Welcome, November! The days are getting shorter, Thanksgiving is right around the corner, and open enrollment season is here. You may have received emails about open enrollment from your HR Department at work or perhaps a message directly from your health insurance provider. Why is this important? Outside of a “qualifying event,” this 6-week period is the only time during the year that you can make changes to your health insurance coverage. Now is a good time to review your policy and consider any changes that you can benefit from. One of the best tools available to those with a High-Deductible Health Plan is a Health Savings Account (HSA). During this season of potential change, it is important to understand the benefits of an HSA and how it may fit into your comprehensive insurance plan.
Tax Deductible Contributions
An HSA is a tax-advantaged tool that those with high-deductible plans should seriously consider taking advantage of. Qualified individuals can fund an HSA and spend from the account on a wide range of approved health-related expenses. These accounts can be funded independently or may be available as an employee benefit within your workplace. Many employers offer a matching contribution to qualified plans, which may include an HSA.
Any money added to your HSA is tax-deductible without phaseout, a major benefit for eligible individuals. There are annual contribution limits (like an IRA or Roth IRA), and these are typically subject to annual inflation increases. For 2021, individuals can contribute $3,600 and family plan participants can contribute $7,200 to an HSA. There is an additional $1,000 “catch up” contribution allowed if you are 55+ years old.
Flexible Use of Funds
Unlike a Flexible Spending Account (FSA), HSAs allow account holders to accumulate money in the account year over year. There is no “use it or lose it” restrictions for HSAs, which provides a lot of flexibility and planning opportunities. Additionally, the list of qualified expenses for eligible spending is quite vast and includes things like prescription costs, doctor’s visits and co-pays, orthodontics, non-cosmetic surgeries, eyeglasses, and contact lenses. For 2020, there are new provisions in the CARES Act that now allow use of HSA funds for OTC medications and telehealth services. (Click here to review the full list published by the IRS.)
Invest for Additional Tax-Free Growth
HSAs have some similar attributes to an IRA or Roth IRA, one of which is the ability to invest contributions in the account. Though not necessary and oftentimes unadvisable, account owners can invest their HSA in a select group of mutual funds, like a retirement plan. The benefit to this is that any growth in the account is tax deferred, and if spent on a qualified medical expense, it also tax free at distribution.
As with any investment, there is risk involved. Oftentimes, the risk of losing your capital in the market does not outweigh the potential for additional growth of your HSA. These accounts should be funded and treated as part of your medical emergency fund, not a leg on the stool of your long-term savings program. Keeping the account at least partially available in cash is smart. You do not want to be entirely reliant upon the performance of the stock market at the time of an emergency when you need to access funds.
Easy to Use and Convenient Access
Best of all, HSAs are easy to set up and maintain. There are several online banks that exclusively service HSA accounts for a low monthly fee, and several traditional banking establishments also have HSA options available. If your HSA is set up through your employer, you can easily elect for monthly contributions to the account on your paycheck cycle. Like an IRA, the account holder can also name a designated beneficiary to inherit the account upon passing. This designation can easily be made or updated at any time online through the online banking portal.
Most banks offer a debit card associated with your HSA account. This makes it very easy to access funds when needed at the pharmacy or at your doctor’s office. It also helps streamline your bookkeeping, which is important in the event of an IRS audit. If needed, you can also access HSAs for reimbursement of a qualified expense you already incurred.
With the current conditions of the healthcare market, many of us carry high-deductible health insurance to offset a high monthly premium. If this is you, it makes sense to consider how an HSA can boost your medical emergency fund planning while offering a great tax benefit at the same time.