American taxpayers have several options available to them when it comes to how to plan and pay for their medical expenses. Most employees receive their medical insurance coverage through their employer and typically they enroll in a plan that is either a low deductible plan or a high deductible plan. If they choose a high deductible plan, then they also have the option to enroll in a Health Savings Account (HSA) which is a tax-advantaged medical savings account. HSA accounts are only available to those people who are enrolled in a high deductible health plan.
There are several advantages to an HSA plan. First, any contributions that a participant makes to their HSA account is pre-tax. Usually, an employee will choose to make contributions directly from their paycheck and that money is taken right off the top, before any taxes are deducted. Second, depending on the employer and the nature of an employee’s overall compensation package, an employer might also make contributions into their HSA account. Additionally, the funds that are contributed into an HSA account can be invested, which means that it can conceivably grow over time. Finally, any withdrawals that are made from an HSA to pay for qualified medical expenses are withdrawn tax free, meaning no taxes are incurred upon withdrawal.
Another major advantage of an HSA account is that it permanently belongs to the holder of the account. Any funds deposited into the account – whether made by the employee or employer – are the sole property of the employee, whether they are still employed at their company or not. If an individual has an HSA account and they change jobs, their HSA account goes with them.
Also, any funds that are deposited into an HSA account are never lost. The funds rollover from year-to-year. This is distinct from a Flexible Spending Account (FSA) where the funds must be spent within a calendar year, otherwise they are permanently lost. FSA accounts are not carried over into the following year.
HSAs were first created in 2003 when it was signed into law by George W. Bush and they are administered by the Internal Revenue Service under Section 223 of their Code.
Every year the IRS establishes what the annual maximum contribution limits are for individuals and families. In 2018, the contribution limit for single individuals is $3,450, and the maximum amount for married couples or families is $6,900. In addition, the IRS created a “catch-up” provision for participants who are 55 or over, which allows them to deposit an additional $1,000 into their account.
It is also important to note that the maximum contribution limits apply whether the funds come from the plan participant or their employer. Regardless of the source of the funds, the annual contribution limits cannot be exceeded.
Also, taxpayers have the option to make contributions to their HSA account up until the deadline for filing their individual income tax returns for that specific tax year, which is generally April 15.
As I mentioned above, in order to participate in an HSA, one must be enrolled in a high deductible medical insurance plan. Typically, if one has a family with young children or if they themselves require frequent medical attention and assistance, then a high deductible plan may not be right for them.
However, a high deductible plan might be perfect for someone who is younger and healthier, and whose medical costs are reasonably low. In those cases, they might be able to take advantage of all the tax benefits that an HSA account provides. A perfect HSA candidate is someone who won’t need to spend their funds on short-term health care, which will allow them to accumulate more money over a lifetime toward their retirement.
Disclosure: Investment options within a Health Savings Account may involve risk, including the possible loss of principal.
United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.
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