Health Savings Accounts (HSAs) are perhaps the single best savings vehicles that Congress has ever given us. But too many people don’t understand them and how remarkable they are. So, let’s look at the rules as they pertain to contributions and distributions starting next year. In 2024 an HSA-eligible worker who has a high-deductible health care plan through his or her employer can contribute up to $4,150 for an individual or $8,300 for a family, plus another $1,000 catchup if age 55 or older. The funds going into the HSA are fully tax-deductible, saving you taxes immediately. Once inside the plan, the money won’t be taxed as it is accumulating value. And, that money can ultimately be withdrawn tax-free if it is used for qualified medical expenses. Now, to be a qualified expense, it has to cover a bonafide medical cost. So, doctor visits, prescription drugs, emergency room visits, etc.
And, what, exactly, constitutes a High Deductible Health Plan (HDHP)? An HDHP has a higher deductible than a typical health plan. That simply means you pay out of pocket for your medical expenses until you reach a certain amount. Then, your plan begins to pay. Your employer cannot offer you a Health Savings Account unless your regular health insurance qualifies as an HDHP.
And, because of their unique tax benefits, HSAs are often the last account to be drawn from, but I’m not convinced that is the best strategy. And that’s because any funds remaining in the account at the owner’s death will be fully taxable in one year to a non-spouse beneficiary (minus any funds used to pay the decedent’s outstanding medical bills within one year of death).
Now, it is not all that hard to rack up medical expenses after age 65, so being able to tap into an HSA typically provides a very valuable option for seniors. What a lot of people do not know, however, is that you can take money out of an HSA to pay for your Medicare premiums. As an example, if you are on Medicare and you’re not subject to the IRMAA penalty, you are paying, currently, $174.70 each month in Medicare Part B premiums. This person could withdraw $2,096.40 from their HSA at the end of the year ($174.70 x 12) and pay themselves back for all the premiums deducted from their monthly Social Security check throughout the year. If they also had unreimbursed, out-of-pocket costs for other qualified medical expenses, these could be paid out of the HSA as well. HSA distributions are tax-free if they are used to pay qualified medical expenses for self, spouse, or dependents - generally defined as any expense that would qualify for the medical and dental expenses deduction as defined in IRA Publication 502, such as unreimbursed expenses for doctors, dentists, and hospitals.
Plus, some additional Insurance premiums can qualify for tax-free HSA distributions such as:
- Medicare for someone age 65 or older (just NOT Medigap premiums)
- Long-term care insurance
- Health care coverage while receiving unemployment compensation under state or federal law
So, an early retiree going off his or her employer plan and not yet eligible for Medicare would not be able to use HSA funds to pay insurance premiums unless the insurance falls under COBRA. Because COBRA is expensive, marketplace insurance, especially with subsidies, can sometimes be a better deal - but HSA funds cannot be used to pay those premiums. Still, there should be significant opportunities to use HSA funds later in retirement.
HSA distributions do have to be reported on your tax return using IRS Form 8889. If all your distributions are used for qualified medical expenses, there will be no tax. And that should be your goal.
So, if you have money in an HSA already, good for you! And, if you’re still working and you have a Health Savings Account through your employer that you can participate in, by all means do so! The long-term benefits can be substantial.
But, what if you work for a company that has a High Deductible Health Plan but they do NOT offer a Health Savings Account? Well, here’s some good news . . . if you qualify, you might be able to actually create your own Health Savings Account! To qualify, you cannot be enrolled in Medicare, and you can’t be claimed as a dependent on someone else’s tax return. But, if you do qualify, you can establish a personal HSA. This can be done through certain banks and credit unions or through a handful of investment companies. In fact, for those of you who bank at the Delta Community Credit Union, they offer a very nice HSA. It’s not “free” but, in our opinion, it’s worth it!
And, of course, if you have questions about this extraordinary savings vehicle, please reach out to either one of us for answers!
Ray & Renee