In Wealth Management

Health care spending can be confusing and often frustrating subject, especially for those with who feel like they pay more for health care insurance than the value they get out of these policies. For those looking to potentially lower their annual health care spending, a combination of a high deductible health plan plus a Health Savings Account could be a great option.  However, they are not for everybody, so read more to find out if they are right for you.

What is a health savings account and how does it work?

Individuals can make pre-tax contributions to a health savings account (HSA), which can be used to pay qualifying medical and dental expenses. These accounts are offered by many financial institutions, some of whom primarily specialize in HSAs. However, please note that to have an HSA, you must  also have a qualified High Deductible Health Plan with this feature, either through your employer or individual policy.

What are the benefits of a health savings account?

HSAs offer significant benefits for many participants. Below are some of the top reasons that people choose to use an HSA:

  • Tax Deductions: HSA contributions are pre-tax and are not subject to either federal income taxes or FICA taxes. It effectively lowers your taxable income while simultaneously allowing you to save money that can be used to pay for qualified medical or dental expenses. 
  • Investment Returns & Tax-Free Compounding: The interest and investment returns earned on money in an HSA account are not taxed and represent an excellent opportunity for tax free compounding.
  • Tax-Free Withdrawals:  Additionally, withdrawals from an HSA account are not taxed, as long as the money is used for qualifying healthcare expenses. Not a qualified expense? You may be looking at paying income taxes and a penalty.  Once you are 65, funds can be withdrawn from your HSA for any reason, without penalty, although you’ll still pay income tax on them if used for non-qualifying expenses
  • Account Balances Rollover Every Year:  Balances in an HSA rollover from year to year, allowing participants to wait until a significant need arises before dipping into funds. They are not subject to any “use-it-or-lose-it” rules.
  • Ease of Use:  HSAs are just as easy to use as a personal checking account for qualified healthcare expenses. For example, if you make regular trips to a medical provider for routine services, they can keep your HSA account information on file to make billing simple and seamless. Many also provide a debit card or allow participants to reimburse themselves directly from the HSA account if they used another method of payment.
  • Funding OptionsHSAs contributions can come from the eligible individual, as well as any other persons (e.g., family member, employer) on the behalf of the individual.  
  • Contributions can be automated: In some cases, employers can deduct a predetermined amount of money from every paycheck, for those enrolled in an HSA through their employers’ health plan, making it easier to fund the accounts. 

How do you use a health savings account?

Only certain types of employees or plan members qualify for an HSA account. Because an HSA is designed to help people save for qualifying medical expenses, HSA participants must be using a qualified high-deductible health plan, either through their employer or the individual marketplace. This is, of course, because those who are using a high-deductible health plan will be required to pay more out-of-pocket for medical expenses before their deductible is reached. For reference, current regulations stipulate that a high-deductible plan for an individual is a minimum of $1,400 for an individual and $2,800 for a family. Therefore, if you plan to use an HSA, make sure your health plan is eligible. 

How much can you contribute to an HSA account in 2022?

Much like a 401(k) investment account, HSA accounts do have annual contribution limits. These limits can change from year-to-year, and the IRS has released guidance for 2022. Fortunately for those using HSA accounts, the contribution limits will be increased next year, making now the perfect time to start using this savings tool. In 2022, individual participants using an HSA can contribute up to $3,650 (compared to $3,600 in 2021) and families can contribute up to $7,300 (compared to $7,200 in 2021). 

Currently, those who are 55 or older can annually put an additional $1,000 into their HSAs though age 65 or until they enroll in Medicare. Once enrolled in Medicare, while existing funds can be used, further contributions cannot be made.

Can you make a one-time large contribution to an HSA account?

HSA participants can opt to make regular monthly contributions, that are often automatically deducted from their paychecks. However, you can make one-time contributions to your HSA, if it doesn’t exceed the total contribution limits for the current year. Bear in mind that HSA users have until April 15th (Tax Day) to make contributions for the prior year. 

What are qualifying medical expenses?

What are qualifying medical expenses? It can be tempting to use your HSA for everything from surgical procedures to toothpaste. After all, you need clean teeth for good oral health, right? Well, it’s not quite that simple. The IRS has given clear guidance on exactly which types of expenses qualify as eligible for HSA reimbursement. You can read more about these expenses in IRS publication 502. 

Are health savings accounts a good option?

People who have chosen lower cost, high-deductible health plans are effectively retaining more of the risk for their personal annual health care expenses. For such individuals, HSA accounts are an excellent tool to help them manage this risk.  It is a way to build a rainy-day fund in case there are unexpected health care expenses that are not covered under their plan design.  

As an investment tool, HSAs also can work well for those who max out their contributions and don’t need to use their HSA funds to pay annual health care expense.  Just like an IRA, money in these accounts can compound over time and have the potential to be worth more in the future.  How HSAs should be invested depend on individual circumstances, and certain higher return (high risk) investment strategies may (or may not) be appropriate.  I believe that individuals who consider higher return HSA investment options need to do so in context of a coordinated wealth management strategy. 

The primary downside to an HSA is the discipline required to fund the account.  If the account is not funded and healthcare expenses end up being higher than anticipated, it could end up costing more to set up your health care insurance in this way.  In addition, if the investment accounts are being managed for a higher return (higher risk) profile, a situation could occur of when health care expenses need to be paid during a capital markets downturn, when the balance may be less than anticipated.  In addition, if the HSA funds are used for non-qualified healthcare expenses, they are then subject to income tax, and for those under 65, a penalty as well as.     

Discuss your options

At Sapling Wealth Management, we specialize in helping small businesses and individuals navigate financial decisions, including how to take advantage of Health Savings Accounts. Reach out today to learn more about your options and how to create a smart, proactive planning approach for healthcare expenses. 

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