Open Enrollment Is HSA Season — and a Valuable Financial Planning Opportunity for Your Family
If you've overlooked health savings accounts in the past, consider them carefully this year. Used strategically, they can be an extremely helpful long-term savings and investment vehicle.
Open enrollment season is approaching. For many employees, that means reviewing health insurance options, comparing premiums and deductibles, and making benefit elections for the year ahead.
Those decisions are important, but there's another financial planning opportunity that can easily get lost in the paperwork: A health savings account (HSA).
For those eligible to contribute, an HSA can be much more than an account for paying current medical bills. Used strategically, it can become a long-term savings and investment vehicle that helps cover healthcare expenses, which represent one of the largest outlay categories many of us will face later in life.
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As you make your open enrollment elections, here are a few things to consider.
Start with the health plan, not the HSA
An HSA shouldn't be the sole reason you choose a high-deductible health plan. Start by considering which health plan makes sense for you and your family based on expected healthcare needs, premiums, deductibles and out-of-pocket costs.
For married couples, that also means making the decision together. If both spouses have access to employer-sponsored coverage, look at the options as one household rather than making two independent elections.
Consider which plan makes sense for each spouse, whether children should be covered under one parent's plan and how those choices affect your eligibility and ability to contribute to an HSA.
One often-overlooked consideration is how a spouse's flexible spending account (FSA) can affect HSA eligibility. For example, if either spouse has a general-purpose healthcare FSA that covers both spouses, neither may be eligible to contribute to an HSA, even if one is enrolled in an HSA-eligible health plan.
Limited-purpose FSAs and dependent care FSAs, however, generally don't create the same restriction.
Don't view your HSA as money you have to spend this year
The primary difference between an HSA and an FSA is that HSA dollars don't need to be spent by year-end. That creates an opportunity to think beyond this year's medical expenses.
If your cash flow allows it, consider paying current healthcare expenses out of pocket while allowing your HSA balance to remain invested.
For example, I generally advise clients to keep enough cash to cover an appropriate level of potential out-of-pocket healthcare costs, and then consider investing amounts above that threshold based on their broader investment strategy and risk tolerance.
For someone who doesn't anticipate needing those funds in the near term, there is an opportunity to invest in an HSA more like a long-term retirement account than a short-term spending account. The appropriate strategy will differ by individual, but the underlying question is the same: When do you actually expect to need this money?
That time horizon can help determine how you invest it.
Keep your receipts
This is one of the HSA features I find people often overlook, which allows for great financial flexibility into the future.
If you pay an eligible medical expense out of pocket after establishing the HSA and maintain the proper documentation, you can reimburse yourself from the HSA years later, provided you haven't already been reimbursed for or deducted that same expense.
That means someone who can afford to pay today's medical bills out of pocket can leave HSA assets invested and potentially let those dollars compound for years. Later, they retain the option to reimburse themselves for those earlier qualified expenses.
The important part is documentation. Keep receipts and records showing the eligible expenses you paid out of pocket. You can't both claim a tax deduction for an expense and later reimburse yourself for that same expense from the HSA.
Think about the healthcare expenses you'll face in retirement
The long-term value of an HSA becomes clear as retirement approaches.
Once enrolled in Medicare, you can no longer contribute to an HSA, but you can continue using accumulated HSA assets for qualified expenses.
HSA funds can be used for certain Medicare premiums, including Medicare Part B and Part D, as well as Medicare Advantage premiums, although Medicare supplemental policy premiums generally aren't eligible.
That gives savers another potential source of funds for healthcare expenses later in life, precisely when those costs can become more significant.
Make open enrollment part of your financial planning
Open enrollment is often treated as a checkbox HR exercise: Select a health plan, make a few benefit elections and move on.
I would encourage you to look at it differently. Benefits make up more than 30% of U.S. employees' overall compensation, according to data from the Bureau of Labor Statistics.
Taking the time to review your full suite of options and maximize the value of health insurance, HSAs, FSAs and other workplace benefits can have a tangible impact on your broader financial life.
The right decisions will depend on your family's healthcare needs, cash flow, taxes, investment strategy and long-term goals. But these decisions should be made with care.
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