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Insight: Health Savings Accounts

Created by Congress in 2004, Health Savings Accounts (HSAs) have become more common in recent years. With the number of employers offering high deductible health insurance plans increasing, America’s Health Insurance Plans reports the number of Americans utilizing these vehicles for accumulating tax-free dollars for health expenses is approximately 22 million. Still many Americans do not understand them.

These accounts have the potential to do more than simply allow investors to save and pay for health care expenses with tax-free dollars. They offer a potential way for individuals to bridge gaps in health insurance coverage that may occur during times of unemployment or in retirement.

Anyone younger than 65 can open an HSA after purchasing a qualified high-deductible health insurance plan. An individual can maintain an HSA and still be covered under other insurance policies, such as dental, vision, disability and long-term care.

To be considered “qualified” for 2020, the insurance plan must have a deductible of at least $1,400 for individuals or $2,800 for families and have out-of-pocket expense limits of $6,900 for individuals and ranges from $13,500 to $13,800 for families. Choosing a policy that qualifies can involve insurance and tax issues that should be discussed with professionals in those fields.

The IRS maximum contribution caps for 2020 are $3,550 for individuals and $7,100 for families. Individuals 55 or older can make a $1,000 catch-up contribution in 2019.

Many employers offer flexible spending accounts for medical expenses that allow employees to set aside pre-tax dollars for medical expenses not covered by the company’s health insurance, including deductibles, copayments and coinsurance. Initially, contributions in flexible spending accounts could not be rolled over to the next year. In 2015, the U.S. Treasury Department issued new rules allowing employers to let employees carry $500 over, if they chose to do so.

HSA contributions and gains can be rolled from year to year – there’s no “use it or lose it” requirement – and you retain ownership of the funds even if you terminate employment. If your employer offers a flexible spending account, you should take a description of the account requirements and restrictions when you discuss an HSA with your financial professional.

Because you establish an HSA independent of your employer, the account can provide a health care expense “safety net” should you terminate employment (voluntarily or involuntarily). These accounts also provide another investment vehicle that offers tax deductions for contributions, tax-free growth and tax-free withdrawals for medical expenses. Withdrawals for nonmedical expenses after age 65 are still taxable, and an additional 10 percent penalty applies for nonmedical withdrawals before age 65.

If you plan to use HSA funds in the near term, a liquid, interest-bearing account like a savings account may be appropriate. However, if you don’t anticipate an immediate need for all or part of your HSA funds, the accounts are self-directed, allowing you to use other investment options. We can help you determine which investment vehicle best meets your needs.

Rising health care costs make an HSA an important option for many individuals. In recent years, health care spending in the U.S. has grown at 5 to 6 percent a year, and the per-person health care tab has risen to around $10,700 annually.[1]