Advantages of a Health Savings Account (HSA)

If you have a high-deductible health plan (HDHP) through your employer and have access to a health savings account (HSA), you don’t want to overlook this opportunity to save into one of the most tax-advantaged accounts available to you.

Here are the basics of an HSA:

• 2022 annual contribution limits are::
  • • Single coverage: $3,650
    • Family coverage: $7,300
    • And if you are over 55, you can contribute an extra $1,000 per year on top of those limits
• You don’t pay federal, state, or FICA taxes on contributions
  • Except in California and New Jersey – you will still pay state income taxes on contributions in those two states
• An HSA is one of the very few tax-deferred accounts where you don’t pay FICA taxes…that’s an extra tax savings of 7.65%!
• Earnings grow tax-free
  • Except in New Hampshire and Tennessee – you pay taxes on earnings in your HSA in those two states
• When you withdraw money from your HSA for qualified medical expenses, the withdrawal is tax-free
• You can use the money in your HSA to pay qualified out-of-pocket medical expenses for your dependents, including your spouse, even if they are not covered on your medical plan
• You can use the money in your HSA to pay long-term care insurance premiums, subject to limitations based on age (see IRS publication 502 for more information)
• You can reimburse yourself for medical expenses at any time in the future, meaning you can invest the money and let the account grow for years or decades before paying yourself back for medical expenses you’ve incurred
  • Just make sure you keep very good records of your out-of-pocket medical expenses if you go this route
• You’ll have to pay taxes and a 20% penalty on withdrawals from an HSA for anything other than qualified medical expenses
  • The penalty goes away after age 65, so an HSA acts a lot like an IRA after age 65 but with the added benefit of tax-free withdrawals for qualified medical expenses

There are many things to consider during your open enrollment period with your employer. You will often have several healthcare options to choose from, ranging from a lower deductible PPO plan with copays and lower out-of-pocket maximums to a higher deductible HSA-eligible plan with no copays (meaning you pay the entire amount until the deductible is met) and higher out-of-pocket maximums.

For instance, for associate-only health coverage, Fiserv offers:

• On one end of the spectrum, a PPO plan with a $600 deductible and $3,500 per year out-of-pocket maximum that includes $30 copays for primary care physician office visits. The copays do not count toward the deductible; however, they DO count toward the annual out-of-pocket maximum. For a Fiserv employee with a base salary between $125k and $200k, this plan will cost $3,852 in pre-tax premiums per year in 2022.
• And on the other end of the spectrum, a basic HSA plan with a $2,800 deductible and $6,000 per year out-of-pocket maximum. The company pays nothing until the deductible is met. For a Fiserv employee with a base salary between $125k and $200k, this plan will cost $1,536 in pre-tax premiums per year in 2022.

Both plans cover preventative care screenings at 100% and provide access to flu shots at no cost.

In this example, the HDHP with the HSA will save $2,316 per year in pre-tax premiums over the PPO plan. If you simply redirect the premium savings into the HSA, that’s $2,316 worth of out-of-pocket medical expenses you can incur before the HDHP with HSA plan has cost you more than the PPO plan.
This example is very simple, but the point I’m trying to make here is that evaluating your benefit elections during open enrollment should be taken seriously. Attention to detail can save you a lot of money.

Now, back to the HSA itself. If you’ve elected the high-deductible plan, it’s hard to imagine a scenario where I wouldn’t recommend maxing out the HSA contribution. In the case of Fiserv employees, the company will contribute $400 per year to your HSA. That leaves just $3,250 per year of pre-tax contributions for an employee with associate-only coverage to max out contributions for tax year 2022. And assuming this employee is in the 24% marginal federal tax bracket and top state of Georgia income tax bracket of 5.75%, that $3,250 will only cost $2,035 after accounting for the $1,215 of federal, state, and FICA tax savings.

Assuming you have no high-interest debt and your emergency fund is in good shape, if you have a high-deductible health plan, I would argue funding your HSA is the very next step after saving enough in your 401k to get the full company match. An HSA is that valuable! It basically offers the front-end benefit of a pre-tax IRA/401k with pre-tax contributions, an additional FICA tax savings of 7.65%, tax-free growth, and the back-end benefit of a Roth IRA with tax-free withdrawals if used to pay for or reimburse qualified medical expenses. It also provides for immediate access to the money for current medical expenses if needed. In other words, you can use the money in your HSA for ongoing medical expenses along the way rather than building up the account for future use if you so choose…you still get the tax benefits, just not the long-term growth.

It’s just hard to beat an HSA. A high-deductible health plan is not the right choice for everyone, but if you have one, strongly consider contributing the maximum allowable amount to your HSA.

Just a note for those approaching age 65…you can’t contribute to an HSA for any month in which you are covered by Medicare. If you plan to enroll in Medicare AFTER age 65, also be aware of the six-month rule which applies Medicare coverage retroactively back six months or to age 65, whichever is less. This six-month rule often trips people up with HSA contributions. You can, however, continue to use the money in your HSA for qualified medical expenses after enrolling in Medicare.

If you need help evaluating and optimizing your company benefits, please reach out to a FLAT-FEE financial planner, especially during open enrollment. You may just end up saving more money through optimizing your benefit elections than you pay the planner.