Make the most of your HSA
Most Americans who have health savings accounts use them as specialized checking accounts for health care costs such as deductibles, co-insurance and co-payments rather than as investment vehicles for medical expenses in retirement, according to new research from the Employee Benefit Research Institute. In fact, 96% of HSA owners invest their money in cash, according to EBRI.
That’s not necessarily a bad thing. HSAs can be used either as a vehicle for either spending or investment.
But HSA owners — given nearly 24 million accounts with $37 billion in assets in 2016 — should at least know how and where to invest their money. And that’s especially so since, according to Morningstar’s 2017 Health Savings Account Landscape report, investors have few resources available to help them navigate the hundreds of plan providers that exist.
An HSA is a tax-exempt trust or custodial account funded with contributions and assets individual workers can use to pay for health care expenses, according to EBRI’s report.
“HSAs benefit from a triple tax advantage: employee contributions to the account are deductible from taxable income, any interest or other capital earnings on assets in the account build up tax free, and distributions for qualified medical expenses from the HSA are excluded from taxable income to the employee,” the report says.
For 2017, if you have self-only high-deductible health plan coverage, you can contribute up to $3,400, according to the IRS. If you have family HDHP coverage, you can contribute up to $6,750. An additional catch-up contribution of up to $1,000 may be made by people over age 55, as set out by the IRS.
On average, total contributions to HSA accounts — combined individual and employer contributions — were $2,922 in
Tax benefits make health savings accounts a great way to save before retirement “Investments carry risk, and the account balance may fall and not be sufficient to cover current medical expenses.” Paul Fronstin, author of “Trends in Health Savings Account Balances, Contributions, Distributions, and Investments”
2016, according to EBRI.
So how might you go about deciding where and how to invest your HSA?
PLAN TO USE FOR CURRENT HEALTH CARE EXPENSES?
If you’re using your HSA for current health care costs, you have a lot of flexibility, said Paul Fronstin, director of EBRI’s Health Research and Education Program and author of the report, Trends in Health Savings Account Balances, Contributions, Distributions, and Investments, 2011-2016: Estimates from the EBRI HSA Database.
“You can fund the account as you incur medical expenses,” he said. “Or you can wait — as you can with a traditional IRA — until April 15 of the following calendar year to fund the account for the past year and take an immediate distribution.”
In general, Fronstin and others recommend investing money in an HSA that will be used for current or near-term health care expenses in safe rather than risky assets. “Investments carry risk, and the account balance may fall and not be sufficient to cover current medical expenses,” he said.
Fronstin also recommends making personal HSA contributions via payroll deduction.
“That allows you to save FICA taxes on the contribution,” he said. “For these people, contributions are more about the tax break than about account buildup, assuming all they want to do is fund current expenses.”
In the Morningstar report, Alliant Credit Union, SelectAccount and The HSA Authority are the most compelling plans for account holders using their HSA to cover current medical costs. The three plans offer checking accounts without monthly maintenance fees, according to Morningstar.
According to Leo Acheson, co-author of Morningstar’s HSA report, account maintenance fees represent the most important consideration for account holders.
“In some cases, it can be challenging to know what fees are being levied,” Acheson said. “But it’s important to know because it can definitely erode away your savings.”
PLAN TO USE FOR LONG-TERM EXPENSES?
For those selecting an HSA plan to use as an investment vehicle to save for future medical expenses, Acheson said there are three important considerations: the breadth of investment options offered, the attractiveness of those investments and the total cost of investing in those options, including fund fees, maintenance fees and investment fees.
Fronstin said those using HSAs for future health care expenses should consider maxing out their contributions if possible, as well as making contributions via payroll deduction to get the FICA tax break.
According to Acheson, using HSAs for future medical expenses makes sense, especially given cost projections. A 65-year-old couple retiring in 2016 would need an average of $260,000 — in today’s dollars — to cover medical expenses throughout retirement, not including longterm care costs such as a nursing home, according to Fidelity Benefits Consulting.
“It definitely makes sense to think about an HSA as a supplement to retirement savings,” Acheson said. Acheson also said it would be “optimal, if you can afford it,” to avoid using money in your HSA for current medical expenses and pay out of pocket. “But it also depends on how much you have saved already,” he said.
If you’ve saved enough to cover your future health care expenses in a 401(k), Acheson said paying for current medical expenses with your HSA makes sense, though it’s also a good idea to use both a 401(k) and an HSA when saving for retirement.
A word of caution to those who plan to use their HSA as an investment vehicle. Morningstar gave only four plans — Bank of America, HealthEquity, Optum and The HSA Authority — positive overall assessments for their investment programs. And only one plan — HealthEquity — offers a well-designed investment menu, strong underlying managers and attractive fees.
If you invest your health savings account funds wisely and spend them only on qualified medical expenses, these accounts are a great way to supplement retirement savings.