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Healthcare costs continue to rise faster than inflation, which creates a conundrum for employers who offer healthcare to their employees. In recent years, most employers have sought to reduce their healthcare expenses by asking employees to shoulder a greater portion of these higher healthcare costs.


Shopping for Healthcare
High-deductible health plans (HDHPs) have become the vehicle of choice for many employers. Each calendar year, employees who have an HDHP are responsible for the first $1,400 in medical expenses ($2,800 for a family)1 before coinsurance kicks in. This encourages employees to shop for healthcare in an effort to reduce their out-of-pocket costs. Enrollment in HDHPs reached 31% in 2020, which illustrates how commonplace they’ve become.2

Health savings accounts (HSAs) were created to help employees pay some of their out-of-pocket healthcare expenses. HSAs can be used for dozens of qualified medical expenses ranging from diagnostic services such as x-rays to prescription medicine (see examples below).


Getting an HSA
You’re eligible for an HSA if you’re:

a) enrolled in a high-deductible health plan,
b) not eligible for Medicare, and
c) not eligible to be claimed as a dependent.

You and/or your employer can contribute to an HSA through payroll deductions. 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 copays and prescriptions. Just be aware you’ll pay a 20% penalty if the money is spent on anything other than a qualified medical expense.3

 

How Do You Contribute?
An HSA generally has two separate functions:

  • As an FDIC-insured personal savings account, or
  • As an investment account for HSA assets

The IRS limits the amount of pre-tax dollars that can be contributed to an HSA each year. In 2021 the maximum is $3,600 for individuals and $7,200 for families.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 build a health-expense nest egg (FIGURE 1).

FIGURE 1

Max Out Your HSA Contributions Before Retirement

Hypothetical of a 45-year old single woman who uses an investment account for growth potential instead of an FDIC-insured savings account. She contributes $3,600 for 10 years until age 55 and $4,600 for 10 years until age 65. Assumes monthly contributions, an 8% investment return, and no withdrawals. The hypothetical 8% annual rate is not guaranteed and does not reflect the performance of any particular investment. Actual results will vary. Source: Hartford Funds. 

What Are the Benefits?

The main advantages of HSAs are the tax benefits:

  • Salary deferrals and employer contributions to HSAs are pre-tax 
  • The investment earnings on HSAs accumulate tax-free
  • Assets can be withdrawn tax-free for qualified medical expenses
  • After-tax contributions (not made via salary deferral) are tax deductible

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. 

Some employers make contributions to HSAs on behalf of their employees. That amount varies from company to company. Other factors, including whether it’s solely for the employee or for the employee plus additional family members, can play a part, too.

 

It’s Not a FSA

An HSA is different than a flexible spending account (FSA). Both allow you to put aside money for healthcare costs, but there are no eligibility requirements for FSAs. The biggest difference is FSAs are “use it or lose it.” Contributions to a FSA must be spent by the end of the calendar year or they’re forfeited. HSAs, however, carry over year after year. If you have an HSA, you’re not permitted to have a FSA, in most instances. 

 

You Own Your HSA Forever

If you leave your current job, you can take your HSA along with you. It’s your money, which is part of what makes HSAs an attractive way to save for healthcare expenses in retirement. Your HSA will always be there for you.

 

Going Deeper With HSAs

Understanding the ins and outs of this additional healthcare tool might help you more easily tackle your out-of-pocket spending. Visit HealthCare.gov and IRS.gov for more details on eligibility and limits today. 

 

Talk to your financial professional to learn more about how to make the most of an HSA.

Examples of Qualified Medical Expenses

Acupuncture Lab Fees
Ambulance Long-Term Care
Artificial Teeth Nursing Home
Birth Control Pills Nursing Services
Body Scans Optometrist
Braille Books/Magazines Oxygen
Breast Pumps and Supplies Physical Exams
Breast Reconstruction Surgery Pregnancy Test Kit
Car Prosthetics
Chiropractor Psychiatric Care
Contact Lenses Special Education
Crutches Special Home for Intellectually and Developmentally Disabled
Dental Treatments Surgery
Diagnostic Devices Telephones
Disabled Dependent Care Expenses     Television
Drug/Alcohol Addiction Treatments Transplants
Drugs Transportation
Eye Exams Tuition
Eyeglasses Vasectomy
Eye Surgery Vision Correction Surgery
Fertility Enhancement Weight-Loss Program
Guide Dog or Other Service Animal  Wheelchair
Hearing Aids Wig
Home Care X-rays
Home Modifications  
Insurance Premiums  

Follow this link for a full list of Qualified Medical Expenses: IRS Publication 502 Section 213(d)

Source: 2020 Employer Health Benefits Survey, Kaiser Family Foundation. Includes only HDHP plans with savings options.

2 Source: HealthCare.gov, 2021

3 Source: IRS Publication 969: “Health Savings Accounts and Other Tax-Favored Plans”

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. The information is not intended to be either tax or legal advice. 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 is provided for educational purposes only.

Investing involves risk, including the possible loss of principal.

CCWP019   225399

 

The material on this site is for informational and educational purposes only. The material should not be considered tax or legal advice and is not to be relied on as a forecast. The material is also not a recommendation or advice regarding any particular security, strategy or product. Hartford Funds does not represent that any products or strategies discussed are appropriate for any particular investor so investors should seek their own professional advice before investing. Hartford Funds does not serve as a fiduciary. Content is current as of the publication date or date indicated, and may be superseded by subsequent market and economic conditions.

Investing involves risk, including the possible loss of principal. Investors should carefully consider a fund's investment objectives, risks, charges and expenses. This and other important information is contained in the mutual fund, or ETF summary prospectus and/or prospectus, which can be obtained from a financial professional and should be read carefully before investing.

Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), Member FINRA/SIPC. ETFs are distributed by ALPS Distributors, Inc. (ALPS). Advisory services may be provided by Hartford Funds Management Company, LLC (HFMC) or its wholly owned subsidiary, Lattice Strategies LLC (Lattice). Certain funds are sub-advised by Wellington Management Company LLP and/or Schroder Investment Management North America Inc. Schroder Investment Management North America Ltd. serves as a secondary sub-adviser to certain funds. Hartford Funds refers to Hartford Funds Management Group, Inc. and its subsidiaries, including HFD, HFMC, and Lattice, which are not affiliated with any sub-adviser or ALPS. The funds and other products referred to on this Site may be offered and sold only to persons in the United States and its territories.

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