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HSAs 101: What you need to know – part one

Health savings accounts (HSAs) are being discussed as an integral part of the 2017 American Healthcare Act (AHA), the proposed replacement plan for the Obama Administration’s 2010 Patient Protection and Affordable Care Act. As the popularity of HSAs grows and they continue to be considered a key component of the AHA, understanding how they work is becoming increasingly important.

According to a Midyear 2016 report from Devenir, HSAs have grown to an estimated 18.2 million accounts with $34.7 billion in assets nationwide—a year-over-year increase of 22 percent.

Educating yourself about the benefits and rules of an HSA is the first step to getting the most out of this health care savings option.

What is an HSA?

A health savings account (HSA) is a tax-advantaged account that an individual can use to pay for qualified medical expenses, long-term care expenses, or invest and save for retirement. Individuals can only contribute to an HSA if they are enrolled in a qualified high deductible health plan (QHDHP). Individuals can’t have any disqualifying coverage (including Medicare) and can’t be claimed as a dependent on another person’s tax return.

HSA-qualified plans must also meet requirements for minimum deductible and maximum out-of-pocket expenses levels. For 2017, the maximum annual HSA contribution is $3,400 for individuals with self-only coverage and $6,750 for individuals with family coverage.

What are the benefits of an HSA?

  1. Triple tax advantage*

HSA contributions go in tax-free, grow tax-free and are spent tax-free if withdrawn for eligible medical expenses.1 In addition, when making an HSA contribution directly through payroll, employees do not pay payroll taxes.

  1. HSAs are individually owned

HSAs are owned by the individual, not by the employer. This means there’s no “use it or lose it” rule – like with  flexible spending accounts (FSAs) – so any money left in the account at the end of the year rolls over to the next. Also, the HSA-holder keeps the account, even when changing employers or health plans.

  1. HSAs can be used as a retirement saving tool

HSAs are a powerful tool to save for health care costs in retirement. Fidelity Benefits Consulting estimates the average retired 65-year-old couple will need $260,000 to cover medical expenses throughout retirement. Because of the triple tax advantage*, HSAs are a tax-effective way to save for these future expenses. After retirement age, individuals can use the HSA funds for non-medical expenses without paying any penalty and with similar taxation to withdrawals from other retirement savings accounts (e.g. 401(k)s).

What is the best way to use HSAs?

The best use of an HSA is to help individuals better manage medical expenses today and in the future. One of the main reasons to establish an HSA is to help account holders pay for the out-of-pocket expenses until they meet the deductible in a QHDHP. However, many account holders treat their HSAs as pseudo checking accounts, paying for health care expenses as they occur and doing little to save for health care costs in retirement. In doing so, many HSA-holders are missing out on the potential for triple tax advantages* inherent in an HSA, something not found in other retirement savings vehicles.

*Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice.  All mention of taxes is made in reference to federal tax law.  States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions.  Please check with your state’s tax laws to determine the treatment of HSA contributions, or consult your tax adviser.

1Withdrawls for non-qualified medical expenses are subject to income taxes and a possible additional 20% penalty, if you’re under age 65.

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