Health Savings Accounts: Benefits Beyond Paying for Medical Expenses

By Ginny Graef, CPA, Partner

Health Savings Accounts: Benefits Beyond Paying for Medical Expenses

Leverage Your Health Savings Account (HSA) as an Additional Retirement Savings Option

Read our update for 2023 HSA inflation adjustments.

Over the last decade, as health insurance costs have risen, the popularity of Health Savings Accounts (HSA) has skyrocketed. HSAs as we know them today were created as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The idea was that these savings accounts, used in concert with a High Deductible Health Plan (HDHP), would enable companies (and self-employed individuals) to still pay for basic health insurance coverage without breaking the bank (so to speak). The high deductible plans would serve to reduce the cost of the insurance premiums and the HSA would allow the individual and/or company to put aside funds (pre-tax) that could be taken out (tax-free) to pay for the out-of-pocket health care costs until the deductible was met. Using a HDHP would likely mean higher out-of-pocket costs than using co-pays under traditional health plans.

HSAs have become extremely popular since their inception, with some studies showing that as of 2019 there were as many as 28 million HSA accounts in existence (up from 25 million in 2018). However, many who have HSA accounts are not aware that they have access to a potentially powerful tax savings vehicle. And there are even some individuals who, based on the type of health insurance plan they have, are eligible to open an HSA but have not yet done so.

Overview of Health Savings Accounts

Before we discuss the tax savings potential, let’s go over some of the basics:

  • HSA accounts can only be established if the individual is covered under a HDHP – to be a qualified HDHP, the plan must meet IRS stated minimum annual deductibles and maximum out of pocket limits (adjusted annually for inflation).
  • HSAs must be held by an approved custodian – i.e. bank, brokerage, insurance company or other IRS approved financial institution
  • HSAs are not allowed for individuals that are covered by Medicare or can be claimed as a dependent on another’s return
  • HSAs grow tax-deferred and withdrawals are tax free if distributions used for qualified medical expenses
  • Contributions must be made in cash and are subject to annual limits which are adjusted for inflation:
    • $3,550 for individual plans (tax year 2020)
    • $7,100 for family plans (tax year 2020)
    • $1,000 catch-up for individuals age 55 and over
  • Distributions are not subject to penalties if the if the funds are used for non-medical expenses and the individual is over age 65
  • Contributions can be made up until April 15 of the following tax year (so, 2020 HSA contributions can be made up until April 15, 2021)

Health Savings Account Tax and Savings Considerations

Now let’s discuss the tax planning considerations and opportunities that an HSA presents:

  • To the extent that you are able, pay for current medical expenses out- of-pocket (do not use the HSA funds) so that the earnings on the assets in the HSA continue to grow tax free. In this way, the HSA acts like another tax-deferred retirement plan vehicle if funds taken out after age 65 (and completely tax-free if funds used for medical expenses).
  • Make sure to maximize your HSA contributions each year, and if you are over 55 do not forget you can contribute an extra $1,000 per year.
  • Some employers will even match all or part of the employee’s contributions so make sure you understand your company’s benefit plan and take advantage of any matching programs.
  • Understand the investment vehicles/funds offered by your HSA account custodian. Most custodians offer several mutual funds in which you can choose to invest the assets, however, if you do not affirmatively choose a plan, your assets will generally be kept in an interest bearing savings account with an almost non-existent rate of return.
  • Think through who should be your account beneficiary upon your death. If the beneficiary is your spouse, they are treated as the new account owner upon your death and will enjoy the same tax benefits as if they were the original owner. If the beneficiary is anyone other than your spouse, the account ceases to be an HSA as of your date of death and is taxable to the beneficiary. However, to extent there are medical expenses incurred before the decedent’s death and paid within one year of death, the taxable amounts to the non-spouse beneficiary are not taxable.

If your current financial situation permits you to participate in a HDHP, fully fund your HSA each year and leave the funds growing in the HSA. That way the HSA can effectively become another retirement account invested in funds of your choosing. There are few tax deferred saving vehicles that remain in the tax code, so don’t let the HSA benefits go under-utilized.

Questions on taking advantage of your HSA? Contact your Opportunity Advisor. We are here to help.

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About the Author

Ginny Graef

Ginny Graef, CPA, Partner

Ginny enjoys working closely with her clients and their team of legal and financial advisors to provide tax planning solutions that meet her clients’ specific needs and goals. Ginny’s areas of expertise include income, gift, and trust and estate compliance and planning services. In addition, she focuses on compliance and consulting related to investment partnerships.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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