New Developments With Health Savings Accounts

Joe DowlingSeptember 29, 2017

Financial Planning

Last year, I wrote about the importance of Health Savings Accounts (HSAs) in funding current and future healthcare costs. A lot has changed in regard to HSAs in the last year, and how they are being utilized.  As HSA assets and adoption rates continue to soar, the Trump Administration and Congress seek to create an even more favorable environment for HSAs and HSA account holders. Legislation currently working its way through the halls of Congress as part of the American Health Care Act (AHCA) and tax reform, if enacted, will make HSAs an even more compelling component of an individual’s overall balance sheet.

Proposed Legislation

Among the changes which would take place if the legislation is passed, 2018 contribution limits would increase drastically, from $3,400 to $6,550 for a single plan, and from $6,750 to $13,100 for family coverage. Spouses would be allowed to make catch-up contributions to the same HSA. Over-the-counter medication would become a qualified medical expense. And the penalty for non-qualified (non-medically related) HSA distributions would be cut from 20% to 10%, making the HSA more attractive as a savings vehicle.

This utilization of the HSA as a savings vehicle, another retirement account, illustrates its flexibility, and the attraction among numerous account holders. Behavioral economist and Nobel laureate Richard Thaler recently called the HSA a no-brainer. In addition, previously little-known features can make HSAs important tools for long-term planning.

HSAs As A Long-Term Planning Tool

One such feature creates an opportunity for a long-term tax arbitrage by allowing account holders to withdraw money tax-free for health-care expenses accrued since opening the HSA. For example, if an HSA account holder incurred an average of $4,000 annually in medical expenses over 20 years, but paid for those expenses out-of-pocket, he can withdraw $80,000 tax-free from the HSA at a later date to fund other expenses, such as a vacation. It won’t count as income, so it helps avoid income-related Medicare surcharges. This strategy requires the discipline to meticulously maintain medical receipts over that time span.

Also, if one can cover out-of-pocket costs without tapping the funds in the HSA, the money in the HSA can accrue and be invested as an IRA or 401(K). A 55-year-old couple today can build a tax-free retirement stash worth more than $175,000 by maxing out on HSA contributions and earning a 5% annualized rate of return.

HSAs and 401(K)s Becoming More Closely Linked

In the Employee Benefits ecosystem, HSAs and 401(K)s are becoming more closely linked. Employers are recognizing the importance of helping their employees account for healthcare costs in retirement and are waking up to the importance of HSAs as critical components of the Retirement Readiness initiative for their employees. Thirty percent of employers offered an HSA-eligible health plan option in 2015 and that percentage will increase as consumer-driven healthcare becomes more prevalent.

Employee Benefits and other service providers are being asked to help employees determine the proper allocation of retirement dollars between 401(K)s and HSAs. Educating employees to understand how all employee benefits tie together is becoming a focus of holistic financial wellness programs.

Transferring IRA Money To An HSA

For HSA account holders, the IRS allows for a one-time transfer of money from an individual retirement account into an HSA, up to the annual contribution limit, essentially creating an opportunity to use those funds tax-free for medical expenses. If you wish to discuss HSAs and explore your options, please call us. We’re happy to guide you (610-651-2777).



Barrons, September 11, 2017, The Hidden Retirement Account

Think Advisor – Favorable Changes to HSAs Under GOP Health Bill

Employee Benefit Advisor – HSAs and 401ks are becoming more closely linked

CNBC – Making Retirement Lemonade from Health Insurance Lemons

Kiplinger – Transferring IRA Money to a Health Savings Account