What are HSAs and how do they work?

If you’re currently covered under a high-deductible health plan (HDHP) then there’s a high likelihood that you have access to a Health Savings Account (HSA). An HSA account is available to anyone regardless of their income level and can be used as an important retirement tool for the future. When it comes to healthcare expenses in retirement, an HSA is arguably one of the best tax-deferred accounts out there.

What are the benefits?

Multiple tax advantages

One of the important draws to HSA accounts is that contributions and distributions have tax advantages. Contributions are 100% tax deductible from your income and earnings on those contributions are tax-free. Withdrawals are similar in that they are also tax-free, provided that they’re used for qualifying medical expenses.

Contributions are vested

All the contributions you make toward your HSA are carried forward each year, and growth on the account is compounded. Additionally, you’re able to choose the investment strategy for the funds in your HSA with the opportunity to grow the account even more.

Funding is similar to a traditional retirement account

Funding your HSA is as simple as setting up an account through your employer. You have the same ability to decide your annual contribution amount, subject to the annual contribution limit, and some employers help in funding your account similar to a 401(k).

HSA limitations to be aware of

Qualifying healthcare expenses only

When setting up an HSA, it’s good to keep in mind that funds from the account can be used for qualifying healthcare expenses only. Otherwise, you’re subject to income tax and a 20% tax penalty. Rest assured, there’s a good chance that funds saved now will be used for healthcare expenses later down the line and make for easier retirement cash flow planning. Keep in mind that, according to Forbes, it’s estimated that the average couple will need around $413,000 to cover their healthcare expenses post-retirement^†.

Estate planning woes

The HSA should not be considered as an estate planning or legacy tool if you plan to give the remaining balance to someone other than a spouse. In the event that there are still funds in an HSA account after the owner has passed away, the account will then be transferred over to the spouse, who becomes the owner and can use it for their qualifying healthcare expenses. A benefit to the HSA is that there are no required minimum distributions (RMDs) once the spouse takes ownership, so they can use the account at their will and the account remains to grow tax-free. If the remaining funds are transferred to a non-spouse beneficiary, they will be subject to a hefty tax at their applicable rate and must withdraw all the remaining funds from the account.

Common HSA-Eligible Expenses

Eligible (IRS approved)

• Ambulance fees and emergency care
• Childbirth and family planning
• Chiropractic care
• Dental care
• Diabetic care
• First aid
• Flu shots & vaccines
• Long-term care premiums
• Medicare premiums
• Nursing care
• Physical exams
• Physical therapy
• Prescription medications
• Psychology care
• Surgery, excluding elective cosmetic surgery
• Vision care

This list is not all-inclusive; always check with you plan provider if you have any questions on care eligibility.

Ineligible

• Childcare for healthy children
• Elective cosmetic treatments
• Funeral expenses
• Medications that are not FDA-approved
• Life-insurance premiums
• Long-term disability
• Marijuana – even if prescribed
• Maternity items
• Everyday toiletries and personal sanitation

Getting the advice you may need

It’s important to keep in mind that your health and insurance options will change over time, and how you manage your HSA account will change with it. Because it also offers tax benefits, it’s more than just a savings tool for medical expenses. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.