Ok…so I got on my soapbox about all of us becoming better consumers of health care in my previous article, the Better Healthcare Alternative to the Exchanges. I mentioned that we needed to take advantage of the tools we have at our disposal that allow us to maximize coverage and minimize our costs.
Enter…The Health Savings Account! HSA’s were established by the US Congress but are regulated and governed by the IRS. HSA’s are one of the best tools we have been provided to help offset the rising cost of healthcare because they are triple tax- free. You heard me correctly, HSA contributions come out of your pay tax free, when used for qualified healthcare expenses they remain tax-free monies, and earnings on your HSA balances accumulate tax-free…how do you beat this? Just remember, you can only contribute to an HSA during a benefit plan year that you are enrolled in a qualified high deductible health plan (HDHP). This does not prevent you from using HSA monies in a plan year that you are not in an HDHP as long as they are qualified expenses.
Another great facet of HSA’s is that they are not use it or lose it, such as the case with Flexible Spending Accounts (FSA). Your balances just continue to accumulate and grow. HSA’s are individual accounts tied to your social security number, like your 401k, you own it, not your employer. And unlike a 401k, when your employer contributes to your HSA the money is 100% yours, there is no vesting period.
HSA’s can earn income as they can be invested in interest bearing checking and savings accounts, Certificates of Deposit, money market accounts, stocks, bonds and mutual funds. Because of this ability most people would likely benefit from a retirement and investment strategy that incorporates and takes into consideration both their 401k and HSA.
In fact, HSA’s and retirement go hand in hand. I have had some clients tell me “I am not using any of my HSA dollars as they will fund my healthcare in retirement.” In retirement HSA’s can be used to pay for prescription drugs, medical premiums, COBRA premiums, dental expenses, Medicare premiums, long-term care insurance premiums and of course any co-payments, deductibles or co-insurance amounts. There are no 70 ½ minimum distribution requirements on HSA accounts like there are on 401k and IRA accounts. So, like our client stated, it makes an HSA a much more tax efficient way of paying for healthcare expenses in retirement, especially if the alternative is taking a taxable 401k or IRA distribution.
The other immediate benefit of an HSA is providing a first dollar safety net for higher deductible health plans. Many employers are contributing to employee’s HSA accounts which entices employees to consider jumping into a HDHP. But don’t be frightened by the descriptor of “High Deductible” as many HDHP’s deductibles are as low as $750 in 2018. Generally, the more first dollar expense deducible you take on, the lower the cost of the monthly premiums.
Many times, you can save as much as 20% on your monthly premiums by moving to an HDHP with a modest deductible. To maximize the impact of your HSA you would take your premium savings and re-invest them into your HSA. Now you have really accelerated your growth which in turn allows you to consider taking on a higher deductible in the future and save even more on your monthly premiums. Ultimately you need a short and long-term strategy for your HSA based on your unique needs.
If you need assistance to help you better understand your HSA options confer with your HR & Benefits folks. They should be able to help you or connect you with the insurance broker who provides your companies health benefits for additional advice.
Whoever dubbed the dog as man’s best friend…may need to re-think that phrase!
About the Author: Joe Cole, Executive VP Business Strategy, Sequent
Joe has been part of Sequent’s senior management team since 2002 and brings over 25 years of experience in business and entrepreneurial ventures. In his leadership role with Sequent’s business development team, and as a regional director, Joe’s extensive knowledge of the Professional Employer Services (PES) industry and the complex facets of the HR outsourcing industry serve him well in developing relationships and serving as a strategic business partner with clients.