If you’re among the 40% of American workers enrolled in a high-deductible health plan, then you’re likely eligible for a health savings account—and you also likely need help understanding how to maximize its benefits.
With an HSA, pretax contributions, potential gains from investment, and withdrawals used for qualified medical expenses are exempt from federal and most state taxes. Any unused balance is carried over to the following year, funds never expire, and they can be passed on to a beneficiary after death.
Bank of America’s ninth annual Workplace Benefits Report, released last week, showed that 76% of eligible workers enrolled in high-deductible plans had signed up for an HSA. It also showed that only 11% of employees could name the four basic attributes of HSAs.
For workers and their dependents facing serious or chronic health conditions, HSAs help ease current financial burdens, so investing HSA contributions might not be an option. But for those healthy enough to limit their medical expenditures, HSAs have the potential to grow into a sizable sum for future medical expenses, especially when employers offer investment vehicles for HSA contributions.
Following a Barron’s article last week, here are answers to several questions readers had about HSAs.
Q: Can a retiree contribute to an HSA? Would there be any benefit?
A: Individuals who aren’t enrolled in Medicare and are covered by an HSA-qualified high-deductible health plan can make contributions to their HSA, says Kevin Crain, managing director and head of workplace solutions for Bank of America. Individuals who are 55 and older can make a catch-up contribution of an additional $1,000 a year.
Additionally, even when an individual enrolls in Medicare and can no longer contribute to an HSA, he or she can still continue to use the HSA dollars saved to cover qualified medical expenses tax-free.
Q: My company promotes good health with a points-based system that turns into funds being awarded into the HSA. Are they now considered additional income?
A: Employer contributions aren’t included in income, says Tom Matarazzo, head of health benefits and institutional retirement investments at Bank of America Merrill Lynch. An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual, Matarazzo says. Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions.
Q: Does the pretax savings feature of HSAs reduce your eventual Social Security payout by virtue of lowering your income that gets considered in the benefits determination?
A: How much you make in a year and how you contribute to your HSA determines whether HSA savings will reduce your future Social Security payout, but there could be a benefit to contributing anyway, says Andrew Frend, senior vice president of strategy and analytics and employee benefits, Voya Financial Inc.
Generally, if you contribute to your HSA via pretax payroll deduction, then you avoid FICA taxes—such as the Social Security tax and Medicare tax—on those HSA pretax contributions.
If you make less than the Social Security cap, which is $132,900 in 2019 and $136,800 in 2020, pretax contributions will reduce your income that gets included as part of the benefits determination. In general, Frend says, the tax savings compounded over many years are almost always a better value than the potential reduction to the Social Security benefit.
Q: Are all high-deductible health plans eligible for an HSA? What are the criteria? Is there any way to get an HSA if your employer’s high-deductible plan isn’t eligible?
A: Not all high-deductible health plans are eligible for an HSA, Frend says, so you’ll want to look for those labeled “qualified” or “HSA-eligible.”
A high-deductible health plan must meet certain criteria set by the Internal Revenue Service to be eligible for an HSA. For 2020, those criteria are: a minimum deductible of $1,400 for an individual or $2,800 for a family; a maximum out-of-pocket cost—like a copayment—of $6,900 for an individual or $13,800 for a family; and coverage of preventive care.
Q: How do you go about investing funds over $1,000 in your account?
A: Account holders can generally set up an investment threshold that automatically sweeps balances over a specified amount into an investment account, Crain says. On BofA’s HSA platform, for instance, the minimum balance for account holders to sweep funds into an investment account is $1,000. They also have the ability to set up a customized threshold and to make a one-time investment transfer.
Q: Is it true that those ages 65 and older who previously had an HSA, continue to work, and only take Part A of Medicare cannot continue to fund the HSA from their earned income?
A: Yes, this is true, says Irene A. Damaryan, vice president and wealth planner at City National Bank. To be eligible to contribute to an HSA, according to IRS rules, you can’t be enrolled in any part of Medicare. When you turn 65, you should typically apply for Medicare Parts A and B because if you wait until after age 65 to do so, the cost for Medicare Part B will increase. Also, when you apply for Social Security benefits, Medicare Part A is automatic, and you cannot opt out.
For every 12-month period you wait after age 65 to apply for Medicare, the premium for Medicare Part B could increase 10%, Damaryan says. (Medicare Part A is free, so there is no effect there.)
If, instead of applying for Medicare, you contribute $3,500 to your HSA, you aren’t paying tax on that amount, which could be a saving of $800 or $1,200 a year, depending on your tax bracket. However, don’t just compare this to the added premium costs; also compare it to how much more you would be paying for health care if you were not to receive Medicare, and whether your cash flow allows you to defer your Social Security benefit to a later age to continue HSA contributions. A financial advisor may be able to help you calculate all the nuances based on your specific situation to decide which option would be best for you, Damaryan says.