HSA priorities, strategies differ by age, financial goals
| Photographs By RomanBabakin
A health savings account (HSA) can be a powerful tool for just about anyone. The flexibility of HSAs makes them appealing for a wide range of users, but that same flexibility can make explaining these accounts a challenge. No two people have identical health-benefit needs, and each employee will use an HSA differently.
For example, an employee who is young and single has different concerns from someone with a family at home. Both individuals will prioritize things differently from someone approaching retirement, or someone with a chronic health condition.
There are numerous ways to approach managing an HSA for individuals, but any strategy will ultimately be influenced by things like income level, health needs, and long-term financial goals.
Something for everyone
Employers play an important role in helping employees and their dependents get the most from their HSAs. The first step is to understand and embrace the idea that HSAs can work for everyone, and to help employees see how an HSA can fit into their current and future lifestyle. Here are some scenarios that can help demonstrate HSA utilization for employees in a range of demographic categories.
Millennials are now the largest generational group in the workforce, and they are the group that has perhaps the greatest opportunity to take advantage of the long-term benefits of an HSA. While research has shown that nearly half of millennials will pay less or forgo medical care to save money, HSAs are the unique benefit that can provide for their health needs now and into the future, as well as providing a supplemental account to cover expenses later in life.
This group can benefit from the short-term tax savings HSAs provide on a wide range of health care-related expenses, but the bigger opportunity is in long-term savings. Contributions earn interest tax-free, so the account works as a kind of health-focused 401(k). For example, a Morningstar study found that a participant in the 25 percent tax bracket who contributes the maximum amount for a family HSA contribution ($6,750 in 2017) and does so for 30 years, will have an HSA balance of $378,573 at the end of that time period (based on earning a 4 percent annual return).
This type of savings is important, especially considering current estimates that a couple retiring at age 65 is likely to spend $266,000 on Medicare premiums alone.
In addition to these annual contributions by account holders, HSAs present an added long-term investment opportunity. In addition to depositing this money into an FDIC-insured savings account, account holders have the option to invest a portion of their unused HSA funds into a self-directed HSA investment account where it can be invested into a wide variety of stocks, bonds and mutual funds.
However, according to a 2017 VISA/ECFC survey of FSA/HSA users, only 8 percent of HSA users surveyed planned on investing their HSA funds for future use. Considering this wealth of options, it’s clear that HSAs provide millennials with a unique opportunity for long-term health-care savings and way to bolster their retirement savings.
2. Generation X
As the middle generation in the workforce, Generation X employees should approach HSA contributions in a balanced manner. According to Pew Research, 36 percent of this generation were married between ages 18-32, as opposed to 26 percent of millennials, so they are more likely to have settled down and have a family with a wealth of new health expenses.
Even the youngest Gen Xer (born in 1981) is in his/her mid-30s, so additional health expenses that come with middle age are just around the corner. Because of this, Gen X employees will benefit from short-term savings on their taxable income and enjoy tax-free withdrawals to pay for eligible health-care expenses.
The good news for this age group is that HSAs can be used to pay for a wide range of health-related expenses. Some of those expenses are well known – such as eye exams, contact lenses, and glasses – but others are less common. For example, individuals can spend their HSA contributions on prenatal vitamins and breast pumps, a variety of SPF 15+ sunscreen lotions and lip balms, or even a defibrillator.
Keeping track of the full list of eligible items is a job in itself, but fortunately there are online resources to help individuals track and check eligibility of expenses as they arise.
Gen X employees may also benefit from the long-term savings an HSA offers, as well as opportunities to invest a portion of unused account dollars into stocks, bonds and mutual funds.
Once again, this is a largely underutilized feature by HSA users, but with consumer interest in these accounts growing each year and larger numbers of banks offering HSAs as investment-ready retirement accounts, Gen X employees may find that HSAs are a great way to supplement existing retirement savings or catch up if they started later in their careers.
According to the 2017 Midyear Devenir HSA Research Report, HSA investments reached an estimated $6.8 billion in June 2017, a 44 percent increase year-over-year, which illustrates how this segment of the market is poised to grow in future years.
4. Baby Boomers
As employees near retirement age, their HSA focus is likely to shift to immediate health needs (and because HSAs offer triple-tax savings, there are still benefits for individuals who open an account). The IRS allows individuals older than 55 to make an annual catch-up contribution of up to $1,000 beyond the annual maximum.
As retirement approaches, those contributions gain additional value as well. While spending from the account prior to age 65 is limited to eligible health-related expenses (withdrawals for ineligible expenses will incur a 20 percent tax penalty), HSA funds are available after the account holder reaches Medicare eligibility at age 65 for any expense. So, even contributions made immediately prior to retirement may be available for withdrawal for non-health-care expenses (while there is no tax penalty for such withdrawals, the account holder will pay income tax on the distribution).
Unique HSA features
Striking the right balance between using your HSA for saving and/or spending on your medical expenses is vital to getting the most out of the account. But, regardless of an employee’s individual situation, there are some key account features that employers can help employees understand.
Contribution limits: HSA limits are scheduled to increase to $3,450 for individuals and $6,900 for families starting in 2018. Tools like online calculators can help employees estimate current tax savings and the future value of contributions so they are better prepared to strike the proper balance for their individual situations. Employers should look for opportunities to make these tools and educational information easily accessible throughout the calendar year, not just during open enrollment.
Eligibility: Medical product and service eligibility is determined by the Internal Revenue Service, which states that medical care is amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for affecting any structure or function of the body. This is a very broad definition, but employers can make it simple by providing an Eligibility List for employees to check before spending HSA dollars.
Dependents: Exactly who can be covered by an HSA is a common question among employees. Because HSAs are tax-advantaged accounts, coverage is limited to individuals (spouse or relative) whom the HSA holder claims on their tax return, including spouses, as well as children and adults listed as tax dependents.
Benefits when paired with other accounts: HSAs are considered a form of “first-dollar coverage,” which means that the account can pay for your covered services before you meet your deductible. Qualified HDHP plans often come with not only out-of-pocket deductible expenses, but co-pays and co-insurance too. Your HSA can be used to cover these costs. As such, HSAs cannot be combined with first dollar options like general medical flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs). However, an HSA can be used with a limited care flexible spending account (LCFSA) to cover vision/dental expenses or a dependent care flexible spending account (DCFSA) that can supplement child care/elderly dependent care. Employers should be clear about which options are offered to their employees, and the compatibility requirements of each.
Investment options: Employers will often partner with a specific HSA administrator to simplify the enrollment process for employees, but it’s important for employees to understand that they have options when opening an HSA. Not all HSA administrators offer an investment platform for the account. Employers should also make employees aware that any interest, dividends or capital gains earned from an HSA are non-taxable. Last but not least, HSA funds are portable, so an employee can move these funds from one job and continue funding it at another position.
With careful management and financial planning, HSAs are extremely viable health-care retirement accounts, and they should be mentioned in the same discussions as 401(k)s and IRAs when employers outline employee retirement-plan options.
The bottom line remains that HSAs are growing in popularity because they give consumers control over their spending, and the kind of flexibility, customization, and financial support employees want from health benefits. For employers and benefits managers, this is important to remember. Giving employees the knowledge and tools to balance their HSA for maximum use is essential to this effort.
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