Many people are unfamiliar with a Health Savings account and the ways it can benefit them, both during their working lives and especially upon retirement. It can be a very effective vehicle for paying for medical expenses in the most tax-efficient manner possible.
Don’t you mean an FSA or Flexible Spending Account?
No, it is not the same thing as a Flexible Spending Account, though you could have both offered through your employer. But whether or not your employer offers both, or just the Flexible Spending Account, you can still set up your own Health Savings Account that will benefit you differently than the Flex Spending.
But what is the purpose of the HSA?
It is a tax-exempt savings account that is used to pay medical expenses, in conjunction with what is known as a High Deductible Health Insurance Plan. You get a full tax deduction for the amount of your contribution to the Health Savings Account, and then are not taxed on the withdrawals if they are used for medical expenses. This is true whether you itemize or not, because it reduces your income. A big difference from the Flexible Spending Account, is that you do NOT have to use all of your HSA every year, and in fact, we encourage you to allow it to accumulate.
Why would I want the Health Savings Account to accumulate and grow?
As already mentioned, withdrawals from the Health Savings Account are never taxed if used for un-reimbursed medical expenses. It can be difficult otherwise to meet the requirements to deduct medical expenses on your tax return, because of the high limits. But what you may not know, is that you can treat it as yet another savings tool for retirement, using the funds accumulated to pay for expenses that are not covered by Medicare after you turn 65. This includes common expenses such as:
- Dental care- an expense that many do not realize increases significantly with age.
- Hearing aids, which are not covered by Medicare.
- Premiums for Long Term Care insurance.
- Premiums for Medicare A, B, C and D once enrolled in Medicare, but not for your Medicare Supplement plan.
There is generally a significant increase in medical expenses after age 65, and many of these will not be deductible on your personal tax return; but if you can pay for these expenses with funds that have had no taxes applied, you will benefit greatly- at least from a tax standpoint.
How do I set up a Health Savings Account?
Step 1: You have to begin with your insurance plan- you will need to identify and enroll in an HSA-compliant plan. This translates into the following minimum components in 2019:
- An individual minimum deductible of $1350, and $2700 for a family deductible.
- The maximum out-of-pocket expenses allowed for your health coverage, including deductibles, co-pays, etc. but not premiums, are $6700 for an individual and $13,500 for a family.
- It can all be a bit confusing, but ask your health insurance provider or employer for an HSA-compliant plan.
Step 2: If your employer offers the Health Savings Account, indicate to them that you want to set one up, and they will walk you through the steps. If not, you can contact a provider to set one up yourself on line. Here are some of the largest providers:
- Health Equity
- HSA Bank
- Optum Bank
How much can I contribute to the HSA?
The limits are relatively low, but this adds to the rationale of our note earlier about allowing the funds to accumulate. An individual can contribute $3,500 per year and $7,000 for a family. For individuals age 55 and up, but before age 65 (when you qualify for Medicare) you can add $1,000 per year to your contribution. No contributions can be made once you are enrolled in Medicare, though you can add a per diem amount for the months prior to your birth date in the year you turn 65.
What if I do not use all of the funds before I die, or if I die early?
You should specify a beneficiary for your Health Savings Account when you set it up. If you do not, the fair market value will be added to your estate. If your spouse is the designated beneficiary, it will be treated as their Health Savings Account after your death. If someone other than your spouse is the beneficiary, the account will be taxable to the designated beneficiary. So clearly the best choice will be to leave your Health Savings Account to your spouse, but if someone else receives it, it is still a gift!
We hope that this helps to explain some of the valuable ways that you and your family can benefit from the use of a Health Savings Account, and encourage you to set one up as soon as is reasonably possible.