Love is in the air. If you’re looking for it, you can see it at every… pharmacy and doctor’s office. That’s right, I’m talking about love for health savings accounts (HSAs).
As I covered in a previous post, HSAs are certainly loved by lawmakers in Washington, D.C. right now.
Politics aside, it’s easy to understand this affinity given the benefits HSAs offer to consumers trying to figure out how to pay for growing health care expenses, which represents nearly 20% of GDP in the U.S. per a recent Research and Markets report.
By pairing an HSA with a high-deductible health plan (HDHP), employees are better able to pay for many out-of-pocket medical expenses not covered by the insurance plan while saving for future needs – even those of retirement.
No wonder a Devenir study recently found that HSA assets have grown to an estimated $7 billion spread across 20 million accounts as of December 2016. That represents a 22% year-over-year increase in HSA assets and a 20% increase for accounts.
Let’s look at some of the many HSA benefits driving this growth among workers and ultimately responsible for all the warm, fuzzy feelings.
If you contribute to your HSA via payroll deductions, the funds go into the account pre-tax. HSA contributions you make manually are likewise tax deductible.
In 2017, the maximum contribution that can be made for employees with single coverage is $3,400, and the maximum contribution for employees with family coverage is $6,750.
When these funds are used to pay for eligible expenses, that money is… yup, you guessed it, tax-free.
And the list of eligible expenses is comprehensive, meaning you can pay for a wide variety of services and items not paid for completely by your HDHP insurance plan with HSA dollars.
Once your HSA balance reaches a certain threshold you can opt to invest the money, just like with your 401(k) or IRA. Any interest or returns on your investment will be tax-free. Combined with tax-free contributions and usage, consumers utilizing HSAs are thus realizing triple tax savings.
Unlike a flexible spending account (FSA) or health reimbursement arrangement (HRA), an HSA is 100% owned by the employee rather than the employer. This means that if you change jobs, your HSA is portable and can be used with your next HDHP.
Any unused HSA funds in the account at the end of the year can be rolled over to the next year without limits. That means any contributions you make that exceed your eligible health expenses for the year can build up overtime and provide greater peace of mind in the future. Play it smart, and your HSA will be paired nicely with your 401(k) or 403 (b) in your Golden Years.
Check out our recent Health Care Stack post for more information about how HSAs fit into the larger retirement picture.
You aren’t the only one able to contribute to your health savings account. Many employers will offer HSA contribution matching up to a certain limit as part of their employee benefits package. So not only are you putting in pre-tax dollars, but you’re also essentially doubling your own contribution by taking advantage of employer contributions.
Additionally, your family members may contribute to your HSA as long as they are eligible, which requires them to have a qualified HDHP and not be otherwise insured.
Not only can you use an HSA to pay for many long-term care expenses, but the flexibility of the account increases when you reach the age of 65.
If you are 65 or older, you can withdraw HSA funds for any purpose without incurring a tax penalty – though you will have to pay applicable income tax.
(Unfortunately, if you are younger than 65 and use HSA funds to pay for a non-eligible expense, that money will be taxed and you’ll also incur a 20% tax penalty.)
One common concern ConnectYourCare sees among clients’ employee populations new to HSAs is paying for medical expenses incurred at the beginning of the year before account contributions have accumulated.
Our patent-pending HSA On Demand® addresses this by providing HSA participants with accelerated access to their full year’s account contribution at any time. If you work for a company offering this ConnectYourCare benefit, your up-front risk of a catastrophic financial event is limited.
What’s heart-breaking to me is that – per a Benefitfocus study – Americans are saving far less than they could with their HSAs. Across all demographics, the average HSA contribution is approximately $1,800 less than the yearly contribution limit – meaning that pre-tax dollars that could have been in these accounts are taxed instead.
Those poor, poor dollars.
I expect that to change as more people come to fully understand all the benefits of HSAs and fall in love with these accounts.
For more information about HSA benefits, check out our frequently asked questions page.