Health Savings Accounts Fueling Retirement (Part I)

Benefits Investments

In 2003, President George W. Bush signed the Medicare Modernization Act into law. The largest overhaul of Medicare in the program’s near 40-year history included the obscure enactment of Internal Revenue Code § 223, which enabled “an eligible individual to [deduct taxes into] a health savings account.”[1]

Those “eligible individuals” include employees covered by Consumer Driven and High Deductible Healthcare Plans (HDHP). With healthcare costs ballooning throughout the new millennium,[2] health savings accounts offered a new solution for employers to cut costs and for employees to save money on rising healthcare premiums. The resulting savings helped small businesses grow and large companies thrive during the great recession.[3] As of 2018, an HDHP is defined as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.[4] An HDHP’s total yearly out-of-pocket expenses can’t be more than $6,650 for an individual or $13,300 for a family.[5]

As employees choose between their current plan options through their employer and plans on the individual marketplace,[6] an increasing number of employers are offering a variety of healthcare plan designs, adding HDHPs to the lineup. Why? HSA-Eligible plans empower employees to choose their benefit levels. For those employees choosing a HDHP, Health Savings Accounts (HSA) become an added benefit. The money saved by the choosing a HDHP through reduced premiums can be reallocated into an HSA by both the employer and employee. For 2018, if you have family HDHP coverage, you can contribute up to $6,900.[7] The contribution limit for self-only HDHP coverage remains at $3,450.[8]

HSAs are beneficial for their triple-tax advantages, transferability, and nearly-timeless lifespan. What is the triple-tax advantage? First, contributions can be deducted pretax from employee’s paychecks, lowering both their taxable income and the tax obligations of the employer. Second, HSA balances grow tax-free and can be invested in various fund options through your HSA administrator. Withdrawals are also tax-free if used for qualified medical expenses. Additionally, HSAs are freely transferable and not tied to your current employer or HSA custodian. Employees own their HSAs[1] – meaning they can shop around and choose the HSA best suited for them. They can also retain the funds in their HSA from employer-to-employer, regardless of whether or not their new employer offers an HDHP (although members can only contribute more to the balance if they are on a HDHP). Finally, HSAs are timeless. If an HSA balance is not fully spent in one year, it rolls into the following year, growing all along.

These HSA characteristics have notable differences from Flexible Savings Accounts (FSA) and Health Reimbursement Accounts (HRA). Both FSAs and HRAs are employer-owned,[2] meaning employees lose access to an FSA or HRA when transitioning through employment. Although all three are made with pre-tax dollars, FSAs follow the ‘use it or lose it’ model, while HRA rollovers are allowed at the discretion of the employer. [3] If an employer chooses, FSAs can rollover $500 year-to-year; however, any balance in excess is lost. Similarly, HRA rollovers are also decided by the employers, and just because a rollover happened last year does not mean it will continue into the next. HSA capabilities will be further explored in future articles.

David Goldsmith, Esq.

Financial Advisor- Retirement Plans

Find out how HSAs fuel retirement throughout this series. The Second Part explores the uses HSAs geared towards spending, saving, and investing. Part Three dives into the long-term investing capabilities while Part Four analogizes HSAs to a similar strategy.

 

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[1] https://www.law.cornell.edu/uscode/text/26/223
[2] https://kaiserfamilyfoundation.files.wordpress.com/2013/04/7936.pdf
[3] https://www.ncbi.nlm.nih.gov/pubmed/29408152
[4] https://www.healthcare.gov/glossary/high-deductible-health-plan/
[5] Id.
[6] https://www.wsj.com/articles/american-jobs-outnumber-the-jobless-1528212776
[7] https://www.irs.gov/forms-pubs/2018-hsa-contribution-limit-for-individuals-with-family-hdhp-coverage
[8] Id.
[9] https://www.bcbsm.com/index/health-insurance-help/faqs/plan-types/health-spending-accounts/differences-between-an-hsa-hra-fsa.html
[10] https://www.uhc.com/content/dam/uhcdotcom/en/Employers/PDF/CDHComparisonGridHSAHRAFSA.pdf
[11] Id.