Experts answer questions about HSAs

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Have you ever received an expensive vet bill and wished you could use funds from the Flexible Spending Account or Health Savings Account to pay it off? While that is not possible today, it is not outside the realm of possibility, although there are complications with the idea.

Will there be HSAs for pets?

“The IRS has taken a broader view of qualifying post-COVID HSA expenses,” said James Bornhorst, co-founder and CEO of First Dollar. “One complication is that HSAs can only be used for dependents on a family’s tax return, and pets do not have dependent status in the eyes of the IRS.”

While waiting to see if the health expenses of furry family members could possibly be covered by HSA plans, other HSA-related developments and trends are changing the way employees plan to balance paying for medical bills while by increasing their retirement savings. We asked experts about the potential evolution of HSAs, especially if we will ever see unbound HSAs offered without high deductible health insurance plans.

Will we see HSAs unrelated to HDHP?

Anne Brunson, vice president of service operations at Maestro Health, a third-party technology administrator for health and benefits, noted that it is already possible to open an HSA with a self-funded employer or individually with some banks. Preparing for unknown medical bills in the future while saving for retirement doesn’t have to be tied to a health plan, she said.

“We might see non-consolidated HSAs,” Brunson said. “As of now, it’s an IRS requirement for the money to be put before tax. If they were to relax that restriction and just keep a maximum contribution limit like a 401 (k), we could really see HSAs take off. “

There have been several attempts over the years by advocates to expand access to HSAs, including eliminating the requirement for a high-deductible health plan, said Rich Ward, chief executive of TIAA. Health Solutions. The most recent effort took place in 2020 as part of COVID-19 relief packages.

“HSA advocates continue to fight for expansion, especially for Medicare beneficiaries, who are prevented from making HSA contributions simply because they are enrolled in Medicare,” Ward said. “There are several hurdles that will need to be overcome if the requirement for a high deductible health plan for HSA contributions is to be removed.”

Among these barriers are a perceived shift in costs to workers, fears that individuals will not be able to pay their deductible and therefore forgo necessary treatments or medications, a perception that HSAs are simply a shelter. tax for the rich, and finally the cost to the federal government. government tax revenue, Ward said.

“Arguably, these concerns can all be overcome,” Ward said. “Nonetheless, they are real concerns for policymakers in Washington, DC, and therefore it seems unlikely that the HSA will be separated from the high deductible health plan in the short term. Supporters of the HSA will no doubt continue their efforts to expand access to the HSA to help all Americans cope with rising health care costs.

Should we spend or invest HSA funds?

Another common question about HSAs is whether participants should spend their HSA funds or invest them.

“Spending and investing with HSAs are valuable ways to save money,” Bornhorst said. “If your household income is higher and you’re already maxing out other retirement accounts like 401 (k) s, it’s usually best to invest your entire HSA contribution each year and pay the cost of health with after-tax money. . This approach allows your HSA contributions to grow tax-free. If you save your healthcare expense receipts, you can reimburse yourself at any time in the future from your HSA. “

Ward said the answer depends on the personal circumstances of the account holder, but for most people, saving and investing their HSA may be the best strategy. Paying current medical expenses on a pre-tax basis is beneficial, but since high-deductible health plans cover 100% of preventive services (not subject to the plan’s deductible), it is possible that the individual may not have to dive into their pocket unless something unexpected happens.

In the long run, because an HSA has a triple tax advantage (pre-tax contributions, tax-deferred growth, and tax-free withdrawals for qualifying medical expenses), the HSA builds up quickly if it doesn’t. isn’t spent on those who can afford to pay their deductible. along with other resources, Ward said.

“This allows you to take advantage of the tax-deferred growth in the HSA which can help pay for medical costs in retirement,” Ward said. “The point is, many people who qualify for the HSA don’t pay the maximum amount each year. But if you can afford it, you might find that you can spend some of it on unforeseen medical bills while saving and investing the rest for future use. “

Ward noted that HSAs are even more beneficial than retirement accounts such as IRAs or a 401 (k) because they can be used at any time tax-free on medical expenses or saved for use at home. retirement.

When an HSA account holder turns 65, they can use their HSA for any reason without penalty, which puts the HSA on par with the IRA or 401 (k) in retirement while still preserving tax-exempt use for qualifying medical expenses throughout retirement. Additionally, the HSA is not subject to a forced minimum distribution like IRAs and 401 (k) accounts are, Ward said.

What trends are emerging around HSAs?

Current trends regarding HSAs are largely focused on awareness and education as employers adopt programs to help workers manage their finances. Employers implement financial wellness programs to help employees with things like building an emergency fund, student and consumer debt, college savings and even mortgages, and HSAs are a major part of financial well-being , said Ward.

“Historically, HSAs have been confused with Flexible Medical Expense Accounts (FSA), which must be spent annually, and originally there were no investment options to choose from among HSAs.” Ward said. “These days, almost all HSA administrators offer mutual funds and / or a brokerage option. We are now seeing more and more HSAs that are built into an employer’s pension plan or 401 (k) platform provider. This makes it easier for employees to plan, save, and invest their HSAs the same way they invested their retirement accounts. “

Ms Brunson said she is seeing an increase in participation in HSA plans as more people realize they are benefiting more than high-risk patients. As younger generations continue to learn about financial wellness, the ability to set aside funds for pre-tax health events is almost a given, she said, and employers who offer HSA will stand out. candidates as a company concerned with the physical, mental and financial well-being of its employees.

“Going forward, I see HSAs being offered at all levels as part of employer health plans and the majority of people are taking advantage of the tax break,” Brunson said. “As more innovative and affordable healthcare services become available, this is a great signal that the industry is moving in the right direction – and HSAs are a good example of that.”

Kristen beckman is a Colorado-based freelance writer. Previously, she was a writer and editor for ALM’s Retirement Advisor magazine and the online channel LifeHealthPro. She has also been a reporter for Business Insurance magazine covering topics related to workers’ compensation.

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