Insights & Thoughts

The Triple Tax Benefits of HSAs

by | Jun 17, 2017 | Financial Planning, Tax Planning

Health Savings Accounts have been growing in popularity with the increased number of high deductible health plans used. High deductible health plans (HDHP) are currently defined as ones with a deductible above $1,300 for an individual and $2,600 for a family. Under a HDHP, all medical care must be paid for out of pocket until this minimum deductible is met although some do have some “wellness” benefits provided before a deductible is paid.

According to a recent PricewaterhouseCoopers study, the percentage of employers offering HDHPs has grown 300% since 2009. 25% of employers are now only offering HDHPs to their employees which is a 40% increase from 2014. It’s projected that by 2018, 50% of employers will only offer high deductible plans as companies of all sizes look for ways to shift rising health care costs to their workers. This is similar to my personal experience as my husband’s employer offers only one choice which is a HDHP. With that plan, our family deductible is $5,200, double the threshold of $2,600. In the ACA marketplaces, almost 90% of enrollees are in a plan higher than the threshold for HDHPs.

The biggest perk to having a high deductible health plan, (and for many families the only one), is the eligibility to contribute to a Health Savings Account (HSA). An HSA is a savings account that allows you to set aside pre-tax money to pay for qualified medical expenses. Some companies even contribute to employee HSAs to help bridge the gap of meeting the deductible, although usually not near enough to cover deductible. HSA funds grow tax free and roll over year to year if you don’t spend them. For 2017, the maximum amount individuals can contribute per year is $3,400 and $6,750 for families. There is a $1,000 catch up contribution for participants 55 and over. Withdrawals for qualified medical expenses are never taxed. No other account offers the triple tax benefits of an HSA – no taxes on contributions, growth, or withdrawal.

Many HSAs offer a list of investment choices so you aren’t limited to keeping the funds in cash in most cases. The portability of health savings accounts also makes them appealing. You can move HSA accounts between custodians even if you change jobs, medical carriers or move to another state. When choosing an HSA, the things to consider are monthly account maintenance fees and the investments available (and corresponding fees). On the low end, monthly maintenance fees are around $2.50 and waived on daily balances above a certain amount. You can click here to see a comparison list of popular HSA administrators.

Prior to age 65, withdrawals for purposes other than qualified medical expenses are subject to a 20% penalty as well as income taxes. After age 65, withdrawals may be made for any purpose without penalty, but will be subject to income tax if not used for qualified medical expenses. Given that the cost of health care in retirement could be $200,000 or more based on averages, using an HSA as a method of paying for future medical bills is a wise choice.  An HSA could also be a way to supplement retirement if you’ve maxed out your 401k and IRA, but investment choices are limited and fees can be tricky so it’s best if used for its intended purpose, paying medical bills.

With high deductibles becoming the norm for many people, it is now more important than ever to do your homework on the cost of medical services. The Kaiser Family Foundation reports that the average annual out of pocket costs per patient rose almost 230% from 2006 to 2015. I had an eye-opening experience recently regarding medical costs that I want to share. My sister, a seemingly healthy 31-year-old, had some alarming symptoms and after seeing a cardiologist, an echocardiogram was recommended. She was in a gap of insurance coverage due to changing jobs and moving from TX to GA, but needed to get the test done right away to rule out anything serious. She spoke to the Wellstar billing specialist ahead of time and was quoted $300 for the cash price. The specialist seemed surprised at that amount and told my sister someone just had the same test a day before and paid almost $800 with insurance.

As someone with insurance, this infuriated me. It also made me think, should I be paying the cash price instead of using my insurance? The downside of course would be that any money I spend won’t be applied toward my deductible, but if it’s highly unlikely that I’ll meet it anyway, I could just take the cash price and pay the bill via my HSA. In the end, to me the more important take away is just to research costs ahead of time. Check to see if your insurance company has an online cost estimator, mine did. Using that, I can see and compare provider costs for tests and procedures ahead of time and be sure I am not overcharged. It is crazy to see the rates some providers are contracted at and how far above the average they can be.

I hope you find this article helpful. The health care industry is changing dramatically and will probably continue to do so for the foreseeable future as our country struggles to rein in costs. It’s important to stay in the loop and take advantage of any opportunities to help mitigate costs. If you are eligible, contributing to an HSA is a no-brainer. With the triple tax benefit, it simply cannot be beat.





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