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Client Conversations: HSAs: 1 Account, 3 Tax Benefits

February 2018

Have a health savings account, but not contributing to it? You could be missing out.

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


Fighting the good fight against rising healthcare costs continues. With out-of-pocket medical expenses shooting sky high, increased responsibility now falls directly on our shoulders.

Thankfully, there’s a special tool—an often overlooked one—right in the back pockets of those with high-deductible health plans. They’re called health savings accounts (HSAs).

 

A new kind of plan

High-deductible health plans gained popularity as employers began opting for more consumer-directed plans. The percentage of privately insured American adults aged 18 to 64 with high deductible health plans rose from 26.3 in 2011 to 39.3 percent in 2016.1 These plans are in addition to, or often in lieu of, traditional lower-deductible preferred provider organizations (PPOs) and health maintenance organizations (HMOs).

Initiated to rein in employer health expenses, employees may pay lower monthly premiums but are responsible for everything before a much higher deductible (defined as $1,350 for an individual and $2,700 for a family) is reached.2 The idea is you become a more careful shopper of health services with added skin in the game.

Some oppose these plans because they may make people more reluctant to seek treatment due to additional up-front costs. Those who are older or less healthy face more out-of-pocket expenses than the younger and healthier. However, one thing everyone can readily agree on is the tax advantages found in the HSAs that can accompany high-deductible health plans.

 

Getting an HSA

You’re eligible for a HSA if you’re enrolled in a high-deductible health plan. However, you can’t be eligible for Medicare and can’t be claimed as a dependent. To help combat the added burden, you and/or your employer can put money for health expenses into an HSA straight from your paycheck. If your employer doesn’t offer an HSA, you can open one yourself. Either way, you’ll get a debit card that you can use for today’s copays and prescriptions and for tomorrow’s expenses, too. Just be aware, you’ll pay a 20% penalty if the money is spent on anything other than a qualified medical expense, according to the IRS.3

 

How do you contribute? 

An HSA functions in two ways:

1. As an FDIC-insured personal savings account

2. As an investment account for HSA assets

The IRS sets limits on the amount of pre-tax dollars that can be put into an HSA for medical expenses. In 2018, that maximum limit was $3,450 for an individual and $6,900 for a family.2

In addition, anyone 55 or older can contribute an additional $1,000 catch-up amount. Those approaching retirement can max out their contributions and then invest to help build a health-expense nest egg (FIGURE 1).

 

FIGURE 1

Max Out Your HSA Contributions Before Retirement

CCWP019_1

Source: Hartford Funds. Hypothetical of a 45-year old single person with maximum contributions ($3,450 for 5 years and $4,450 for 10 years) with an 8% investment return. This hypothetical illustration does not represent the return on any particular investment, and the return rate is not guaranteed.

 

What are the tax benefits?

One of the biggest wins of HSAs is the tax benefits account holders can take advantage of:

You can contribute money on a pre-tax basis

The earnings on invested HSA money are not taxed

Assets can be withdrawn tax free for qualified medical expenses

All contributions are also tax-deductible. So, if you know you have a big out of pocket medical expense on the horizon, you can add funds (up to your limit) into your HSA account.

 

Potentially free money

Some employers make contributions to HSAs on behalf of their employees. That amount varies from company to company. Other factors, including whether it’s just an employee or an employee and other family members on the plan, can play a part, too.

 

Qualified Medical Expenses

CCWP019_2

Client Conversations gives financial advisors an easy way to communicate with clients on topics influencing financial markets; it highlights common investor behaviors and offers ways to address the challenges investors face. Share this article with your clients, and remember to follow your firm's policies that govern sharing content with clients and prospects.


1 “High-deductible Health Plans and Financial Barriers to Medical Care: Early
Release of Estimates From the National Health Interview Survey, 2016;” 6/17;
National Center for Health Statistics

2 HealthCare.gov; 1/18

3 “Revenue Procedure 2017-37;” 5/17; IRS.gov

All investments are subject to risk, including the possible loss of principal.

This material is provided for educational purposes only.

This information should not be considered investment advice or a recommendation to buy/sell any security. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. This material and/or its contents are current at the time of writing and are subject to change without notice. This material may not be copied, photocopied or duplicated in any form or distributed in whole or in part, for any purpose, without the express written consent of Hartford Funds.

CCWP019   205219