Are your clients searching for a way to reduce the $369,000, on average, they’ll spend on health care during retirement?
A health savings account (HSA) is one of the most efficient savings vehicles that an individual can take advantage of, and the only type dedicated to long-term consumer health.
While your client does need a qualified high-deductible health plan (HDHP) to be eligible to contribute to an HSA, once established, it’s an invaluable savings tool with benefits for life.
(Related: HSA Provider Raises $27 Million)
Are your clients wondering whether an HSA is right for them?
Of course, here’s an essential disclaimer: The content presented in this article is for informational purposes only. It is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action.
Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
Financial professionals like you should make sure you’ve talked to the people on your own tax and compliance teams, to make sure you know what you can say about HSAs and HDHPs, and how.
Once you’ve gotten your advisors’ blessing, here are five lesser-known HSA benefits to share with your clients.
1. HSAs are stealth retirement accounts
As soon as HSA owners reach the age of 65, they’re able to use the funds in the account for anything, health care or otherwise. Funds spent on qualified medical expenses are tax-free, however, funds withdrawn for any other use are taxed the same as non-qualified withdrawals. The tax shelter for health care expenses, in addition to the ability for the owner to withdraw funds as if the HSA were a 401(k) plan, makes an HSA a great tool for supplementing retirement savings.
Health needs can change year-to-year, so a high-deductible health plan may not be the right fit at every stage of life. Clients who can take advantage of a high-deductible health plan can put even greater savings away towards their health care and retirement savings.
2. Contributing to an HSA gives employees a tax break.
A primary benefit of being employed by a business that provides an HSA as part of its benefit offerings is that the pre-tax HSA contributions are not considered part of the employees’ taxable income.
Clients with employer-sponsored HSAs see their savings grow tax-free. They can use these funds for qualified medical expenses without ever being taxed. Even if individuals contribute to their HSAs post-tax, all of their contributions are considered tax-deductible, making contributions into their HSAs completely tax-free.
3. HSAs never expire.
While you can contribute to an HSA only when you’re enrolled in a high deductible health plan, that doesn’t mean you can use those funds only when you’re enrolled in an HDHP. In fact, that’s one of the major benefits of having an HSA: You can use the funds at any time for qualified medical expenses, for the rest of your life.
Even if a client with an HSA from an employer changes health plans or changes to a different health plan other than a qualifying HDHP, the HSA is still your client’s HSA. Unlike a flexible spending account, an HSA never expires. The funds in the account will always belong to the employee, even if the employee leaves.
An employee who leaves can choose between sticking with the employer’s HSA provider or moving to a different one. This is one of the features that make an HSA such a valuable asset: the freedom of managing funds for health care in the future.
4. Other people can contribute to an individual’s HSA.
While the most common scenario is for employers to contribute pre-tax to an employee’s HSA, other people, such as parents, a sibling, or friend, can contribute to an individual’s HSA. It’s a win-win for the contributor and recipient, because the HSA contributor is exempt from gift taxes for the person making the contribution for that contribution, while the recipient builds a health care savings nest egg.
Keep in mind, however, that all contributors’ contributions count toward the HSA owner’s maximum annual contribution limit.
5. HSA funds can be invested.
This is another major benefit of having an HSA: Provider permitting, individuals can choose to invest their HSA funds at any time — even if they no longer qualify to contribute to an HSA. Investing HSA funds is a good way to diversify HSA assets well beyond the standard interest rate of a savings account. Depending on what state a client lives in, funds invested in an HSA may be able to be invested tax-free.
Most HSA providers offer a way for your clients to invest their funds. The opportunity for your clients to invest the HSA funds is another reason why HSAs are a great vehicle to save for health care expenses in the future.
Shobin Uralil is chief operating officer and co-founder of Lively, a health savings account provider.