A Health Savings Account…Is It Right For You? (22:07)
For years, HSAs were thought of as “the cheap insurance” because consumers paid more out-of-pocket expenses, which resulted in lower premiums. How do you know if it’s a good fit for you? First, analyze your medical spending habits. Are you a relatively healthy person? Or, are you on many medications or make frequent trips to the doctor? What are your views on investing? An HSA can be an investment account too. You can invest the funds in the account so they have the opportunity to grow. This podcast simplifies the decision on if an HSA is right for you.
Brian Leitner: Welcome to Your Life, Simplified. My name is Brian Leitner, and I’ll be the host of this podcast. In today’s episode, we’re going to talk about health savings accounts or what is referred to as HSAs. These accounts are incredibly powerful for those of you who are trying to save money for the long term to pay for future medical expenses. I think we all know the cost of medical care continues to go up every year. In fact, Fidelity Investments put out a study just a couple of years ago, and they estimate that the average 65-year-old will spend somewhere between $200,000 and $300,000 to pay for medical expenses that are not covered by Medicare. I know, as an employee of Mariner Wealth Advisors, I cherish our benefits. They are absolutely excellent, but I also know I get busy. I get a little overwhelmed with all the benefits that we have to offer, and I have a feeling I’m not the only one. I think that there are a lot of people who get confused. There are different types of plans out there. Everyone wants to do what’s best for themselves and their family. So today I’ve invited Tabitha Boissonneau to help us in this discussion regarding health savings accounts. Tabitha, welcome to the show. Would you just give maybe 60 seconds of background on who you are and what you do?
Tabitha Boissonneau: I’m a senior manager on the human resources team for Mariner Wealth Advisors, and I specialize in benefits and compensation. So, a very large majority of what I do on a daily basis is managing our self-insured medical plans, as well as all of our voluntary options for our associates.
Brian: So I know that gets really confusing in terms of the conversations that you have with employees across the country. Your team puts a lot of information out there, and it’s great, and there’s a lot of information on the internet, but there’s still a lot of confusion, is there not?
Tabitha: Yes, there’s a lot of confusion, and I think that it becomes a little bit overwhelming for people. So they think they know enough to make decisions. They set it aside, and it’s difficult to get in front of people, because we feel like we have to bait them to get them into one of our presentations.
Brian: And then you have to help them make the right decision. So, talk to me a little bit about health savings accounts. How do they work?
Tabitha: A health savings account is a way of self-insuring your medical care, but it comes with a lot of advantages associated with it in order to create a long-term savings strategy, the same way you would with your 401(k) accounts. It’s gotten a lot of criticism for being the cheap option that employers could save a lot of money by offering an HSA to their associates, because the deductibles are so much higher. The individual is responsible for a lot of the first dollars that come out of your pocket throughout the course of the year. But what it’s really intended to do, when an employer implements it effectively, is encourage people to make smarter consumer decisions when it comes to their medical care and how they select their providers and manage what they need to stay healthy and happy.
As far as the structure of an HSA account, it’s first coupled with a medical insurance plan that qualifies. The IRS has certain restrictions on which plans qualify for an HSA account treatment. And that’s going to be one that has a significantly lower premium, but it’s also got a higher deductible. The higher deductible is usually what scares people out of enrolling in those types of plans. For most HSA plans, you’ll want to check your specific employers’ options, but most of those types of plans offer 100 percent coverage after the deductible is met. So, your deductible and your out of pocket are going to be considered the same thing. There are folks who can’t participate in an HSA. Anyone who is covered by another traditional plan doesn’t have the availability of using HSA accounts. Additionally, people who are covered under tri-care, VA benefits or Medicare can’t use HSA accounts either.
Brian: With the HSA account, we’re putting money away ultimately for retiree medical expenses, similar to a 401(k). These accounts are going to be utilized for medical expenses. So how do you fund this type of investment?
Tabitha: There are different options for funding an HSA. The first and simplest is going to be having a payroll deduction from your employer check. That’s going to allow for you to take advantage of the tax favorability immediately. The process is all managed for you. Another way is that you, as an individual taxpayer, can contribute to your account at any point in time. Most banks offer the opportunity to direct wire or transfer through ACH into that bank account. So you can be funding it on your own. If you do have a large, unexpected medical expense, and you weren’t prepared for it, your account is missing the money. To take care of that, you can go ahead and do a one-time fund transfer into your account. That way, you can still use your account for the cost of the medical insurance, but you haven’t yet taken the tax liability for it. What’s going to happen when you file your taxes at the end of the year, is you’re going to be able to take an above-the-line deduction to get that tax credit back, and you have the ability to continue to contribute to your HSA account up until April 15 of the following year. Similar to investing in an IRA.
Brian: So to recap, when you say above-the-line deduction for the non-tax experts who are out there, essentially you have your gross income and whatever you’re contributing to this plan, and you’re able to use those dollars to reduce your gross income and come up with your adjusted gross income. So, similar to a 401(k) contribution, you’re not currently paying tax on that income that’s going into this account? So how much money can you put into this account? And then ultimately, how does that money get invested?
Tabitha: Each year the IRS issues limitations. So you’ve got limitations, an individual account, which is when you’re paired with the medical plan and just means that you’re covering just yourself on the medical plan. For 2018 that number was $3,450; however, whenever you’re covered under any medical plan that includes two or more people, you’re considered a family when it comes to the HSA account. So, for 2018, you could contribute as much as $6,900 into that account.
Brian: So the contribution threshold for a family in 2018 was roughly $6,900. Does that include the employer’s contribution set or match?
Tabitha: Yes it does. It includes all sources of funding, whether it’s through your own payroll deductions, contributions that you make outside of payroll or your employer contributions or matching, are going to be a part of those limitations. So, you need to make sure that, at any point in time, you’re not setting yourself up to over-fund and require an access withdrawal.
Brian: And if you’re over 50 years old, there’s a catch up contribution. Is that right?
Tabitha: Similar to 401(k) plans or IRAs, anyone over the age of 50 also had the opportunity to contribute an additional $1,000 dollars in 2018.
Brian: What I love about these plans are they are triple tax-exempt. Let me say that again. Triple tax-exempt, right? When you put the money in, it’s a pre-tax contribution, it goes into this account. It grows on a tax-deferred basis. And then ultimately when you take that out for eligible medical expenses, and you’re age 65, you don’t pay tax on that. Again, assuming that you’re spending that on something that fits the criteria for eligible medical expenses.
Tabitha: That’s right. You can take the money out at any time before age 65, and you’re not going to experience any penalties associated with that as long as you’re meeting the criteria of how you’re spending the money. And once you reach age 65, you can continue to use the money on medical expenses, but you can also expand. So, if you find yourself wanting to take a vacation and you want to dip into your long hard savings, then you can go ahead and take a withdrawal of that as well. And there’s not going to be any penalty associated with it because you’ve reached age 65.
Brian: You’re right. If you’re over age 65, you can access these funds for expenses other than medical expenses. However, while you may not pay the penalty of 20 percent, you will owe ordinary income tax on this, similar to a distribution from a 401(k) or IRA. In addition to that, if you’re over the age of 65, and you have non-medical expenses, while you can access this account to pay for those expenses, you probably don’t want to do that. You probably want to raise funds from different type of account, so you get to preserve the triple tax-exempt nature of this account. So, finding resources from another account would likely be in your best interest, right?
Tabitha: That’s absolutely right. Obviously, this is making a lot of assumptions, but if you took the exact same amount and put it into an HSA, the exact same amount and put it into a 401(k), because of the triple tax exemption, the HSA is actually going to be worth 33 percent more as long as you’re spending it on those medical expenses.
Brian: Incredibly powerful. So the contributions are invested into an account and typically what are the investment options?
Tabitha: Investment options might include a self-directed platform or a mutual fund platform that’s managed by an advisor. You can decide whether or not you’re taking active role in your management, or you can ask someone else to do it for you.
Brian: When you say have somebody else manage those funds or control that, you’re saying maybe invest those funds in more of the managed money types of programs like mutual funds?
Tabitha: Yes, absolutely.
Brian: So to play that out, I’ve been investing in this account, or I’ve been putting money into this account. Maybe years have gone by, maybe I have $6,000, $7,000 or $8,000 in that account depending upon how it’s done. Now I need to get access to those funds. So, from a planning perspective, it might make sense to not have all of your money inside of the mutual funds, even though you do want it to grow, in case something should come up. You have some funds that are liquid inside that HSA account. Is that accurate?
Tabitha: That’s definitely a thought. You want to make sure that you can pull out your debit card at any point in time and pay for whatever comes up. Most plans, however, don’t have minimum balances in order for you to be able to start investing your dollars. Come up with a number that feels right to you to make sure that you can take care of typical and expected expenses, and then move the rest over to either the mutual fund platform where there’s no transaction or trading fees or you might set that limit a little bit higher if you go with a self-directed platform.
Brian: And then make sure, of course, like any account, it’s well diversified and you’re not putting all your eggs in one basket, if you will, of funds. Hey, just a quick note to our listeners, if you have a topic that you want to hear on this podcast or you have a question about your own personal financial situation, please don’t hesitate. Go ahead and send us an email at email@example.com, and we’ll have an advisor reach out to you directly. And now back to the episode. Let’s say, hypothetically, I’ve been investing in this account for several years. I have maybe $10,000 or $20,000 in this account. Now it’s been invested in mutual funds. The market’s done well. What happens if I leave my employer? What happens to this account?
Tabitha: So HSA accounts are portable. That’s one of the great features of an HSA over a like program called the flexible spending account or FSA—an HSA bank account is yours. It’s something that you own, and it moves with you throughout your employment.
Brian: That’s a really important point. A lot of people talk about the FSA accounts, and they’re popular. They were even more popular before HSAs. But the biggest issue with that, it was a use-it-or-lose-it type of plan. And I think that’s where people get confused as to, well I don’t want to enroll in this account, this HSA because it’s a use-it-or-lose-it. And in fact, it’s not.
Tabitha: That’s correct. In fact, HSAs are unilaterally more accepted in government programs. It’s getting a lot more attention, and you’re going to see both sides of the political line want to reinforce that they want to further the HSA program. Whereas the FSA over the last five, 10 years, the program has been getting decreased in the amount of funding and the availability for how you can use the funds. One of the key features of the FSA is that use-it-or-lose-it. So, if you’re not cautious about how you estimate your expenses at the beginning of the year, you could be going into the end of the year having already exhausted everything and leaving something on the table, or you haven’t spent everything, and it’s going to be forfeited back to the plan.
Brian: So I talked about qualified expenses. What is a qualified expense under the HSA accounts?
Tabitha: To make it simple, most people are really familiar with FSAs. So the list of eligible expenses is going to be the same under both. It basically includes any expense related to your health and wellness care. Anything from doctor’s visits, hospital stays and your prescription medications as well. It even expands into medical equipment, even acupuncture and chiropractic or massage care.
Brian: What happens if you fund this account, and you ultimately need to take a distribution because you need to get your hands on some funds, but it’s not going to be used as one of these eligible expenses?
Tabitha: Similar to an early withdrawal penalty of a 401(k), you’re going to be subject to taxes on the money that you withdraw and a 20 percent penalty.
Brian: So, ordinary income taxes and a 20 percent penalty, which is higher than the retirement accounts at 10 percent, so it’s pretty substantial. We talked about portability and that you can take it with you. If you do go to a different employer, can you take it with you if you die? How does that work?
Tabitha: Well, there are a couple of different rules. You must define a beneficiary on an HSA account. That can be a person, a family member, unrelated individual or an estate. However, the only person who can take that money away and use it under its tax-free status, the same way you would have during life, is going to be your spouse.
Brian: So similar to that, an IRA would be where they could roll it over into the spouse’s account. If I understand correctly, if it is a non-spouse beneficiary, ultimately those assets or those funds go to that non-spouse, but it’s recognized as ordinary income in the year of that distribution. As I mentioned, the accounts are triple tax exempt, certainly at a federal level, but as it relates to the state taxation, every state can be a little bit different. And not every single state will recognize this as a deduction. Depending upon where you live, make sure that you understand your local state laws. Tabitha, it sounds like everybody should be signing up for these accounts, but who is the HSA really right for?
Tabitha: There are a couple of different groups of people we have. Individuals have a health care consumer profile. It’s going to be made up of their personality traits, their attitudes toward health and finances, and it’s going to establish a pretty reliable pattern as to what enrollment options you should seek whenever you’re going through open enrollment. So, the biggest contributor is going to be the volume of your medical expenses. Whether you are a minimal spender or a high spender, and that could be because you have a chronic illness or you have a lot of family members, and so just the natural volume of people in your family create additional expenses above and beyond the average. So high and low. There’s really good opportunities to be saving money by utilizing an HSA plan. Additionally, your personal priority given to a savings and invest in is going to be really important.
Tabitha: If you’re not focused on long term and what the account can be doing for you in retirement, then you’re kind of missing the point. And lastly, what’s your propensity for researching your care options and pricing before you make a decision? Are you someone that’s going to jump to the first referral when something comes up? Are you willing to look at urgent care or telemedicine, which is something that has become very popular in recent years? Making sure that you’re considering your different options and what those costs are going to do to your pocketbook.
Brian: That’s excellent information. One of the other ways in which I’ve seen this used is for those who are highly compensated, and one of the benefits of this account is that even those who are highly compensated and are making an excess of a certain dollar threshold, certain benefits that they have access to are limited, and with an HSA, they’re not limited to participating in this plan. They’re limited based upon the contribution limited. Again, for family members, but they can still participate in this plan. They’re not phased out of this plan like other benefits might be. Saving for retirement on top of everything else that people want to accomplish can be incredibly overwhelming. Medical care in retirement is a major component of that. The real challenge is that it’s a variable expense. We have no idea of what it’s really going to cost us. We can do our best to ballpark what these expenses are, but they are variable expenses.
Your comment on focusing on the long term and making sure that people are setting aside the right funding in their own financial plan is incredibly important. One of the things to think about or potential strategy that somebody may want to consider is, while you’re putting money into this account every year, you have that debit card in your wallet, you can take that out when you’re at the doctor’s office or you have a qualified medical expense and utilize it. It’s true, you’re getting that upfront deduction, but what you’re not doing is you’re not getting one of the other benefits of letting those funds grow on a tax-deferred basis. Then you’re really able to take advantage of the triple tax exempt nature of this account. So now we know who it’s right for, but I’m sure there are individuals that this account, it just doesn’t make sense for them. Can you comment on that?
Tabitha: It’s going to be the medium health care consumers who could win or lose each year, and you really don’t know the answer when you’re starting out and when you have to make those decisions. So it’s really important to understand the plan design that’s being offered to you and be able to work with your employer to identify that gray area in the middle of the plan, not being a low user and not being a high user, as to whether or not it financially makes the most sense, but that result shouldn’t be discounted, because the HSA was designed to be a long-term savings investment. You want to put enough weight on both of those decisions.
Brian: These accounts and expenses need to be in the context of your overall comprehensive financial plan. Just to reiterate, what’s truly powerful about this account is similar to a 401(k) where you have that upfront deduction, you’re able to invest the money, it grows tax deferred, but really it grows tax free like a Roth IRA, assuming you’re going to take out these funds after age 65. I can’t think of another account out there that provides this type of tax benefit. As we wrap up the show, this has been incredibly informative. I hope it has been for our listeners. We talked about the HSA account, the triple tax exemption, that it provides individuals the potential strategy really leveraging this account for the long term and maybe paying cash out of pocket upfront for current expenses to really capture that benefit. For those of you that are not enrolled with your employer’s plan, or you’re interested in learning more about it, I would encourage you to check with your HR department. Find out when open enrollment is, take a look at the account and see if it makes sense for your given situation. So Tabitha, as a guest of the podcast, we ask every guest the same question. And that question is, what’s the worst financial decision you’ve ever made?
Tabitha: That one comes to mind pretty easily, but it’s with a heavy heart. When I was 19 years old, my family was faced with a lot of financial problems, and as stubborn as I am, I insisted on buying their house at it was an attempt to keep them from going into bankruptcy.
Brian: So at 19, you bought your parents’ house to save them from bankruptcy? That is absolutely incredible. Especially at that age. What did you learn from that experience?
Tabitha: First of all, repayment penalties. I couldn’t sell the house off for 10 years. I had no idea that that existed. It was painful, and the house was in significant disrepair, so it just kept getting worse as time went on, and I certainly didn’t have the money to take care of that. And while my parents had gotten a fresh start, they weren’t in a position to be able to do everything that the house needed. So making that decision, as noble as it was at the time, it definitely brought forward a lot of baggage for me to carry through my twenties, and I feel like I was always a step behind everyone else getting the house squared away and finally sold off, as well as being able to focus what a 20-year-old should be on their student loans.
Brian: Tabitha, without a doubt, you’re probably the best daughter out there. Again, incredibly generous, incredibly kind. What you did for your parents, there are a lot of folks out there that make really poor financial decisions, and they do it for potentially the wrong reasons, and the decision you made, it was hard, and you did it for all the right reasons. I really do appreciate you sharing that story. Thanks again for coming on the show today. I appreciate it. If you have comments, show ideas that you would like to hear in the future, please email us at firstname.lastname@example.org, and if you enjoy this show, please leave us comments on iTunes or wherever you listen to podcasts, and please be sure to subscribe to our podcast, so you don’t miss an episode. We know that your time is incredibly valuable, and we hope you find this podcast a worthwhile investment of your time. Thank you for listening.
The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.
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