5 HSA Benefits You Might Not Know About
Health savings accounts are an often-misunderstood and overlooked opportunity for American workers. Here’s why they are worth a close look during this year’s open enrollment period.
If the COVID-19 pandemic has taught us anything, it’s that we have to be ready for the unpredictable. This is especially true when it comes to planning for unexpected medical costs. After all, no one plans to get sick or end up in the hospital. However, when you consider that roughly 4 in 10 Americans would struggle to cover a $400 emergency, many families could find themselves in a challenging financial situation if they got hit with an expensive and unplanned medical bill.
Health savings accounts, or HSAs, can help you take control of your health and financial wellness needs in today’s unpredictable world. Not sure how they work? Don’t worry — you’re in good company. New research from Voya Financial shows that only 2% of people are aware of the key attributes of an HSA.
To help you get up-to-speed, below are five facts to help break down what you need to know about HSAs. And with open enrollment season underway for many American workers, now is a good time to get educated on HSAs as you consider all your employer-sponsored workplace benefits.
Fact #1 – HSAs help offset costs of high-deductible health plans
An HSA is a medical savings account that’s available to you when you’re enrolled in a qualified high-deductible health plan (HDHP). The IRS defines these plans as those that have a deductible of at least $1,400 for an individual and $2,800 for a family in 2020. With the rising costs of health care, an increasing number of companies started offering HDHPs in their employee benefits packages. Prior to the pandemic, industry research showed that nearly half of Americans (46%) with private health insurance were enrolled in a HDHP.
Typically, most HDHPs are combined with an HSA, which is funded by pretax dollars that are deposited into your account, usually through a payroll deduction. As a result, HSAs have increased in popularity to help pay for qualified medical costs, while also helping employees plan for and cover the high deductibles associated with these health plans.
Fact #2 – HSAs offer triple tax advantages
Perhaps the biggest benefit of an HSA is the triple tax advantages it offers: 1) contributions are pretax and reduce your taxable income; 2) your HSA funds grow tax-free; and 3) when used to pay for eligible medical expenses, HSA withdrawals are tax-free.
HSA contribution amounts are capped each year by the IRS. For 2021, the HSA contribution limits are $3,600 for individuals and $7,200 for family coverage. Individuals who are 55 and older are eligible for an additional $1,000 catch-up contribution.
If affordable, it’s a good idea to consider maximizing your HSA contributions to get the full advantage of these triple tax benefits. Plus, when a person reaches retirement age at 65, those HSA funds can then be used to pay for general living expenses — housing, food or travel, for example — and will be taxed like any normal distribution from a retirement account. Unlike a 401(k) or an individual retirement account (IRA), HSA contributions made via payroll deduction aren’t subject to FICA (Social Security and Medicare) taxes, and a person is not required to take minimum distributions at any age.
Fact #3 – HSAs offer flexibility
Most people do not realize that when you enroll in an HSA through your company it’s not tied to your employment. Unlike your health insurance plan and your flexible spending account (FSA), which are generally tied to your employment, your HSA is portable — meaning you own the account. Therefore, if you get laid off, furloughed from your job or chose to leave, your account and funds stay with you and you can always use your HSA dollars to help pay for qualified medical costs.
In addition, unlike flexible spending accounts, HSAs are also not “use-it-or-lose-it” accounts, and your balance carries over each year. Also, when enrolled in an HDHP and HSA, you can choose to cover medical expenses out of pocket now and take a tax-free distribution in the future in the amount of your current expense. This approach allows you to use your HSA as a potential emergency savings vehicle. Just make sure to hold onto your receipts to verify all distributions. Plus, with an HSA, you have the ability to change your contribution amount at any time during the year. You’re not “locked in” to the amount you selected during your open enrollment period.
Fact #4 – New legislation makes it easier to use HSA dollars
Back in March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help Americans impacted by the pandemic. As part of this legislation, HSAs can now be used to purchase certain over-the-counter medical products and medicines — including those needed in quarantine and social distancing, and feminine hygiene products — without a prescription from a doctor.
The CARES Act also expanded coverage of telehealth services. Specifically, it now includes a provision that allows HDHPs to cover telehealth services before the deductible has been met. Until now, the IRS had not allowed these expenses to be reimbursed under a HDHP until the plan’s deductible had been reached.
Fact #5 – HSAs can help close the retirement health care gap
In addition to helping American workers take control of their health and financial wellness needs, HSAs can also provide an attractive investment opportunity. Account holders can contribute money in their HSA to plan for future health care costs, while also investing in mutual funds once the account reaches the investment threshold. These investment options are similar to lineups available in typical workplace retirement accounts and can include target-date series, active and passive equity, and bonds and fixed income. Therefore, an individual can put money into their HSA for 20 or 30 years and potentially be better prepared for retirement.
This design feature of an HSA is important when you consider the U.S. is facing a retirement crisis, due in large part to the ever-increasing costs of health care. Industry research shows 40% of American workers lack confidence that they will have enough money to take care of their medical expenses in retirement. And, those feelings may be justified, when you consider the average couple is estimated to need $296,000 in savings for a 90% chance of covering health care expenses in retirement.
Therefore, in addition to helping pay for health costs when you are working, HSAs can serve as a valuable long-term savings vehicle to help close the retirement health care savings gap.
Final Thoughts
While no one knows for certain when this global health crisis will come to end, it’s important we continue to prepare for the unexpected. During your open enrollment period, I would encourage everyone to take a closer look at HSAs. While misunderstood and often underutilized, now is the time to get smart on HSAs as a potential opportunity to help protect your family’s health and financial wellness needs.
About the Author
Rob Grubka, Fellow in the Society of Actuaries
President, Employee Benefits, Voya Financial
Rob Grubka is president of Employee Benefits for Voya Financial. In this role, he is responsible for product development and management, distribution and the end-to-end customer experience for Voya’s stop loss, group life, disability and supplemental health insurance solutions, as well as health savings and spending accounts, offered to U.S. businesses and covering more than 6.2 million individuals through the workplace.
