You may be among the 25 million HSA account owners, here are some things you might not know about them.
Health savings accounts (HSAs) are becoming an increasingly common feature in benefit packages. Usually offered together with a high-deduction health plan (HDHP), they are tax-exempt and set up to pay for certain medical expenses that owners may incur.
Contributions used to pay for medical expenses that meet requirements are not taxed, and the funds that grow in the HSA remain tax-free.
Some owners may not realize that contributions made via payroll do circumvent the Federal Insurance Contributions Act (FICA) tax, which makes HSAs as tax-perfect as they can get.
HSAs are Underutilized
HSAs are rising in popularity but are not optimally utilized. According to a survey conducted by Mercer, more than 53% of large employers offer HSA-eligible health plans but only 24% of covered employees have opted into one.
The HSA enrollment process is actually quite easy. Here are the requirements according to the IRS:
- You must be covered under a high-deductible health plan.
- You cannot have any other health insurance coverage, including Medicare.
- You must not be claimed as a dependent on someone else’s tax return
For 2019, if you only have personal HDHP coverage, you can contribute up to $3,500 towards your HSA. If you have HDHP coverage for your whole family, the contribution amount increases to $7,000.
Avoid Spending on Current Medical Expenses
The HSA is designed to cover health care expenses in retirement. But many HSA account holders use their accounts to pay for current medical expenses which defeats the purpose of having a HSA in the first place.
Rob Foregger, co-founder of NextCapital says that in certain situations, HSA account holders have no other funds to pay for their current medical expenses. If they plan to use their HSA in retirement, Foregger suggests investing in mutual funds, and that most HSA providers now offer these long-term investment options.
No Need for Required Minimum Distribution
After signing up for a HSA, you are under no contractual obligation to spend it on current and/or future medical expenses. You can also use it as a savings account, or to pay for personal costs at a 10% penalty.
There is no required minimum distribution (RMD)with a HSA as compared to a standard IRA. After age 70, most IRAs are required to take an annual minimum amount from their accounts. However, HSA owners can leave their money in their accounts for longer and let it grow tax-free.
Shop Smart
It is idealistic to think that people with high-deductible plans will allocate their money wisely for their medical expenses. But if people spent more time comparing prices they can avoid paying for overpriced plans.
There are procedures like MRIs that can be overpriced, draining HSA accounts. HSA owners should get quotes from different vendors for such services to avoid long-term impact to their HSA’s future value.
If you would like to discuss the merits of enrolling in a HSA, or if you require any other financial advice, feel free to reach out to the Financial Helpers. We are only a phone call away.
