Health Savings Accounts
Connecting with clients on their Health Savings Account
February 2016 Newsletter
Concern over retirement health care costs now ranks as a top concern among pre-retirees. Clients, especially those considered affluent, are taking action to plan and prepare. Americans with high incomes ($175,000+) are significantly more likely (47%) than lower earners to have specific plans to cover healthcare costs (How Working Americans View Healthcare costs in retirement. Sun Life Financial May 2011). It is therefore not surprising to see the tremendous growth of the number and size of Health Savings Accounts. As of June 2015 there were approximately 14.5 million health savings accounts with $28 billion in assets (Devenir).
Clients do need advice in order to maximize the potential of their Health Savings Account (HSA). I will provide a short description of these accounts and then provide five ideas every HSA owner should consider.
- HSAs are only available in conjunction with a high deductible health insurance plan. You or possibly your employer, place money into your HSA to be used for health care expenditures not covered by insurance.
- Any amount you contribute (up to the contribution limit) is tax deductible from federal and most state taxes (exceptions are Alabama, California, and New Jersey). Contributions are not counted toward taxable wages for FICA taxes.
- There are no earning limitations to prohibit HSA contributions like the ones that exist for IRAs.
- Earnings in an HSA accumulate free from federal taxation and free from most state taxation.
- Unused balances rollover from one year to the next.
- Accounts continue to belong to you if you leave your employer.
- Distributions for qualified medical expenditures are tax-free.
- Withdrawals for non-qualified medical expenditures are subject to ordinary income taxes and if you are under age 65, a 20% penalty.
2016 Contribution Limits:
- HSA with Single Person Health Coverage: $3,350
- HSA with Family Coverage: $6,750
- A $1,000 catch up provision is available for those age 55 years and older.
There are five ideas you should discuss with your clients who utilize HSA accounts.
- Do not touch your HSA account until retirement. Most individuals will experience their greatest health care costs during retirement, hence the great concern mentioned at the top of the newsletter. Alleviate this concern by accumulating meaningful assets earmarked for retirement health care costs in a tax favored setting. This will require some basic financial planning. An emergency fund (most planners recommend 6-12 months of living expenses in a liquid account) may be needed to handle unexpected medical bills.
- Invest the HSA. This will involve making sure your HSA custodian offers a reasonable level of investment choices. If not, you can transfer your account to a custodian that does. Remember that the HSA is your money. Depending on your age, a 10-15 year time horizon for the HSA account should be sufficient to weather the short-term market volatility as you dollar cost average in each year.
- Spouses covered under a family plan should split their HSA into two accounts as they approach age 55. This will allow each spouse to use the $1,000 catch up contribution.
- Save medical receipts from each year you make HSA contributions. Receipts from prior years can be used to create qualified tax-free distributions in any year.
- For those who continue to work beyond age 65 for an employer with 20 or more employees, you should consider deferring your Social Security Benefit, delaying your Medicare enrollment and continuing to fund your HSA. A full discussion is beyond the scope of this newsletter, but the increase in deferred Social Security payments, the cost savings of delaying Medicare and the added benefit of continued funding into the HSA warrant serious consideration.
The information in this presentation is provided as a general overview. It is derived from the Internal Revenue Code, Medicare.gov and other government publications, all subject matter sources reasonably believed to be reliable. Tax law and the laws governing Medicare/Medicaid are complex and subject to change. Clients should consult with their attorney and/or qualified tax advisor when making decisions regarding these matters.