medical expenses will continue to be tax free and distributions for non-medical expenses will be taxed the same as they would have been to you. If the beneficiary is someone other than your spouse, the account stops being an HSA on the date of your death. The account balance is distributed to the beneficiary and included in his or her gross income.
- You can contribute to your adult child’s HSA if they don’t have the means to do so themselves. Total contributions to the HSA for the year from all sources can’t exceed the annual limit. The contribution counts toward your annual gift tax exclusion amount of $15,000. Since the HSA isn’t covering you or a dependent, you won’t be able to deduct the contribution.
- Many employers contribute to their employee’s HSA accounts.
- $3,550 for self-only coverage in 2020
- $7,100 for family coverage in 2020
- $1,000 additional catch-up contribution for those over 55
WHAT ARE CONSIDERED QUALIFIED EXPENSES?
- Payments to doctors or dentists
- Imaging (Scan and MRIs)
- Medical services such as home care
- Medical equipment or supplies
- Reimburse yourself for any qualified medical expenses that your insurance didn’t cover, and you had to pay out of pocket.
The IRS outlines a detailed list of qualified expenses on their website.
WHAT IS NOT COVERED?
Some examples of items not considered to be qualified expenses are:
- Maternity clothes
- Funeral costs
- Childcare for healthy babies
- Over-the-counter medicine
- Elective cosmetic procedures
- Weight loss programs
The HSA is a valuable tool for many due to the savings it can provide regarding your health-care costs and your tax bill while you are working, as well as later in retirement. However, they are not for everyone. They might not make sense if you have some type of chronic medical condition or if you know you will be needing expensive medical care in the near future. Be sure to understand your specific situation and how it factors into the benefits of an HSA.
Forbes. (May 2020). 7 Ways to Maximize the Benefits of HSAs. Retrieved from https://www.forbes.com/sites/bobcarlson/2020/05/19/7-ways-to-maximize-the-benefits-of-hsas/?sh=7dcd5315398b
Motley Fool. (September 2020). Comparing HRA vs. HSA Accounts. Retrieved from https://www.fool.com/retirement/plans/hsa/hra-vs-hsa/
NerdWallet. (2020). What to Know About HSA Qualified Expenses. Retrieved from https://www.nerdwallet.com/blog/health/hsa-qualified-expenses/#:~:text=Your%20income%20is%20taxed%20after,grow%20your%20money%20tax%2Dfree.
SHRM. (October 2020). Moderate Cost Increases Projected for Health Benefits in 2021. Retrieved from https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/moderate-cost-increases-projected-for-health-benefits-in-2021.aspx
CNBC. (July 2019). Retiring This Year? How Much You’ll Need for Health-care Costs. Retrieved from https://www.cnbc.com/2019/07/18/retiring-this-year-how-much-youll-need-for-health-care-costs.html
U.S. News Money. (August 2020). What to Expect from Your Employer’s Health Plan in 2021. Retrieved from https://money.usnews.com/money/personal-finance/family-finance/articles/what-to-expect-from-your-employers-health-plan-in-2021
Main Street Advisors, LLC. November 2020. Main Street Advisors, Inc. is a Registered Investment Advisor. The articles and opinions expressed in this material were gathered from a variety of sources, but are reviewed by Main Street Advisors, LLC, prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of November 2020 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual situation. Always contact your financial/investment professional before making any financial decisions. Main Street Advisors, LLC is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.