The most common HSA questions – answered
Published on October 7th, 2021
It’s that time of year again: HSA Month! We’ve compiled the most common questions surrounding health savings accounts (HSAs) in hopes of increasing access to and understanding of these helpful tax-advantaged savings vehicles. With healthcare costs in the U.S. continuing to rise, HSAs provide an option for consumers to ease the cost burden in retirement and make healthcare more affordable today.
The better consumers understand HSAs, the more likely employers will be to offer the account, which in turn will allow benefit administrators to take advantage of the fastest-growing segment of the consumer funding space.
Are HSAs better for those with a lot of money?
Many consumers believe that HSAs exist as a tax shelter for the wealthy or as a low-cost health insurance alternative for young and healthy individuals. The truth is that up to 65% of consumers would benefit financially from being in a high-deductible health plan (HDHP) paired with an HSA. These plans and accounts support a diverse group of participants who have middle-class incomes, families and even chronic conditions.
In an ideal world, healthcare consumers would have plenty of money to contribute to their HSA to pay for qualified medical expenses pre-tax, save money for future medical care and invest to increase savings. But the reality is that many people simply can’t afford to engage in that way with their HSA. The next-best move is to contribute the dollar amount you think you’re likely to spend on out-of-pocket healthcare costs in the coming year, at least up to your plan’s deductible. That way, you can reach your deductible with tax-free dollars and, therefore, spend less money (30% less on average) than you would were it to come straight from your bank account.
Another tip for paying for healthcare costs and increasing savings: Contribute to your HSA the amount that would have gone toward your monthly premium in a traditional health plan. For example, if the monthly premium for your employer’s traditional health plan is $400 and the premium for the HSA-eligible HDHP is $200, take the difference ($200) and contribute it into your HSA. Worst case, you’ll be prepared to spend that money on medical expenses that arise. If you don’t use it all that month, however, you can slowly build up a nest egg for future unforeseen costs, retirement or investing.
Can you use HSA funds for long-term medical expenses?
Many people view an HSA as a funding account to help pay for immediate healthcare expenses – more along the lines of a flexible spending account (FSA). However, an HSA also makes an exceptional savings and investment vehicle, much like a 401k. In short, you can do three things with your HSA funds:
- Pay for immediate eligible out-of-pocket healthcare expenses
- Save to pay for future healthcare expenses or retirement
- Invest for growth (once your funds reach an amount set by your HSA custodian)
As healthcare costs continue to rise, they’ve become one of the biggest concerns when it comes to retirement planning. A 65-year old couple leaving the workforce today can expect to need $300,000 to cover medical expenses during retirement. Directing savings to an HSA and maxing out your annual contributions, if possible, can help ensure you’re prepared for these rising costs. If you’re fortunate enough to have good health and little need for healthcare-specific savings later in life, you can still access your HSA funds but must pay ordinary income tax on the distribution and wait until age 65 to avoid penalties for withdrawal.
Which is a better long-term/retirement savings vehicle – a 401k or HSA?
HSA tax benefits also far exceed what most people realize. In fact, HSAs offer the greatest tax advantages of any benefit or retirement account, including 401ks. With an HSA, you can tap into the power of triple-tax savings:
- Tax-deductible contributions, which reduce the federal income taxes you owe
- Tax-free growth of funds
- Tax-free withdrawal of funds used for qualified out-of-pocket medical expenses
This doesn’t mean you should bypass a 401k, however. Those whose employers offer a 401k match and contribute funds to an HSA would be wise to elect and contribute to both accounts to maximize their long-term savings.
Are PPOs more affordable than high-deductible health plans?
Despite what many think, high-deductible health plans (HDHPs) would be financially beneficial for 65% of consumers. When paired with an HSA, HDHPs are the most cost-effective health plan for most people.
To start with, HDHPs typically have a much lower monthly premium than traditional health plans. When employees save on those monthly premium costs, they can reallocate the saved dollars as contributions to an HSA and reap pre-tax benefits. Similarly, employers can elect to reallocate their monthly premium savings to seed employee accounts. When employers contribute to employee accounts, they not only see greater adoption of HSAs, but also see higher account balances. The more employees use pre-tax dollars to pay for their healthcare, the less money they’ll spend. In fact, an Alegeus report found that American consumers could save a collective $85 billion on eligible out-of-pocket medical expenses if they used pre-tax dollars. This would go a long way toward bending the medical cost curve.
So why do many remain hesitant to consider electing one? It may stem from the term “high-deductible.” The expectation of more out-of-pocket costs can send people to a traditional (PPO) plan. To combat this issue, the Health Savings Act introduced in Senate in Jan. 2019 proposed changing the name “high deductible health plan” to “HSA-qualified health plans” to draw more attention to the benefits of such plans – primarily the triple-tax advantage of HSAs that typically pair with HDHPs. Financial expert and radio host Dave Ramsey has also suggested reframing the plan options as HSA vs. PPO, rather than HDHP vs. PPO.
When can you adjust your HSA election amount or make contributions?
You can change your annual election amount or make additional contributions at any time during the plan year. (Contributions may not exceed the IRS annual limit.)
If I don’t spend my HSA funds by the end of the year, will I lose those funds? What about if I leave my employer?
The funds you or your employer contribute to your HSA are yours to keep year after year, unlike the use-it-or-lose-it rule of FSAs. This allows you to save and grow funds over time for future expected or unexpected medical expenses. For example, money you save in your HSA this year could be used to pay for a surgery 10 years from now. As long as you spend HSA funds on qualified medical expenses, you will not receive a penalty for removing funds.
An HSA is a personal financial account, meaning the money in the account is yours even if you leave your employer. If you switch employers and find yourself with multiple HSAs, you can consolidate them into a single account.
Can you invest HSA funds for growth?
Yes, an HSA makes an excellent investment vehicle. Once you meet the minimum balance requirement ($1,000, for example), you may invest your HSA dollars for growth, and any earnings are tax-free. Some HSA providers simplify the experience even further, with a solution that allows consumers to invest their HSA funds directly within the HSA experience and that provides an advisor tool to help less experienced investors.