For Those Struggling to Save, Funding an HSA Not a Matter of If But When

By James Thompson, CIP, CHSP

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Setting aside enough money for life’s biggest moments is a struggle for many Americans. So how can anyone who is struggling to save manage to accumulate the financial resources necessary to pay healthcare expenses? Well, if eligible to contribute to a health savings account (HSA), taking advantage of an HSA’s triple tax benefits—current-year tax deduction, tax-deferred earnings, and tax-free distributions when eligible—can make it easier.

The HSA was designed to pay for unreimbursed medical expenses incurred by the HSA owner and the HSA owner’s dependents. Its multiple tax benefits are available no matter how much—or how little—the HSA owner contributes.

While building up a healthy HSA balance is certainly preferred, what about those individuals who cannot afford to do that? They may disregard the HSA because they feel they are not capable of saving enough to make having an HSA worthwhile. But it’s not a matter of using the HSA in case they incur medical expenses; it’s a matter of using the HSA when they incur medical expenses. That’s where the tax benefits really come into play.

Think about the person who becomes injured and has to be seen by a doctor or hospitalized. That trip to the doctor or hospital could end up costing hundreds, if not thousands, of dollars. If that person owns an HSA, she has the option to use her HSA money to cover the unreimbursed portion of those expenses, versus just paying for them out-of-pocket. The beauty of using the HSA is that the HSA owner may be able to contribute the payment amount (being careful not to exceed the annual contribution limit) to her HSA before paying the medical expenses from her HSA. Moreover, the tax deduction she will receive on amounts contributed to the HSA is like getting a discount on those medical expenses. For instance, someone in the 25 percent tax bracket essentially is receiving 25 percent off his medical bills by contributing to an HSA.

Note that an HSA owner who makes HSA contributions in this way does not have to contribute an amount equal to his medical bills. He can contribute as little (or as much) as he wants to an HSA, up to the statutory limit. There is no statutory minimum balance requirement to maintain an HSA, though some financial organizations may have minimums. Making multiple small contributions may be a viable option for those who feel that they cannot set aside a greater amount all at one time.

Many who work for employers that offer an HSA-eligible high deductible health plan have amounts withheld from their pay, thereby capturing the tax benefit without ever having to claim the tax deduction on their individual income tax return. But no matter how contributions are made, either directly or via payroll withholding, there is no restriction on when amounts accumulated must be distributed.  

Be careful not to overlook those who are eligible to make HSA contributions but can’t see the value in having an HSA because they don’t believe they can build up a large enough HSA balance. These potential HSA clients may be an untapped opportunity for your organization to boost its HSA business. By sharing with them the concept of paying their HSA before they pay their medical bills—as they incur qualified expenses—they will begin to see the benefit of not only having an HSA, but contributing to it to capture the tax deduction. After all, paying for medical expenses strictly out-of-pocket when eligible for an HSA contribution is like throwing money away.