HSAs: Don’t Take a Use-It-or-Lose-It Approach
By Jodie Norquist, CIP, CHSP
Depending on the type of health insurance coverage your clients have, they may be eligible to contribute to a health savings account (HSA) or a health flexible spending arrangement (FSA). Both allow your clients to set aside money in a tax-advantaged account to help them pay for qualified medical expenses throughout the year.
But there’s a major difference between the two accounts. FSA assets generally must be spent by the end of the calendar year. If they aren’t, the assets essentially “expire” and the FSA owner effectively gives up, or “loses” that money. HSA assets, on the other hand, do not have an expiration date. They may be left in the account to be used for qualified medical expenses in subsequent years—or not used at all, continuing to grow over time, even into retirement. As 2020 draws to a close, you may want to remind your HSA owners of this important distinction. In fact, many HSA owners may want to think about using their accounts as another savings vehicle for retirement, much like their 401(k) plans or IRAs.
Think of HSA as Retirement Savings Vehicle
Why might clients want to think about their HSAs as retirement savings vehicles? Perhaps they’ve maxed out their 401(k) and IRA contributions for the year and the HSA is yet another tax-advantaged way for them to save. In fact, an HSA packs a hefty triple-tax-savings punch: your clients 1) contribute pretax money, 2) defer taxes on the earnings, and 3) can withdraw the assets tax free to pay for qualified medical expenses—now or anytime in the future.
The longer those dollars stay in the HSA, especially if your clients don’t need to use all of those dollars for current medical expenses, the more time they have to generate earnings. Some HSAs with large enough account balances may be invested in stocks, bonds, or mutual funds. Many of your clients may not realize that they can take this long-term investment approach with their HSAs.
By thinking of the HSA more like a retirement savings account, rather than a medical spending account, your clients can put their HSAs to work for them. They may find that contributing the maximum amount to their HSAs each year—if they are eligible or able to—allows them to creatively invest more of the money. In doing this, clients may choose to use some of their HSA assets to pay for the qualified medical expenses that they incur each year or leave their HSA assets untouched and use non-HSA money to pay for current medical expenses in order to maximize their net annual contributions.
If able to build up their HSA balances before retiring, your clients will be able to draw from those accounts to pay for medical expenses incurred during retirement. After all, once your clients retire, they are unlikely to be covered by a high deductible health plan and, thus, would no longer be eligible to contribute to their HSAs. And, based on many projections, it’s highly probable that their expenses could be significant, and not all post-retirement medical expenses will be covered by Medicare.
In addition, once HSA owners reach age 65, they can use their HSAs to pay for any nonqualified medical expenses without incurring a 20 percent penalty tax on the withdrawal. They will, however, be taxed at their ordinary income tax rate, just as pretax IRA distributions are. HSA assets can also be used to pay certain Medicare expenses, including premiums for Part B and Part D prescription drug coverage.
All of these are worthwhile considerations when saving with an HSA. No matter what HSA strategy your clients ultimately choose to take, you’ll provide them a valuable service by offering them an alternative to the use-it-or-lose-it savings approach. Be sure they are aware of the many attributes of an HSA and how they can make their HSAs work for them.
