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HSAs - Beyond the Triple Tax Advantage

Beyond tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses, HSAs can do more for you and your family. Paraplanner Jason Ramage highlights some of those opportunities.

By Jason Ramage, CFP

Health savings accounts (HSAs) continue to grow into a significant piece of the savings puzzle for many Americans. Total HSA assets posted a 25% increase in 2020 while invested assets doubled. That’s from research released by Devenir in March 2021 on the year-over-year period ending December 31, 2020.

Much of the financial press rightly promotes the “triple-tax advantage” of tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. Yet a few more planning opportunities lurk beneath the surface that can be helpful to know in the right situation.

Medical Tourists and Ex-Pats

You might assume that getting a tax break on your U.S. income means qualified medical expenses must be incurred within our borders. Yet any medical care that is legal in the U.S. can be paid for (or reimbursed to you) with HSA dollars anywhere in the world. Your first thought might be medical tourism, which may also allow some travel expenses to qualify as medical expenses. Still, a well-funded HSA could prove useful to ex-patriots, frequent travelers, and cross-border families. After turning 65, those looking to maintain Medicare coverage could dedicate their HSA to that purpose in order to free up their regular cash flow for other priorities.

Family Hacks

There is an interesting disconnect between what makes a “family” for the HSA contribution limit versus who is eligible to use funds in the same account. This can be especially helpful for working couples or any situation where a HDHP (high deductible health plan) is great for some family members but not a good fit for others.

To qualify for the higher family contribution limit to an HSA, the account owner’s HDHP must cover the “eligible individual” (who would typically be the one contributing to their HSA) and at least one more person. While the HSA owner must be careful that their only health insurance is the HDHP that limitation does not apply to other family members they choose to cover.

Meanwhile, HSA funds can be spent on spouses, partners, and dependents regardless of who is covered on the HDHP. This could allow a family to save more aggressively in their HSA if there is a family with ongoing medical needs who can be covered by another traditional low deductible plan.

Pay to Stay

Since it is not true health insurance, indemnity coverage is allowed while contributing to an HSA. These plans provide a fixed cash payment for each day of a hospital admission or certain accidents or medical treatments. You might reason that meeting the maximum out-of-pocket limit on your HDHP is likely to involve a hospital stay. Thus, indemnity coverage partially covers the risk of high deductible plans.

Bear in mind it is entirely possible to swing-and-miss here with diagnostic tests, prescriptions, or other expensive outpatient care without every tasting one of those delicious hospital meals. Weigh the cost carefully and consider if your finances would be uniquely stressed by a hospital stay compared to other medical care.

Transfer Away

Since HSAs are personal and fully portable accounts, owners can transfer their assets anytime. Thus, nobody is required to stick with their employer-sponsored provider if the cost or investment options do not meet their needs. If possible, you do want to fund your HSA via payroll deduction. Employer contributions are effectively tax-free income, and payroll contributions are exempt from FICA taxes for Social Security and Medicare. If your HSA is funded from other sources, you end up paying FICA taxes on those contributions.

Retiree Money Moves

While these benefits are probably better known among advisors, two excellent ways to take advantage of HSAs after turning 65 are insurance premiums for Medicare (excluding Medicare Supplement) and long-term care (within limits set in the instructions for Schedule A).

Another move that could prove particularly valuable in a down market is the once-per-lifetime IRA-to-HSA funding distribution. This is more interesting in low-income years when tax deductions are less valuable. If the market is low to boot, a couple at age 55 or higher could move $16,400 from their IRAs to their HSAs in separate tax years. It’s limited, but unlike Roth conversions it is a tax-free transaction and might move the needle to make long-term care insurance more affordable on an after-tax basis.

Passing On

One of the worst elements about HSAs is inheritance planning. Only spouses can receive assets tax-free to their own HSA, so it pays to check beneficiaries to ensure the easiest possible transfer. All other beneficiaries will receive a taxable distribution. Those with substantial savings in their HSA should consider naming people in low tax brackets, using a trust, or name a charity as beneficiary — perhaps a non-profit hospital or medical organization.

HSAs are far from perfect, and I certainly would like to see expanded eligibility and simplified rules. In the meantime, perhaps some of these ideas help you make the most of what you have today.

About the author: Jason Ramage, CFP®, ECA

Jason Ramage is a paraplanner for TouchPoint Wealth Partners in Cincinnati, Ohio, a member firm of Valmark Financial Group. To him, financial planning is about helping people be financially successful while living the life they are made for. He enjoys the adventure of raising a family, random walks around neighborhoods, board games, cycling, camping, and Japanese convenience stores.

Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor

Securities offered through Valmark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 1-800-765-5201. TouchPoint® Wealth Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

This article is for informational purposes only and does not constitute tax advice. Please consult with your tax advisor and/or IRS regulations concerning your personal situation.

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