Regardless of whether an employee considers themselves a saver, a spender, or an investor, there are HSAs geared specifically toward each of those needs. In this Second Part, we’ll explore three ways to utilize HSAs and how effective different contribution strategies can be, due to their triple tax advantages. The “triple tax advantage” refers to the fact that (1) contributions are made with pre-tax dollars; (2) balances grow tax-free and are not subject to capital gains taxes; and (3), withdrawals are tax-free if used for qualified medical expenses. When enrolling into a high-deductible health plan (HDHP), employees can explore several different vendors and plan designs when determining what type of strategy is best suited for him or her.
“Savers” tend to be those individuals beginning their financial journey and who may need greater liquidity to pay off other debts.  Most millennials are considered “savers”, who are just starting their career, need to pay off other debt and have little saved elsewhere. Since premiums on a high-deductible plan are usually lower and are less expensive to administer, money saved by an employer can be reallocated into an employee’s HSA with pre-tax dollars. This directly benefits the employer’s tax situation: the more that is deposited into employee’s HSAs, the more the employer can deduct on their taxes. Likewise, the money an employee is saving with lower healthcare premiums can also be funneled into his HSA on a pre-tax basis, thus reducing the employee’s taxable income. Overtime, employer and employee contributions will accumulate tax-free. For example, a balance of $1000 will save an employee about $150 in taxes. If an employee needs to spend or invest HSA balances, they can restructure their HSA strategy and opt for another provider at any time. Remember, HSAs are fully-portable.
“Spenders” tend to be those individuals who have regular medical expenses. Spenders are often families with young children, many of whom have recurring medical expenses and who frequently pay out-of-pocket. Spenders can use their HSA to pay for qualified medical expenses, including routine checkups, prescriptions, dental visits and orthodontist equipment, and other expenses. As spenders use their HSA dollars, they should treat their HSA as a pseudo-checking account which pays for healthcare expenses as they occur. As a result, these qualified medical expenses are paid with tax-free dollars. Spenders should look for an HSA with transparent fees, one that provides easy access to funds, and one with a robust reimbursement process. Spenders are the largest category of HSA users. According to Devinir, about 80% of HSA assets are sitting in cash, ready to be spent.
“Investors” tend to be those individuals who generally can afford to pay for medical expenses upfront and who have less of a need for liquidity. These investors often include working professionals such as doctors, attorneys, accountants, etc. who can afford to pay their medical expenses as they are incurred. Investors should search for HSAs that have low investment thresholds, funds with low expense fees, and diverse investment lineups. The best investment-type HSA offers first-dollar investing. In other words, they allow their account holders to invest right away, without having to leave any money in the checking account. An example: for an employee with a family who consistently makes annual contributions of $6500 and has monthly medical expenses of $200 or less, they can grow a balance of $50,000 to over $150,000 over 15 years in an HSA that has an annual rate of return of 2%. An annual rate of return at 6% puts their ending balance at over $250,000.
Regardless of whether an employee is a saver, spender, or investor, they can always move their HSA to another vendor and change their contribution or investment strategy. Obligations to specific HSA vendors and plan types are never set in stone. Whether you’re a saver, spender, or investor, there is an HSA contribution strategy that fits your needs.
David Goldsmith, Esq.
Financial Advisor- Retirement Plans
Find out how HSAs fuel retirement throughout this series. The next part dives into the long-term investing capabilities while Part Four analogizes HSAs to a similar strategy.