For many individuals in the second half of life, healthcare has become a bigger burden than they ever could’ve imagined. Well checkups turn out not so well, procedures grow more plentiful, and healthcare and health insurance costs seem to have no upward limits. COVID-19 is also likely to remain a threat for the foreseeable future. As of mid-August, cases in the U.S. had rebounded to pre-vaccination levels.
Although it’s hard to eliminate these issues, Kevin Robertson, chief revenue officer of HSA Bank, a leading administrator of health savings accounts, says HSAs can help take some stress off investors by enabling them to save for future healthcare expenses and retirement. He also thinks they’re just as important for retirees as pre-retirees and younger adults.
Jerilyn Klein: Why do HSAs matter after retirement?
Kevin Robertson: HSAs are one of the most powerful tools available to save for retirement and to help stretch healthcare spending dollars in retirement. Because of their unique tax advantages and the fact that they are the only way to pay for certain healthcare expenses on a tax-free basis, their power is unmatched in the retirement toolbox of Americans.
For example, only HSAs can pay for Medicare premiums on a tax-qualified basis. And given the numbers of years that people will likely pay for these premiums in retirement, they offer uniquely powerful capabilities and flexibility in retirement. In addition to Medicare premiums and eligible medical expenses, HSAs can also be used to pay for deductibles, co-insurance, prescriptions, vision expenses and dental care.
The 2021 HSA Bank Health & Wealth Index found that 93% of consumers over 55 years old are worried about current or future medical bills, and of those consumers, more than one-third reported they rarely save money for future healthcare expenses. And, there is a reason for their concern.
A recent study by HealthView Services estimated that a healthy, average couple aged 65 who retired in 2020 will spend $662,156 on retirement healthcare expenses. Having an HSA is the most tax-advantaged way to save and pay for healthcare expenses with its triple tax savings — contributions are tax-deductible, money grows tax-deferred and there are no income taxes on withdrawals.
Klein: What can individuals in their mid fifties do to make sure their HSAs will help them in retirement?
Robertson: The universal challenge to everyone heading into retirement is the time horizon. As such, the sooner you start, the better off you’ll be. For HSAs, it is never too late to start, but once the account is open, making contributions as large as you can afford is key. The IRS sets yearly limits for how much money HSA accountholders can contribute, and these limits change each year. In 2021, the maximum contribution limit for single plans is $3,600 and $7,200 for family plans.
Individuals over the age of 55 are also eligible to make an additional $1,000 yearly catch-up contribution. These catch-up contributions are really important not to miss out on, especially if there are spouses involved. Each spouse can make a catch-up contribution if they are over 55 and otherwise eligible. One thing to note in that scenario is that each spouse needs to have their own account to make their catch-up contribution. From a tax perspective, HSAs are individually owned, and therefore one spouse cannot make their catch-up contribution into the other spouse’s account.
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To help people understand their savings, there are easily accessible online tools that Americans can utilize on their journey towards retirement readiness. These can be tools such as HSA Bank’s HSA Savings Calculator, which calculates how much money one can save with an HSA.
Klein: How can older workers and retirees use HSAs to protect against market volatility and recessions?
Robertson: Investments are a great way to potentially grow HSA funds for a healthcare nest egg for retirement. However, we do have a few tips to help. First, we highly recommend keeping some “cash” funds available for current medical expenses within the base account balance as a safety net of liquid funds. Next, we encourage people to apply the same principles of investing with an HSA as any other investment, including age and risk-appropriate investment selections, and planning horizons.
Finally, remember that investing isn’t just for the accumulation phase. Like other retirement accounts, accountholders may want to keep investing after retirement to preserve capital. This is especially important considering how long people may live into retirement, and how helpful HSA assets can be to helping to afford healthcare expenses in those retirement years.
Klein: Are there any updates on the Health Savings for Seniors Act or other legislation that would allow seniors on Medicare to contribute to HSAs?
Robertson: HSAs are evolving and we continue to work with legislators on significant bipartisan proposals that could affect both their application and advantages, such as decoupling HSAs from high-deductible health plans (HDHPs) and allowing Medicare enrollees to open and contribute to HSAs. Under current law, only about 30% of Americans have access to HSAs, but decoupling and Medicare expansion could dramatically increase this number. If all Americans with public or private health insurance plans were eligible for an HSA, there would be huge benefits from tax-free health savings, helping everyone better address current expenses and save for their future needs.
Due to other legislative priorities within Congress such as the pandemic stimulus packages and infrastructure investments, healthcare has taken a back seat right now. There are continuing efforts to include provisions such as these in legislation. For example, even within the infrastructure bill debate in the Senate, there were amendments presented to include such proposals; unfortunately, none made it into the final bill passed by the Senate. Of course, things may change in the House, or perhaps these may appear in other legislative efforts such as the next budget reconciliation bill, but nothing concrete has materialized as of yet.
Klein: Are HSAs subject to required minimum distributions or other restrictions?
Robertson: No, HSAs are not subject to required minimum distributions (RMDs) such as with IRAs. And aside from the yearly contribution limits, there are very few restrictions with regard to HSAs. So long as a person is covered by an HSA qualified health plan, not covered by Medicare or other health plan coverage, and not claimed as a tax dependent on someone else’s taxes, they are eligible to contribute. There are no income restrictions, age restrictions, or other obstacles.
Lastly, remember that HSAs are designed to cover qualified medical expenses such as deductibles, co-insurance, prescriptions, vision, dental care and more for accountholders, their spouses and their dependents. For more information on what costs are eligible, the IRS offers a full list. If you pay for an ineligible expense using funds from your HSA, you must report it in your annual income tax filing and pay the related income taxes; plus, if you are under 65, a 20% tax penalty applies to that non-qualified distribution.
Klein: What rules apply to HSAs for estate planning?
Robertson: There are clear rules around HSAs and estate planning, and this depends on who the beneficiary is. If the beneficiary is a spouse, the account becomes their HSA, and the transfer of ownership is not taxable. If a beneficiary is not a spouse, the account ceases to be an HSA, and the account assets become taxable to the beneficiary in the year of the accountholder’s death. If the beneficiary is a trust, the full value becomes taxable income to the trust. If the beneficiary is a charity, the account will be paid to the charity free of tax.
The transfer in all these cases is completed free of probate, so long as there is a clearly designated beneficiary. If the beneficiary is the accountholder’s estate or there is no beneficiary designated at the time of death, the account will be changed to a taxable account in the name of the accountholder’s estate. It is highly recommended that the HSA accountholder ensure that they have a named beneficiary on their account — this is a common mistake, and one that can cause significant additional angst for the accountholder’s family after their death.
One last item to note here is that non-spouse beneficiaries (other than if the beneficiary was the person’s estate) may pay for qualified medical expenses incurred by the decedent before death, but only if the payments are made within one year after the death, thereby reducing the taxable amount to the beneficiary.
Klein: What information about HSAs would benefit older advisory clients and their adult children?
Robertson: Advisors should make sure their clients understand the powerful components of spending and savings that HSAs offers. Even current HSA accountholders don’t often know or understand some of these incredible traits or how to get the most from their accounts. Simple recommendations can have large impacts here. For example, there is no time horizon for when healthcare expense reimbursements must be made in an HSA. Many people fail to recognize that unlike “use it or lose it” benefits that come with a flexible spending account, HSAs allow a person to pay for their current healthcare expenses through other means, save their receipts, and they reimburse themselves in bulk at some future date.
From contributions to distributions to investing, there are really powerful attributes of an HSA, but only if they are understood and acted upon. And there is no better time to engage people on this topic than right now. The COVID-19 pandemic has underscored the need to be better prepared for health expenses and has highlighted the significant financial benefits HSAs can offer for both emergency healthcare spending and retirement savings. This is a huge opportunity for most, especially for those early in their career who likely have fewer medical expenses now than they will later in life.
For example, HSA funds used to pay for medical expenses in retirement will be discounted at the tax rate other retirement funds are subject to. So, hypothetically given a 20% income tax rate, using $1,000 from HSA funds to pay for medical expenses in retirement would be equivalent to $1,200 from a 401(k).
By maintaining enough funds in an HSA cash account to cover out-of-pocket expenses and a deductible, and investing the rest, your clients can ensure their money is working for their future and that unexpected medical bills won’t disrupt their retirement plans.
Jerilyn Klein is editorial director of Rethinking65. How are you helping clients manage healthcare expenses? Message us.