Health Savings Accounts (HSAs) continue to grow in popularity as they offer valuable tax advantages to those who use them. Today, there are about 26 million health savings accounts with assets exceeding $61 billion. Although they’re more prevalent in other parts of the country, they’re gaining popularity in Massachusetts. And there are at least seven reasons why more and more employers are offering HSA programs and employees with a choice are enrolling in these plans.
An HSA is a fund that members with a high deductible health plan can use to pay for their qualified medical expenses using pre-tax dollars. These accounts are similar to FSAs (Flexible Spending Accounts), another type of tax-advantaged health spending account, with a few key differences. Here are seven things that you need to know about HSAs:
1. HSA owners look like you.
A decade ago, account owners were healthier and wealthier than the population at large. Since then, more and more employers have offered HSA programs, offered employer funding, and eliminated some other options. Now, account owners are nearly indistinguishable from Health FSA participants as measured by age, income, health status, or average contribution or election.
2. Health Savings Accounts deliver peace of mind.
A Health Savings Account is just that – an account through which you save for current and future health care expenses. Surveys show that most Americans haven’t saved as much as $1,000 to cover an emergency room visit or unexpected auto or home repair. HSA owners who make regular pre-tax payroll contributions to their accounts have a dedicated source of funds to use when they incur unexpected health care expenses. That’s a level of security that many don’t enjoy in other parts of their financial lives.
3. You don’t “use it or lose it.”
You never forfeit HSA balances. That means no more rushing to the optical shop or drug store at the end of the year to buy items you really don’t need, just to avoid losing any remaining election dollars, as Health FSA participants (perhaps you?) do. Instead, you can preserve your HSA balances to reimburse high-value care at any point in the future – next year, a decade from now, or in retirement.
4. You can reimburse family members’ qualified expenses.
You can make tax-free withdrawals to reimburse not only your own qualified expenses, but also those incurred by your spouse and your tax dependents. And they don’t have to be covered on your medical plan, either. But, note that you can’t reimburse expenses incurred by family members covered on your medical plan who aren’t your dependent or spouse. Domestic partners and adult children who are no longer your tax dependents are two common examples.
5. You can make tax-free withdrawals forever.
As long as you have funds remaining in your balance, you can make tax-free distributions for qualified medical, dental and vision expenses, plus many over-the-counter items and Medicare premiums. You don’t have to remain enrolled in an HSA-qualified medical plan to withdraw funds tax-free.
6. You can invest your balances.
Today, about one in seven HSA owners invests his or her balances. Your account administrator determines the menu of investment options – usually between a dozen and three dozen mutual funds – and administrators and employers often set a cash balance that you must maintain before you can invest additional contributions.
7. They make great retirement accounts.
Health Savings Accounts are superior to traditional or Roth 401(k) plans or Individual Retirement Arrangements for retirement savings. Those accounts are tax-advantaged, which means that some taxes are waived or deferred on either contributions or distributions. In contrast, all HSA contributions, balance growth, and withdrawals for qualified expenses are tax-free. HSA balances last about 25% longer than comparable balances in a traditional 401(k) plan, where distributions are taxed as ordinary income.
Fidelity® projects that a couple retiring this year at age 65 will incur $285,000 in health care costs in retirement. You need to save about $340,000 in a traditional 401(k) plan to match the spending power of $285,000 in an HSA.
William G. (Bill) Stuart is Director of Strategy and Compliance at Benefit Strategies, LLC. Benefit Strategies administers Health Savings Accounts, Flexible Spending Accounts, Health Reimbursement Arrangements, commuter benefits, COBRA, and direct-bill programs for AllWays Health Partners.