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The HSA Juggernaut

Retirement Funding

Heath Savings Accounts (HSAs) were established in 2003 as part of the Prescription Drug Improvement and Modernization Act. They were created to replace the Medical Savings Account System and marked a major advancement in the evolution of consumer driven healthcare.

Much has been written about the advantages of Health Savings Accounts, including the lower premiums associated with High Deductible Healthcare Plans, which are a required to become HSA eligible.

The triple tax advantage of: pre-tax contributions; tax deferred growth; and tax free withdrawals (for qualified expenses) is unrivaled by even the best known tax-deferred savings vehicles such as the 401k and Roth IRA.

As employers have accelerated their contributions to make funds available for employees at the beginning of the year, financial risk for individuals has diminished, and not surprisingly, adoption has risen dramatically.

Still, it doesn’t appear much strategy is being employed, even by those who have already embraced the structure. Funding levels remain low across all age groups, and lowest among those who have the most time to benefit from the tool, Millennials.

While it may be difficult for some to absorb the upfront costs that go with a high deductible plan, even when those expenses are met with funds from a tax-advantaged account, many others who have relatively little costs associated with healthcare due to youth or good health status, should be giddy over the prospect of stuffing all they can into this incredibly powerful tool.

As in many things, change comes slowly, especially when the incentive is murky. Add complexity, the need to do analysis or comparison and you have a recipe for inaction. Furthermore, since financial firms and their advisors can’t monetize these accounts, few, if any, are providing the needed collaboration and partnership to accelerate their use.

Here’s the skinny…Flex Spending Accounts and Medical Savings Accounts anchored thinking and behavior that has made the strategic use of HSAs a challenge to say the least. These predecessors offered some tax savings but came with forfeiture provisions commonly referred to as “use it or lose it” and resulted in conservative funding and interest-bearing savings accounts as the underlying investment. 

But HSAs are different…and better. First, there is no forfeiture provision and monies unused in the current year continue on for the account owner’s benefit. This lays the groundwork for investment. The opportunity to actually grow the account is the first of many advantages, and for those who can cover current expenses out of pocket, presents a tremendous opportunity.

And since reimbursement for qualified expenses can be done AT ANY TIME in the future, access to the money is never lost. The simple act of archiving receipts, made easy by HSA providers, ensures participants can get reimbursement for qualified expenses anytime they need it, even if the expense was paid out of pocket. 

Imagine letting the money grow for 10, 20 or even 30 years knowing full well it’s always within reach and can be used for any purpose so long as the withdrawal was for a qualified expense, even one that may have occurred many years in the past. This is a critical feature of the HSA structure and one that is little understood.

When asked about the top three concerns clients have about their retirement, the cost of healthcare invariably makes the list. But few understand the opportunity to build a virtual war chest for funding that expense through the HSA. For anyone who can cover current medical expenses from another source of funds, the opportunity is significant.

And there’s more…unlike other tax advantaged accounts Health Savings Accounts have the unique advantage of not requiring earned income to participate. In addition, contributions to the account are deductible from taxable income “above the line” which means you don’t have to itemize to get the benefit. Imagine a person who retires at age 58, and is able to contribute $7100 + $1000 catch up (indexed) for being over age 55, above the line, thereby reducing taxable income by $8100 per year until age 65 when Medicare begins.

The opportunity is nothing short of staggering and should be embraced by legions of people who likely are just not aware.