Even though they first became available in 2003, health savings accounts (HSAs) paired with high-deductible health plans are becoming more popular and are being offered by more employers. These accounts receive a unique triple-tax advantage, whereby contributions are made pre-tax (federal, most states and payroll taxes), can grow tax free and can be withdrawn tax free for qualified medical expenses at any time. Unspent funds aren’t forfeited at the end of each year like a health flexible spending account, so they can be accumulated and invested during your working years and spent in retirement to cover healthcare expenses.
A recent Fidelity study estimated healthcare costs for couples in retirement is $245,000, and this figure doesn’t even include the cost of long-term care. Rather than drawing down cash reserves or taking retirement account distributions to cover healthcare costs in retirement, why not accumulate and invest the funds in an HSA to spend tax free later?
So what is a high-deductible health plan paired with an HSA?
Similar to other health care plans, where you have an annual deductible that can be anywhere from $250 to $10,000, a high-deductible health plan has an annual deductible of at least $1,300 for an individual and $2,600 for a family. Contributions limits to an HSA for 2016 are $3,350 for an individual and $6,650 for a family, and those 55 or older can contribute an extra $1,000. Many employers contribute the deductible on your behalf and permit you to make contributions to reach the contribution limits. And, maximum out of pocket expenses are $6,550 for individuals and $13,100 for families. Once you reach this maximum, your health insurance provider will cover all remaining costs for the year.
You can’t make contributions to an HSA once you enroll in Medicare. However, if you’re still employed after reaching age 65 and want to stay on your employer’s health plan, you can postpone enrolling in Medicare and continue to contribute to an HSA. Keep in mind that you must enroll in Medicare within eight months after you retire and/or lose group health coverage to avoid paying any penalties.
What can the account be spent on?
The account can be spent tax free on out-of-pocket qualified medical expenses. You can also use an HSA to pay for a portion of your long-term care insurance premiums (based on your age), continuation coverage through COBRA, and Medicare premiums, except Medigap. You can’t use an HSA to pay for regular medical premiums, though, unless you’re unemployed and receiving federal/state unemployment benefits.
Investing an HSA
HSAs often have investment options similar to a 401(k). Some of these plans may carry high expenses, so be mindful of fees when reviewing options.
If not needed for health care costs in retirement, HSA funds can be used after turning age 65 for non-medical expenses; however, withdrawals will be subject to ordinary income tax. Funds withdrawn for non-medical related use before 65 are subject to a 20% penalty plus ordinary income tax. They can also be rolled over to a new employer’s HSA.
A high-deductible health plan paired with an HSA can provide the best overall value of any health insurance option, especially if invested during your working years to cover medical costs in retirement tax free.
So you’ve accepted a job offer at a new company, but you want to take some hard-earned time off before you start. The problem is that your current employer will only pay your medical premiums through the end of your last month on the job, and you’re starting the new job in the middle of the following month. So what do you do for the two weeks in between?
COBRA, short for Consolidated Omnibus Budget Reconciliation Act, bridges this gap by providing workers and their families with continued group health benefits during this transition. Once you leave an employer, your plan administrator will send you information regarding your rights under COBRA, stating that you have 60 days from whichever of the following happens last: receiving this notice, the last day on the job or the last day of health care coverage at the end of the month. If elected within the 60-day window, the coverage becomes retroactive.
If you have a medical claim during the two weeks before you start with your new employer, you can elect for coverage after the fact within that 60-day window and pay one month’s worth of medical premiums to receive insurance coverage. Note that this could cost as much as 102% of the cost of the medical premium that was previously split between the employer and you. Still, this is much cheaper than paying thousands of dollars in medical expenses if you’re not covered. One suggestion is to put off any non-emergency medical visits for your family until after this two-week period.
It’s also important to know when your medical coverage for the new job starts. Many employers start these benefits on your first day, but some may have a 30-day waiting period.
Other COBRA Scenarios
Continued coverage under COBRA also applies in the following situations.
Leaving a job voluntarily
Becoming eligible for Medicare
Having a dependent child who loses dependent status
Having the number of hours you work reduced
Death of the covered employee
Divorce or other big life events
For a termination or reduction in hours worked, you and your family will be eligible for 18 months of continued coverage under COBRA, while the other scenarios qualify for 36 months of coverage. More information can be found on the Department of Labor website.