Some workers are embracing health savings accounts, but their value as a potential retirement-savings vehicle is still largely untapped and misunderstood.
Health Savings Accounts (HSAs) were established in 2003 by the Medicare Modernization Act so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. Generally, an adult who is covered by a high-deductible health plan (and has no other first-dollar coverage) may establish an HSA.
HSAs are a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. HSA funds generally may not be used to pay premiums.
Why do we need HSAs?
According to Bank of America’s Workplace Benefits Report, more than 40% of American workers are enrolled in high-deductible health plans, which offer lower premiums in exchange for higher out-of-pocket costs. HSAs are designed to help employees with out-of-pocket medical costs through pre-tax contributions.
A retirement-savings tool? How so?
Pretax contributions, potential gains from investment, and withdrawals used for qualified medical expenses are exempt from federal and most state taxes. Any unused balance is carried over to the following year, funds never expire, and they can be passed on to a beneficiary after death.
What are the penalties?
Workers can withdraw money from HSAs at any time and for any reason, but if the money is used for an ineligible expense, it will be taxed. And for people who aren’t disabled or are younger than 65, an additional 20% tax penalty applies to withdrawals for ineligible expenses.
While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP) — generally a health plan that only covers preventive services before the deductible. For plan year 2019, the minimum deductible is $1,350 for an individual and $2,700 for a family. For plan year 2020, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family. When you view plans in the Marketplace, you can see if they’re “HSA-eligible.”
For 2019, if you have an HDHP, you can contribute up to $3,500 for self-only coverage and up to $7,000 for family coverage into an HSA. For 2020, if you have an HDHP, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into an HSA. HSA funds roll over year to year if you don’t spend them. An HSA may earn interest or other earnings, which are not taxable.
Some health insurance companies offer HSAs for their HDHPs. Check with your company. You can also open an HSA through some banks and other financial institutions.
To learn more
Policy Smart provides independent retirement and insurance advice by reviewing your current plans to improve coverage and reduce cost. Through our proprietary database – The CMR Database® (comprised of some 13,000 brokers and specialists globally) – we maximize access to the retirement and insurance industry for greater options that will translate to better coverage and lower cost. Since 1999, we have saved clients over $120 million.
Please email CMR Associates or call 877-447-4301 or 212-447-4300 for more information.