Health Savings Accounts - Definitely not wood related

peakbagger

Minister of Fire
Jul 11, 2008
6,127
Northern NH
The more folks I run into the more I find that most employers do a crappy job selling these accounts and even if they do, the default firm that administers the accounts that they recommend take most of the benefits. There is also a lot of confusion by HR folks and employees that the HSA is just a new version of medical spending accounts. Generally HSAs are used by folks who are healthy and do not use the health care system. Someone with a chronic condition or an upcoming pricey medical procedure (things like new knees or hips that are scheduled months in advance) may want to skip it.

I had read a few articles several years ago and as soon as my company offered the right insurance plan (more below on HD plans) I started up an account and its been a winner for me as I did some homework. I dont make a buck on this but hopefully I might help someone out. (note if someone really wants to PM me I can refer them to my plan and get a Amazon gift card for a referral but feel free to skip the middleman)

The basic idea is like the old medical spending accounts, you set aside a sum of money to pay for medical cost every year that you can draw from the account over the year, you can take a deduction on your taxes on that amount you set aside. Unlike the old medical spending accounts, at the end of the year you keep whatever you did not spend at the end of the year and it stays in the account until you need it. If you need the money next year for medical cost just take it out. Next year you can set more money aside and take another take another tax deduction. At this point you may ask what the catch is?. The catch is you need to have a high deductible health care plan (lets call it s HD plan) at work or on your own. So why would you voluntarily chose to spend more money over the year out of pocket when you can let the insurance pay the bills? Well the HD plan cost less out of your paycheck and many companies contribute to the HSA to make up part of the difference. I do not have access to company insurance so I have to buy on the Health Care Exchange (AKA Obama care). I do not qualify for subsidies at least for now so I get to see the difference costs for the Gold, Silver, Bronze and HD plans. The ones I have access to have the same services its just lower deductibles on the Silver and the lowest on Gold. The HD plan is very similar price as the bronze plan. The interesting thing is that the cost difference for the plans is very close to the difference in deductibles between the plans. So in my case is if I pay more for the Gold plan I am just doing an installment plant to pay down my deductibles if I need to use medical services. If I do not use the services that money is gone. With my HD plan I pay less and if I do not need to use medical services it stays in the HSA.

So what are the benefits?. HSAs are the ultimate tax shelter. For a working person, its a tax deductible item just like an IRA or 401K contribution but unlike those two where you need to pay income taxes when you take it out, you do not have to pay taxes on HSA distributions as long as they are medically related. Various studies show that typical retires will spend 250K during their retirement out of pocket on medical during their retirement so they will have plenty of options to spend the HSA down. They can also pay their medicare Part B plans.

The big problem with HSAs is the companies who offer them typically want to make it easy for themselves and usually recommend the same firm that handles their payroll. In my experience those plans are crap. They are basically a low interest savings account with fees withdrawn. Its easier for the company as they just click a box on the payroll and it goes in. The money is as "safe" as it can be so employees do not complain about investment losses and the company could care less about potential investment profits. The trick to this is that the HSA is owned by the employee and they can put have it in an administrator of their choice and a lot of those administration firms are far lower cost and allow the money to be invested in mutual funds. When I looked into it when I first started my companies standard plan was 4 times the annual cost and they defaulted to a savings account. They did have investment options but they were all high cost plans and the bank charged an extra fee. Our company accountant with an MBA and I both did independent research and picked the same company. I still use Health Savings Administrators (healthsavings.com) but there are several other options that may be right for others. The annual costs are a lot lower and they let me invest in noload Vanguard funds. I invest those funds conservatively but over the long run, the have grown by about 8%. I dont pay capital gains or any taxes on that growth as its tax free account. When I first told my HR group that I wanted to use an outside HSA firm they complained as they had to write a check every paycheck to my firm but it helped that the accountant was also doing it. Its the law that they have to send it where you tell the to as its you account and its portable.

Folks who already have HSAs can move them to new firm anytime. Anyone with insurance with an employer has to wait until next year to set up HD plan (if its offered). The health care exchanges which normally are open enrollment in December (unless you switch employers or unemployed during the year), were re-opened for some limited time due to the Covid blll and i think someone with an individual plan can swap over to HD plan.

BTW, the government put some free care into the HD plans that you do not have to pay for. Some of them is yearly physical and free vaccine shots including covid. There are more but I dont have a list. One big detail is once you go on Medicare you no longer can contribute. I have 4 more years to build up the account. I may not have 250K but will have a chunk of it. Because its tax free I am far better paying for out of pocket costs directly than raiding the account.

As usual do your research as there are details I skipped but dont just trust your company.
 
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Highbeam

Minister of Fire
Dec 28, 2006
18,717
Mt. Rainier Foothills, WA
It gets better.... the hsa contributions for regular w2 employees are not subject to payroll tax either so no ss or Medicare which is like 13% as I recall.

Then, the account grows tax free and distributions are tax free for medical. But get this, after age 65 you can spend it on anything with no penalty.

People are actually setting up and fully funding hsa accounts and then paying out of pocket instead of using it because it makes a great IRA.

One other weird thing is you can save up receipts and draw from the hsa for medical expenses incurred in previous years for strategic income management.
 
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PaulOinMA

Minister of Fire
Oct 20, 2018
913
MA
Our finance guy was pushing saving for medical in retirement. He said he has a bunch of money in his.
 

FramerJ

New Member
Mar 18, 2021
15
Missouri
Could not agree more. Its possibly the best savings tool out there. I opened up ours through Fidelity. I have money to pay the deductible in their HSA money market account and now I invest my monthly contributions in their HSA mutual funds. All tax free, Its a win-win-win. So much so that the govt/irs will probably find a way to rewrite the tax code on them in the near future.
 

peakbagger

Minister of Fire
Jul 11, 2008
6,127
Northern NH
It does seem to be the greatest idea that many do not know about. I have mine about 60% bonds and 40% equities and its just about doubled my contributions I wish I would have been able to get it earlier. I would much rather pay myself and pay out of pocket on occasion.
 

clancey

Feeling the Heat
Feb 26, 2021
295
Colorado
Sure sounds like a wonderful way to take a deduction on taxes and that sure adds up and in my day there were not plans like this so you people are smart to take advantage of this tax deduction and if you don't use it you don't lose the money and I hope that I got this right.. Good for you..clancey
 

Highbeam

Minister of Fire
Dec 28, 2006
18,717
Mt. Rainier Foothills, WA
This is small potatoes though. The cap on contributions per year is very small. Just over 7000$ for a family. Still, it adds up but not like other savings options.
 

peakbagger

Minister of Fire
Jul 11, 2008
6,127
Northern NH
It all adds up. Someone with a few years left to work like me its not going to add up to big dollars but to a younger person it adds up. Do it for 20 years invest it and let it compound. $7,000 for 20 years at 8% is roughly $352,000 with a $140,000 in tax deductions over 20 years.
 
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Highbeam

Minister of Fire
Dec 28, 2006
18,717
Mt. Rainier Foothills, WA
It all adds up. Someone with a few years left to work like me its not going to add up to big dollars but to a younger person it adds up. Do it for 20 years invest it and let it compound. $7,000 for 20 years at 8% is roughly $352,000 with a $140,000 in tax deductions over 20 years.
I wouldn't call it tax deductions as much as you just don't pay income taxes on HSA contributions, or payroll tax. It just reduces your income subject to taxation and that benefit depends on your income level. I guess those are the same thing!

Sure, it adds up but so does money you place in your other accounts.

Do you really think we'll have this program for 20 years? Or will the healthcare situation finally be fixed in the US? I expect that we will have to roll this into an IRA at some point.
 
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peakbagger

Minister of Fire
Jul 11, 2008
6,127
Northern NH
Clunky as the US government can be, usually when it comes down to financial programs, the normal solution is to grandfather a program. A few years ago I inherited a small Roth 401K plan. The prior rules were that I could withdraw it using my life expectancy. That rule changed and now its five year maximum distribution. I am grandfathered and once a year as long as I have earned income I can just roll it into a Roth. My guess is if HSAs go away, the existing ones will be grandfathered into a Roth like instrument. As I use it for a financial instrument that is fine with me.