Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Health Savings Accounts (HSAs): An Investment Opportunity?
Health Savings Accounts (HSAs) are a way that people can pay for unreimbursed medical expenses such as deductibles, co-payments, and services not covered by insurance. Eligible individuals can establish and fund these accounts only when they have a qualifying high-deductible health plan (HDHP). This means insurance with a deductible of at least $1,300 for individual coverage and $2,600 for family coverage (2017 figures).
HSAs were created in 2003 so that individuals covered by HDHPs could receive tax-advantaged treatment for money set aside to pay for medical expenses. HSA tax advantages that can be substantial, and go well beyond paying for health care, especially for people in good health with relatively low outlays for medical expenses:
1) Contributions are deductible (or excluded from income that is taxable if made by an employer)
2) Withdrawals are not taxed if used for medical expenses
3) Earnings on the savings account earnings are tax-exempt
4) Unspent balances may accumulate without a maximum limit
In other words, HSA money gets deposited tax-free, grows tax-free, and comes out tax-free, if used for health care expenses. As long as funds are saved and spent on qualified medical expenses, all contributions, capital gains, and withdrawals remain untaxed. Like many other bank accounts, HSAs come complete with debit cards and checks with which to pay out-of-pocket health care costs. Individuals interested in establishing an HSA must locate an entity that accepts the accounts; they cannot simply call an ordinary savings account an HSA.
Two types of contributions may be made to HSAs: regular and catch-up. The annual contribution limit for an HSA for individual coverage is $3,400 in 2017. The annual limit for family coverage is $6,750. For individuals between 55 and 64, additional “catch-up” contributions to an HSA are allowed. The dollar amount is an extra $1,000 in 2017. The maximum contribution limits are adjusted for inflation and rounded to the nearest $50.
Although there are no “guarantees,” living a healthy lifestyle is the best thing people can do to control health care costs. HSA owners will likely do better than break even if they are in good health. With savings on health care costs, they may be able to accumulate a sizeable nest egg. Unlike flexible spending accounts (FSAs), HSAs are not subject to a “use it or lose it” policy. Anything not spent one year carries over to the next year.
About 25% of U.S. workers have HSAs. HSA funds may be put into investments approved for IRAs, such as bank accounts, annuities, certificates of deposit, stocks, mutual funds, and bonds. No matter how many times workers change employers, their account is fully portable. Account owners are immediately and fully vested. All contributions made by an employer belong to the account holder.
Withdrawals not used for qualified medical expenses are included in gross income on federal income tax forms and are also subject to a 20% penalty tax. The penalty is waived in cases of disability or death and for individuals age 65 and older. After age 65, the money can be used without penalty for non-medical purposes.
If the owner of an HSA account dies before funds are spent and has a surviving spouse, it becomes a HSA for that widow or widower. If someone other than a surviving spouse is the designated beneficiary, the HSA is terminated as of the date of death and the fair market value becomes taxable income to that person. If there is no designated beneficiary, the remaining assets become part of the deceased’s estate.
A study published in the Journal of Financial Planning in 2016 found that the tax savings on many employees’ contributions to an HSA increased wealth by more than an employer match on the same employees’ 401(k) contributions. In such cases, perhaps surprisingly, the maximum allowable HSA contribution should be made prior to the employee contributing any amount to his or her 401(k). The higher an employee’s combined tax rate, the larger the employer’s 401(k) match had to be to beat contributing to an HSA first.
If you qualify to participate in a HSA, consider it as part of your “financial planning toolkit.” HSAs can be used as both a savings account for health care expenses…and as an investment.
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