by Michael Gibney, CFP®, AIF®, Modera Wealth Management

Increasing healthcare costs are a concern for many individuals and are taken into account when formulating a financial plan. Years ago the cost of health insurance was low enough that as common practice many employers covered most of the premium. Over the years, as health care costs have increased, employees have borne a higher percentage of the monthly premium. With costs skyrocketing and employees paying more and more, the advent of high-deductible health care (HDHC) plans and health savings accounts (HSAs) has become a story worth blogging about.

HDHC plans are attractive to some because they offer lower premiums than traditional health insurance, but the deductibles and expenses are much higher than traditional PPO or POS plans, requiring those covered to pay more out of pocket for copays, coinsurance, etc. As an incentive, HDHC plans normally offer a health savings account option providing an enticing way to save for these additional expenses.

HSAs offer triple tax-free savings: you make pre-tax contributions, the funds grow tax-deferred, and withdrawals are tax free as long they are used for qualified medical expenses. (If not used for qualified expenses, distributions may be subject to a 20% withdrawal penalty, and, depending on your age, may also be taxable.)

HSAs are not to be confused with flexible spending accounts (FSAs), which offer a pre-tax way to save for limited medical expenses but have the unfortunate requirement of having to be spent in the year the money is saved. Often, some FSA money is left on the table.

HSAs are different. They can only be opened when enrolled in a HDHC plan. Also, as mentioned, they can be carried over from year to year. In fact, currently, there is no limit on how long you can keep an account open and funded.

The 2021 annual limit on HSA contributions will be $3,600 for self-only and $7,200 for family coverage. That’s about a 1.5 percent increase from last year. The catch-up for those 55 or over is unchanged at $1,000. The fact these accounts can be carried over provides an opportunity to save a substantial amount over time. While the primary use for these funds should be current qualified medical expenses, there is nothing preventing a younger person from accumulating funds in an HSA to grow tax-free until he or she is older and more likely to need them. There are even some who argue that, if you can afford to pay for your current out-of-pocket medical costs out of normal cash flow, you should save the funds in your HSA for the inevitable retirement health care costs such as premiums for Medicare supplemental plans and/or long-term care expenses.

In fact, the latest estimates state that medical costs in retirement will average approximately $70,000 to $120,000 for individuals and possibly as high as $250,000 per couple. With expenses like that, the opportunity to potentially save today on a pre-tax basis for future expenses underscores the argument for using HSA accounts as a long-term investment.

Considering this, it also can make financial sense to seek an HSA provider offering investment options. Certain providers offer ways to invest in a well-diversified, low-cost portfolio of mutual funds or ETFs.

Interestingly, the fact that those covered by HDHC plans are forced to pay more out of pocket due to their higher out-of-pocket expenses, may give rise to people acting more like consumers when it comes to medical expenses. That is, they may be asking more questions, shopping around, asking about generic drugs, and bargaining.

Consumers are not the only ones who can potentially benefit from this type of account. Employers may also favor HDHC plans because any contribution by employees to an HSA account is not subject to payroll taxes, saving the employer 7.5% to 7.65% of each dollar contributed.

Are HDHC plans with HSA accounts right for everyone?

Probably not. Young families with infants, toddlers or young children who find themselves in the doctor’s office often probably will not benefit from a plan like this. However, if this is an attractive option for you, there may be an opportunity to initially fund an HSA account with a one-time IRA conversion through your HSA account provider.

Michael Gibney, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNER® professional with Modera Wealth Management, LLC in Westwood, NJ. He may be reached at michaelg@moderawealth.com or 201-768-4600.

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