Although many organizations today offer high-deductible health plans (HDHPs) paired with health savings accounts (HSAs), many Americans are still unfamiliar with HDHPs. If your company offers this option and you are not taking advantage of these vehicles, you may be missing an opportunity, as HDHPs and HSAs can play a valuable role in your financial wellness.
In the past, you may have heard that HSAs were a convenient way to pay for out-of-pocket costs, such as doctor visits or prescriptions at your local pharmacy. But did you know that HSAs can be used in a variety of ways to help manage other current qualified medical expenses—as well as to pay for future medical expenses, such as your qualified medical expenses in retirement?
HSAs: The basics
HSAs are individual accounts typically offered by employers in conjunction with an HDHP to cover qualified medical costs. So, if you put money in an HSA and use that money to pay expenses for a doctor’s visit or another qualified medical expense anytime in the future, you never pay federal taxes on the money. And although state taxation may vary, most states follow the federal tax law.
What’s more, unlike health flexible spending accounts (FSAs), HSAs are not subject to the “use-it-or-lose-it” rule. Funds remain in your account from year to year, and any unused funds may be used to pay for future qualified medical expenses.
The IRS maximum annual contribution limit for HSAs in 2014 is $3,300 for those individuals selecting single coverage and $6,550 for those electing family coverage under an HDHP. Individuals age 55 and older in the calendar year may contribute an additional $1,000 (applies to both single and family coverage).
You can use your HSA to pay for some or all of your qualified medical expenses each year and let the rest of the money in your HSA potentially grow for use in the future, including in retirement. Or, if you have the cash to pay your medical costs out of pocket, you can let your HSA grow tax free for future qualified medical expenses.
For how the Internal Revenue Service defines “qualified medical expenses,” read IRS Publication 502 and IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans.
Three healthy HSA habits
We believe there are three simple and effective “healthy habits” that can help you get the most value from your HSAs, both now and in the future.
1. Cover anticipated out-of-pocket health care costs.
Each fall, during annual enrollment, you have the opportunity to make health care choices that serve the needs of you and your family for the coming year. You may be wary of enrolling in an HDHP plan because you are concerned about potential out-of-pocket costs. You may have worried, “What happens if I get really sick or have a catastrophic accident? Where will I get the money to pay the higher deductible?”
These are valid considerations. To start with, you should factor in the deductible and any out-of-pocket costs. But what you may not realize is that you may be paying more than $2,000 every year in premiums for a “lower-deductible” plan (such as a traditional preferred provider organization [PPO] plan)—whether you need services under the plan or not. A “worst-case scenario” typically is going to occur only for a small number of people, and HDHPs generally provide generous coverage above the higher deductible, including an out-of-pocket maximum for protection. What’s more, most preventive care and screenings are now required by law for most employer-sponsored health plans.
Generally, those who choose traditional health plan options may be paying higher premiums, while those who elect an HDHP generally pay a lower premium for health coverage and can direct those premium savings to their HSA to help cover any “worst-case” expenses.
Consider contributing enough into your HSA so that you have enough cash on hand to cover anticipated or unanticipated out-of-pocket qualified medical expenses for the year. This approach can help you better prepare for an unexpected trip to the emergency room or an unforeseen health issue in the coming year.
2. Take advantage of available company contributions.
If your company supports your efforts to save, with an employer contribution to your HSA, you’re in good company. In 2012, nearly 93% of employers with HSA plans made a contribution to employee HSAs, with an average annual contribution of $884.1
Combined with your own contributions, the savings of accumulated contributions can go a long way toward meeting any anticipated qualified medical expenses. While employers may have different rules and timing for their contributions, a common approach is to put the full employer contribution in your account as soon as you open your HSA and enroll in the HDHP.
3. Save and invest for future qualified medical expenses.
Many financial professionals suggest that individuals can benefit from tax-advantaged vehicles such as workplace savings plans and HSAs. While individual tax situations will vary, the triple tax advantages offered by HSAs merit them a closer look. Generally, an HDHP with an HSA enables you to set aside pretax dollars—many employers offer this as a payroll deduction—that can accumulate tax free and can be withdrawn tax free to pay for future qualified medical expenses,2 such as in retirement. An HSA balance can remain in your account from year to year and can be taken with you once you leave your job or wherever life takes you.
Because many employers are dropping or cutting back retiree medical coverage, planning for medical expenses both now and in the future, including in retirement, can be an important part of your overall savings plan.
For many Americans, health care is likely to be among their largest expenses in retirement. A 65-year-old couple retiring in 2013 is estimated to need $220,000 to cover medical expenses throughout their retirement.3 Fortunately, employees who have access to an HDHP through their employer may have the option of saving and investing in an HSA. Just as investing for retirement is a priority for most Americans, investing in a tax-advantaged HSA to help pay for current or future qualified medical expenses is becoming just as important.
Consider contributing the maximum that you can afford to your HSA. For the portion of the HSA that you are saving for the future, you might want to consider contributing to an investment portfolio in line with your longer-term savings goals.
HSAs offer a number of benefits both for short-term spending and for saving for longer-term qualified medical expenses, even in retirement. The three healthy habits outlined here can help you better understand how to take advantage of this growing health care savings opportunity.
- Read about how to save on health care costs on Viewpoints: “Seven ways to save on health care costs.”