Health savings accounts (HSAs): A more substantial retirement savings tool

Health savings accounts (HSAs) have been in the news recently and for good reason. First introduced in 2003, the HSA is a tax-advantaged medical savings account available to taxpayers in the United States who enroll in a qualified high-deductible health plan (HDHP). Since their introduction, these savings accounts have proven to be valuable for participants as they offer a number of tax advantages for qualified health benefit expenses. Recent changes proposed within the Senate and House bills during the effort in 2017 to repeal and replace the Patient Protection and Affordable Care Act (ACA) are supporting even further expansion of HSAs, creating even more of an advantage. With these changes, HSAs stand to compete with other standard retirement savings mechanisms, such as tax-deferred 401(k) savings plan contributions, potentially even pushing them into the forefront.

The tax code places certain annual limits on contributions to HSAs, as well as on the HDHP’s deductible and out-of-pocket maximum. For individual coverage for 2018, the maximum contribution to an HSA is $3,450, the minimum deductible is $1,350, and the maximum out-of-pocket limit is $6,650. These limits are doubled for family coverage. The standard advantages for HSA participants have not changed since they were first introduced in 2003:

• Contributions to HSAs are tax-exempt.
• Those same contributions can be invested and any investment income and appreciation are also tax-exempt.
• Withdrawals are tax-exempt as long as participants use them to pay for qualified medical expenses, such as doctor’s visits, prescription drugs, and dental care.
• HSA funds roll over and accumulate year to year if they are not spent. They are owned by the individual.
• HSA plan contributions are not subject to the Federal Insurance Contributions Act (FICA) tax whereas 401(k) plan contributions are.

Some of the recent bills introduced in 2017 have proposed even further expansion for HSAs, as outlined below, creating even more advantages for employees if these bills are passed and become law.

• Allowing spouses to make catch-up contributions to a single HSA.
• Permitting reimbursements from an HSA for qualified medical expenses incurred before HSA-qualified coverage begins, as long as the HSA is established within 60 days.
• Permitting participants to use their HSAs to pay for over-the-counter medications. This was originally restricted under the ACA.
• Lowering the tax penalty if you use an HSA to pay for unqualified medical expenses to 10% from 20%.
• Increasing the annual limit on HSA contributions to match the annual deductible and out-of-pocket expenses under the HDHP. In other words, the HSA contribution limit could be $6,650 for individuals and $13,300 for families (consistent with 2018 HDHP maximum out-of-pocket limits).
• Eliminate the requirement that a participant in an HSA be enrolled in a high-deductible healthcare plan.

Employers also stand to gain from offering HSA plans. Some of these advantages include:

• HSAs can help with attracting and retaining employees if employees understand their full benefits.
• HSAs offer flexibility around how much employers want to contribute to HSA accounts.

The adoption of HSAs and HDHPs is growing regardless of what Congress is doing. However, for retirees who plan to use a portion of their retirement savings accounts to pay for healthcare, these proposed expansions will make HSAs even more valuable. For example, increasing the contribution limits to be consistent with the HDHP maximum out-of-pocket limits stands to double plan contributions while lowering taxable income, including amounts subject to FICA tax. Retirees with both healthy HSAs and retirement accounts such as 401(k)s will find even more financial security and stability rather than just relying on 401(k) accounts alone.

This article first appeared in the January 2018 issue of Health and Group Benefits News and Developments.

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