HSA

How to Use the HSA, for Medical or Retirement Savings

Health savings accounts offer a unique triple tax advantage

The health savings account, or HSA, can be a powerful savings tool—if you approach it the right way.

These accounts, which Congress authorized in 2003, are more than just a simple savings tool for medical emergencies. Retirement planners laud the HSA’s triple tax advantage and its use as a complementary savings vehicle to 401(k) plans.

Oftentimes when people first hear of HSAs, it is during this time of year. For companies with policies that start in January, open enrollment typically happens in the fall. During this period, many employees are already stressed about choosing and selecting other benefits.

“I don’t think most people understand HSAs from the get-go,” said Roy Ramthun, a consultant who specializes in HSAs. “From my experience, the HSA gets 30 seconds of the health benefit presentation. It’s all about the insurance, and then ‘Oh, you have this.’”

HSAs are unique in the triple tax advantage they offer: You can contribute to them by setting aside pretax earnings without paying federal or state income tax. From there, that money can be invested and grows tax-free. Additionally, if used for medical expenses, you can withdraw this money tax-free before retirement, which you can’t do with a 401(k) or an individual retirement account.

Eric Remjeske, president of Devenir Group LLC, said since Congress authorized these accounts in 2003, the number of accounts and the average account balance have both grown over time. By 2011, there were 6.2 million HSAs, according to Devenir Research; this past June, that number had grown to 26.3 million.

More money is flowing into HSAs every year. Devenir Research data show that $43.5 billion was deposited in HSAs in 2018, with $10.2 billion invested, a sharp increase from the year before when $31.5 billion was deposited and $5.5 billion invested. By 2021, Devenir estimates that number will rise to $67 billion deposited with $21.2 billion invested.

While the 401(k) remains the predominant retirement savings vehicle, Mr. Ramthun recommends contributing to both a 401(k) and HSA, especially if your employer offers a match for either.

“Advisers are now asking the question: Where do you put the money, 401(k) or HSA?” said Steve Christenson, executive vice president at Ascensus, a retirement and college savings service provider. “They’re seeing more of a balance amongst consumers.”

To make the most of both, research if your employer offers matches. If your employer also offers an HSA match, Mr. Ramthun recommends prioritizing that contribution, as you’ll eventually be able to reap greater benefits from the HSA’s triple tax advantages. From there, contribute to your 401(k), and if your employer also offers a match there and you’re taking advantage of it, you’ll be benefiting from both savings plans.

The HSA contribution limits for 2020 are $3,550 for an individual with a high deductible health plan and $7,100 for an individual with family coverage. The catch-up contribution amount for those 55 years old or above is an additional $1,000. The amount contributed to an HSA doesn’t affect the contribution limits for 401(k) plans or IRAs, which are $19,500 and $6,000 respectively for 2020.

One approach to the HSA is to consider paying for current medical expenses out-of-pocket after establishing the HSA; you can then file for reimbursement in retirement. This way, you can supplement your retirement income—entirely tax-free.

If you’re taking this approach, you should make sure you invest your HSA balance in a diversified portfolio, so you can maximize its potential return. According to 2019 data from Ascensus, less than a third of HSA account holders eligible to invest their funds actually did so.

Meanwhile, keep track of the medical expenses you pay out of pocket. Keeping these receipts on hand means you can then file during retirement to have them reimbursed. But remember: You have to keep the receipts from any medical expenses you paid for out-of-pocket before retirement, just in case the IRS ever comes knocking for an audit.

An HSA can also be considered as a “rainy day” medical fund that works in tandem with your 401(k) to help offset the cost of out-of-network care, over-the-counter medicines or other things your insurance may not cover. Even if you’re healthy now, studies show you could still be spending much more on medical expenses once you enter retirement.

Remember: You can’t keep contributing to your HSA once you’re enrolled in Medicare. So maximizing contributions now will allow the miracle of compounding to work, growing that money in your HSA over time.

“Everything about retirement planning says, ‘Start young, be regular and invest,’” Mr. Ramthun said. “That’s what we want people to hear about HSAs.”


Republican Study Committee Proposes Significant HSA Changes

The Republican Study Committee (RSC), limited to current Republican members of the U.S. House of Representatives, has released a comprehensive proposal to address perceived weaknesses in Americans’ access to quality, affordable healthcare. A component related to tax-advantaged savings proposes statutory changes intended to expand the use of health savings accounts (HSAs), including significantly liberalizing their provisions.

The RSC’s proposed changes include the following.

  • Permit HSAs to pay health insurance premiums
  • Permit HSAs to pay costs of participation in health sharing ministry, direct primary care (“concierge”), and other nontraditional health insuring arrangements
  • Allow persons whose health insurance is not a high deductible health plan (HDHP) to make HSA contributions
  • Allow persons with no health insurance to make HSA contributions
  • Increase the annual individual HSA contribution limit to $9,000 (currently $3,500)
  • Increase the annual family HSA contribution limit to $18,000 (currently $7,000)
  • Allow annual catch-up contributions ($1,000 for those age 55 or older) to be made to a non-catch-up-eligible spouse’s HSA, if desired
  • Permit persons receiving currently-disqualifying Medicare benefits to make HSA contributions
  • Expand HSA-eligible health services and products beyond those currently allowed to include all Food and Drug Administration-approved over-the-counter/nonprescription medicines (not to include homeopathic or dietary products, or fitness equipment)
  • Allow military Tricare, Indian Health Service, or other veterans’ benefits recipients to contribute to an HSA
  • Permit those with health flexible spending arrangements (FSAs) to make HSA contributions
  • Allow FSA or health reimbursement arrangement (HRA) balances to be converted to HSA assets
  • Allow annual rollover of unused FSA balances to an HSA, at an employer’s discretion
  • Protect HSA accounts in bankruptcy proceedings
  • Prohibit HSAs from being linked to insurance coverage that provides abortion services, and treat abortion services as non-eligible expenses for HSA purposes

The RSC’s proposal is presented as an alternative to one or more Democratic presidential candidates’ support for a “Medicare-for-all” type program, in which the federal government would play a central role in the delivery of health care benefits. The Medicare-for-all approach—support for which is not shared by all Democratic candidates—is not an official Party position for reform of the U.S. healthcare system.


How HSAs May Help Women Clear Retirement Savings Obstacles

Throughout the ages, women have grown adept at doing more with less. It’s a skill that will stand many of today’s women in good stead when it comes to retirement savings.

Compared with men, women generally earn less, take more career breaks and live longer, so it stands to reason that they need more income — not only for general living expenses, but to pay for additional healthcare associated with aging. Women who reached age 65 in 2016 are expected to live almost three years longer than men, according to the Social Security Administration. What’s more, a recent study claims that by age 65, a woman will need to have saved $161,000 — compared to a man’s $148,000 — to cover healthcare costs in retirement.

It all adds up to an inescapable, if frustrating, conclusion: If women want to sustain a secure lifestyle during their retirement years, they’ve got to save more.

The good news is that there are ways for them to boost their retirement readiness through a number of methods. One that’s often overlooked is incorporating a health savings account into their savings strategy early on. HSAs’ unique features can help women supplement traditional retirement income via employer-sponsored retirement plans, IRAs and Social Security, and can help to overcome some of their savings obstacles, too.

 

Bridging the 18% gap

Women’s salaries, on average, are 82% of men’s, according to a recent Bureau of Labor Statistics report, and this 18% gap may mean less money available to put toward retirement each year. While an HSA might not close the pay gap, it can help a woman’s money go further. HSAs offer unparalleled tax benefits. The “triple tax advantage,” as it is known, allows tax-deductible contributions, tax-deferred earnings and tax-free distributions for qualified medical expenses. (See IRS Publication 502, Medical and Dental Expenses, for a partial list of qualified medical expenses.) These tax savings can free up money to save or spend elsewhere, while the unused contributions can be saved for retirement. HSA assets can pay for qualified medical expenses, but they don’t have to be used at all. Unlike a health flexible spending arrangement (FSA), an HSA is not subject to a “use-it-or-lose-it” rule; balances are carried forward from year to year — even into retirement.

 

Turning career breaks into savings breaks

Most workplace retirement plans require ongoing employment in order to save, which can mean fewer opportunities for women, who tend to take career breaks more often than men. But with an HSA, women can remain eligible to contribute to an HSA even while they are not working. For example, if a woman is covered by her spouse’s HSA-eligible, high-deductible health plan, she may continue to put money into her HSA, up to the annual limit. This means her HSA can keep growing even during a career break.

 

HSAs in retirement

An HSA can lessen the burden of higher healthcare costs and can be used as supplemental income. While women cannot contribute to an HSA once they are enrolled in Medicare, they can still keep using HSA assets during retirement.

Sure, HSA assets can be used to pay for qualified medical expenses — including Medicare premiums and certain qualified long-term care expenses — instead of dipping into retirement plans or IRAs. But once a woman reaches age 65, she can take HSA distributions for any reason without penalty (although she will pay taxes on those distributions that are not qualified medical expenses).

With so many savings obstacles lined up against them, women in the workforce need to have a plan to meet their retirement savings goals. While every individual’s strategy will be different, one thing is certain: for women, making HSA savings a priority now could pay off in the future.


DOL Rules HSA Contributions Generally Are Not Wages for Garnishment Purposes

The Department of Labor’s (DOL’s) Wage and Hour Division has issued an opinion on whether contributions to an employee’s health savings account (HSA) can be considered wages for purposes of garnishment in a Consumer Credit Protection Act (CCPA) legal action. The DOL’s opinion notes that the applicant requesting the letter sought it out of concern that wage garnishments of employees who are receiving HSA contributions may be “withheld in error and in excess of CCPA limits” that define wages that are subject to garnishment to satisfy certain debts.

In Wage and Hour Opinion Letter CCPA2019-1, the DOL ruled that contributions to an employee’s HSA generally would not be considered wages for purposes of garnishment as long as the amount of such contributions does not vary based on “the amount or value of [the] employee’s services” to the employer, and the employee does not have the option to receive the amount in cash instead of as an HSA contribution (as in a 401(k) plan deferral election).

 


Prescription Drug Manufacturer Coupon Values May Be Excluded for Determining Annual Cost-Sharing Limits, for Now

The Department of Labor (DOL), Health and Human Services (HHS), and Internal Revenue Service (IRS) jointly released an FAQ on August 26, 2019, that explain whether health plans should be including drug manufacturers’ coupons in determining the annual cost-sharing limits under the Affordable Care Act (ACA). HHS regulations that announced the 2020 benefit and payment parameters (including the maximum annual cost-sharing limits) indicated that plans and insurers may exclude the value of drug manufacturers’ coupons when determining the annual cost-sharing limits when a medically appropriate generic equivalent is available. This applies for plan years beginning on or after January 1, 2020.

Feedback received following the release of these regulations was that this provision implies that such coupon amounts must be counted toward the annual cost-sharing limit in any other circumstance, and that a requirement like this could lead to a conflict with the certain rules for high deductible health plans (HDHP) and the establishment of health savings accounts (HSA). IRS guidance surrounding HSA’s provide that drug manufacturer coupons would not affect an individual’s HSA eligibility as long as the plan did not apply the value of the coupon towards their deductible.

Since plan sponsors and insurers may not be able to comply with both the impending HHS rules and the existing IRS regulations simultaneously, the agencies jointly intend to address this conflict in the HHS regulations that announce the 2021 benefit and payment parameters. Until then, enforcement action will not be initiated in cases where a health plan excludes the value of drug manufacturers’ coupons from the annual limitation on cost sharing, including in circumstances in which there is no medically appropriate generic equivalent available.


Congressmen Introduce “IRA Preservation Act of 2019”

Although members of the House of Representatives have officially begun their annual August recess, among bills that have recently been introduced and referred to committee is H.R. 4117, the “IRA Preservation Act of 2019.” Its chief co-sponsors are Reps. Ron Kind (D-WI) and Mike Kelly (R-PA). The bill’s main thrust is expanding the IRS Employee Plans Compliance Resolution System (EPCRS) to cover certain errors under individual retirement plans, and providing for reduced penalties for certain self-corrections.

The bill has been referred to the House Ways and Means Committee.  The House of Representatives’ 2019 session resumes on September 9.

Key provisions of H.R. 4117—based on bill text provided by Rep. Kind’s office—include the following.

  • Require the Treasury Department to provide public education materials on IRA contribution and deduction limits, rollovers, required minimum distributions (RMDs), prohibited transactions, the 10 percent early distribution excise tax, and common IRA errors.
  • Reduce the IRA excess contribution penalty from six percent to three percent if corrected within a specified time window.
  • Reduce the penalty for failure to fully distribute an RMD from 50 percent to 10 percent of the undistributed amount if corrected within a specified time window (no reference is made to the existing procedure by which a full waiver of this penalty can be obtained).
  • Exempt earnings withdrawn in a timely IRA excess contribution correction from the 10 percent excise tax on early distributions (which generally applies to those under age 59½)
  • Eliminate the IRA prohibited transaction (PT) consequence of complete IRA disqualification; H.R. 4117 would apply the same rule to HSA, Archer MSA, and Coverdell ESA PTs.
  • Liability for an IRA, HSA, MSA, or ESA PT would be the general 15 percent (primary) and 100 percent (secondary) tax on the PT amount, unless the infraction is a pledging of assets within the account, in which case—while no excise tax—the pledged portion of the account would be deemed distributed and subject to normal taxation consequences.
  • A three-year statute of limitations on PT tax liability would apply.
  • Expand the IRS’s EPCRS program to allow IRA custodians, trustees, and issuers to self-correct errors “for which the owner of an IRA was not at fault;” to include, “but not limited to,” failure to complete a rollover within 60 days, and allow indirect rollover by a nonspouse beneficiary who had reason to believe that due to service provider error, an indirect rollover was permissible.
  • Permit self-correction of “inadvertent” RMD failures in retirement plans (those subject to EPCRS) and IRAs—presuming the existence of practices and procedures designed to prevent such failure—within 180 days; for an IRA owner, “inadvertent” to mean “due to reasonable cause.”
  • The effective date, in general, is as of the date of enactment, with transition provisions; the education elements required of the Treasury Department are to occur “as soon as reasonably practicable after the enactment,” but no later than one year following the date of enactment.

 

 


House Passes Legislation to Repeal Cadillac Tax

The U.S. House of Representatives has overwhelmingly passed the Middle Class Health Benefits Tax Repeal Act of 2019 (H.R. 748), which eliminates the so-called “Cadillac tax” element of the Patient Protection and Affordable Care Act—often referred to simply as the Affordable Care Act, or ACA.

The Cadillac tax was intended to fund certain benefits provided by ACA, and—as some economists claimed it could—exert downward pressure on rising healthcare costs. Application of this tax—40 percent on the value of healthcare benefits exceeding specified thresholds—has been delayed twice by Congress.

The Cadillac tax was to apply to what were claimed to be the most generous and expensive employer-provided healthcare plans. Opponents contended, however, that, in operation, it would have been levied on employer-provided health plans offered to many middle-class workers, and adversely affect employer incentives to offer health benefits. Notably, health benefits included in the calculation to determine application of the Cadillac tax included employer-provided health savings account (HSA) and health reimbursement arrangement (HRA) benefits.

While the 419-6 vote in the House is an indication of broad bipartisan support for repeal of the Cadillac tax, it is unclear at this time when—or whether—the legislation will be taken up in the U.S. Senate in the limited time remaining in the 2019 session of Congress. Repeal cannot occur without the Senate and House passing identical legislation, enacted with President Trump’s signature.


IRS Notice with HSA Implications Expands “Preventive” Care to Include Certain Chronic Conditions

The IRS has issued Notice 2019-45, in which it identifies certain chronic health conditions whose treatments will be considered “preventive.” As a result, such treatments can be covered by a health insurance plan without first meeting the minimum deductibles generally required of high deductible health plans (HDHPs) for health savings account (HSA) contribution eligibility purposes.  This guidance is effective July 17, 2019.

This guidance, which is effective July 17, 2019, notes that it is a response to an Executive Order issued by President Trump on June 24, 2019. The President charged the Secretary of the Treasury with the task of issuing guidance that would “expand the ability of patients to select HDHPs that can be used alongside an HSA, and that cover low-cost preventive care before the deductible, that helps maintain health status for individuals with chronic conditions.”

In general, “preventive” care does not include treatment for existing illnesses or conditions. Under current HDHP/HSA rules, treatments of a nonpreventive nature that are covered or reimbursed by a health plan without first satisfying HDHP conditions would generally disqualify a covered individual from HSA contribution eligibility.

Notice 2019-45 identifies the following conditions whose ongoing treatment may now be considered preventive, and, therefore, may be covered by a health plan without first satisfying an HSA-qualifying deductible.

  • Congestive heart failure
  • Coronary artery disease
  • Osteoporosis
  • Hypertension (high blood pressure)
  • Asthma
  • Diabetes
  • Liver disease
  • Bleeding disorders
  • Heart disease
  • Depression

The treatments listed for the above conditions include certain inhibitors, therapies, monitors, medications, screenings, tests, and statins, which will be considered preventive expenses for HDHP purposes. Items not listed in Notice 2019-45 will not be considered preventive for HDHP purposes.


House-Passed Financial Services Bill Would Block SEC Investment Guidance

The U.S. House of Representatives this week approved legislation to provide appropriations for funding various financial services provided by federal agencies. Added to the bill before its passage was an amendment by House Financial Services Committee Chair Maxine Waters (D-CA) that would block federal funding for administration and enforcement of guidance recently issued by the Securities and Exchange Commission (SEC). The vote was largely along party lines in the Democrat-controlled House.

Targeted by this amendment was the SEC’s recently finalized Regulation Best Interest and accompanying guidance, which provide standards of conduct for broker-dealers in making investment recommendations to retail customers. Elements of the guidance also impact registered investment advisors. In addition to retail investment accounts, the SEC guidance also applies to investment recommendations made for an individual’s own account in an employer-sponsored retirement plan, or an IRA, health savings account (HSA), Archer medical savings account (MSA), IRC Sec. 529 plan, or Coverdell education savings account (ESA).

Rep. Waters and others have criticized the SEC guidance as allegedly being insufficient to protect investor interests. This guidance generally is considered less restrictive than Department of Labor fiduciary investment advice guidance that was vacated by an appeals court in June of 2018.

Because appropriations bills must be identical in House and Senate versions, and there is a Republican majority in the Senate, many feel that de-funding the SEC investment guidance is unlikely to ultimately occur. The Senate has not yet taken up financial services appropriations.


President’s Executive Order Would Affect HSAs, FSAs, HRAs

On June 24, 2019, President Trump signed an Executive Order designed to “enhance the ability of patients to choose the healthcare that is best for them.”

The order has multiple directives that touch on different aspects of healthcare. It includes a request for the Department of Health and Human Services to produce a report on steps that the administration may take to eliminate surprise medical billing. It also instructs multiple departments to issue guidance on topics such as increasing price transparency for medical services, and developing rules to expand the use of health savings accounts (HSAs), health flexible spending arrangements (FSAs), and health reimbursement arrangements (HRAs).

The order specifically directs the Secretary of the Treasury to do the following.

  • Issue guidance that would permit HSA-compatible high deductible health plans to cover certain costs for individuals with chronic conditions before satisfying the plan deductible
  • Propose regulations that would expand eligible medical expenses under Internal Revenue Code Section 213(d) to include direct primary care arrangements and healthcare sharing ministries
  • Issue guidance that would increase the permitted FSA carryover amount (currently limited to $500)

The order places deadlines ranging from 120 to 180 days for the Treasury Department to produce the relevant guidance.

Watch Ascensus.com for any further information about this extensive guidance.