Strategies to maximize HSA benefits

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There is no disputing the cost of health care is high and there have not been any signs those costs will decrease. In 1960 health care spending represented  5% of the total U.S. GDP.  In 2020 spending on health care was near 20% of the total U.S. GPD. In 2003 the Medicare Prescription Drug, Improvement and Modernization Act established health savings accounts. Here’s everything you need to know about health savings accounts (HSA) and how to maximize HSA benefits.

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What is a health savings account?

A health savings account is a tax advantaged savings vehicle for individuals that are covered by high-deductible health insurance plans. The theory behind the establishment of these plans was that individuals could pay lower premiums and invest the savings tax-free until they were needed for medical expenses. Critics of the health savings account argue that a greater burden is placed on individuals to cover medical expenses as high deductible plans generally result in higher out of pocket costs if there is a medical event or condition.

How HSAs work

Contributions to the HSA grow tax-free until they are distributed. If the distribution is for a qualified medical expense the distribution is tax-free. Most plans have a debit card which can be used to directly pay for the expense or the expense can be submitted for reimbursement from the health savings account.  An important feature to note is that there is not a time limit as to when the reimbursement can be claimed. An eligible expense can be reimbursed years after it was incurred if the HSA was in place at the time the expense was incurred. An individual could save all their medical receipts from the inception of the health savings account and then claim the reimbursement post retirement to provide additional cash flow.

Unlike an individual retirement account there is no required minimum distribution rule. The assets in the health savings account can grow in the account for the entirety of the individual’s lifetime. If you can avoid withdrawing from the account for medical expenses the strategy of accumulating your medical receipts and deferring withdrawal until later in life can produce a dual benefit.

The reimbursement of your medical expenses that you have accumulated for years would be considered a non-taxable distribution as it is for qualified medical expenses. This would provide you with additional cash. If instead you were to withdraw from your individual retirement account to pay for your medical expenses you would be realizing taxable income. This taxable income could impact the taxability of your social security benefits, the Medicare Income-related monthly adjustment amount surcharge (if applicable) and your ability to deduct your medical expenses given a higher floor for the deduction. Any qualified medical expenses paid using funds in your health savings account are not a deductible expense.

Maximize HSA benefits

If you are covered by a high deductible plan you should consider the use of a health savings account. To maximize the benefits of the account you should try and maximize your contributions, not withdraw from the account unless it is for medical expenses and financially necessary and invest the funds in your health savings account rather than have them sit in cash. Good recordkeeping is a necessity especially if you plan to take the reimbursement later in life. If the IRS were to question the reimbursement and you are not able to provide adequate documentation the distribution will be deemed as ordinary income.

Your health savings account is not only a vehicle for your health care costs but can be an extraordinary retirement planning tool for your future. If you have questions, please reach out to your Henry+Horne adviser.

Cheryl Dickerson, CPA