There’s at least one thing that Republicans in the House of Representatives and Senate can agree on when it comes to replacing Obamacare: Health savings accounts.
HSAs, introduced in 2003 during President George W. Bush’s administration, offer you triple tax advantages: First, contributions are tax-deductible. Second, those contributions can be invested and grow tax-free. Third, withdrawals aren’t taxed as long as you use them for qualified medical expenses, such as doctor’s visits, prescription drugs and dental care.
“HSAs offer tax breaks no other retirement vehicle can match,” said Begonya Klumb, CEO of UMB Bank Healthcare Services.
Provisions of the American Health Care Act, which passed the House by a narrow 217-213 vote May 4, will nearly double the contribution limits for health savings accounts and give people more flexibility in how they can spend money in these tax-advantaged accounts.
“If enacted, it would be a win-win for employees and employers because it makes it easier for people to use their accounts and for employers to administer them,” said Steve Wojcik, vice president of public policy at the National Business Group on Health, which advocates for large employers. “It also would greatly increase the ability for both employers and employees to contribute funds to employees’ HSAs.”
“What is happening on Main Street, not Washington, is what is really driving the growth of HSAs.”
When lawmakers revamped the American Health Care Act to win enough Republican votes to pass the House, the provisions dealing with the expansion of HSAs were left largely untouched.
Though top senators have said they want to write their own health-care bill, key lawmakers in the debate are supportive of boosting the benefits of HSAs. For example, Senate Finance Committee Chairman Orrin Hatch, R-Utah, sponsored legislation earlier this year that would increase HSA contribution limits the same way as the American Health Care Act.
Boosting benefits for HSAs is not a cheap proposition. Congress’ Joint Committee on Taxation estimates provisions in the American Health Care Act that expand HSAs will cost $19 billion through 2026. But whatever happens in Washington, D.C., HSAs will become a bigger part of how many people pay for and save for health care.
“What is happening on Main Street, not Washington, is what is really driving the growth of HSAs,” said Chris Byrd, executive vice president at WEX Health, a payments technology company that administers benefits for more than 225,000 employers.
HSAs continue to grow
HSAs have grown to an estimated $37 billion in assets and 20 million accounts at the end of last year and reached $41 billion in assets during January, according to Devenir, an HSA consulting firm in Minneapolis.
Given the momentum, Devenir forecasts assets in the accounts could reach more than $53 billion by 2018, a 20 percent increase from this year. (See chart below.)
A drawback of HSAs is that they must be paired with a high-deductible health plan. Such a plan means you’ll have to pay a deductible of at least $1,300 for individual coverage and $2,600 for families. The maximum annual out-of-pocket costs for these plans are $6,550 for individuals and $13,100 for families.
In 2017, you (and your employer) can contribute up to $3,400 to an HSA for individuals and $6,750 for families. Account holders age 55 and older can contribute an extra $1,000.
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The American Health Care Act will increase the annual limit on HSA contributions to match the annual deductible and out-of-pocket expenses under a high-deductible health plan. That means the HSA contribution limit could be at least $6,550 for individuals and $13,100 for families beginning next year.
The House bill also makes HSA rules more flexible by:
- Allowing both spouses to make catch-up contributions to one HSA beginning in 2018.
- Permitting qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA as long as the account is established within 60 days.
- Letting people use their HSAs to pay for over-the-counter medications, which was restricted under the Affordable Care Act.
- Lowering the tax penalty if you use an HSA to pay for unqualified medical expenses to 10 percent, from 20 percent. (If you’re 65 or older, you can withdraw from an HSA penalty-free, but you do not get a tax break if you use the money for something other than health care.)
Roughly three-quarters of people who have HSAs withdraw less than they contribute. People who invest their HSA money in stocks and bonds have an average balance of $14,000 compared with $2,500 for those who keep it 100 percent in cash, according to recent research from Fidelity Investments based on data from the accounts it administers.
“HSAs are a fantastic vehicle for long-term savings,” said Kevin Robertson, senior vice president at HSA Bank. You may need the extra money to pay for health care in retirement. Fidelity estimates a 65-year-old couple retiring in 2016 will need $260,000 to cover health-care costs.
How to pick an HSA
You don’t have to wait on Congress or President Donald Trump to open an HSA.
Unlike flexible spending accounts, you don’t have to “use it or lose it” with an HSA each year. In fact, more than three-quarters of HSA account holders withdraw less than they contribute, and roughly a quarter of people don’t touch any money from their accounts, according to Fidelity.
Your employer may direct you to sign up with its preferred HSA provider, but if you are enrolled in a qualified high-deductible health plan, you can choose whatever provider you want. However, if employers only offer matching HSA contributions to their preferred provider, it makes sense to stick with them.
Devenir estimates that about 10 percent of the roughly 20 million HSA account holders have a balance of $5,000 or more and 4 percent of people are using their HSAs as investment plans. Many HSA providers require that you have at least $1,000 in your account before you can invest.
How should people invest their HSA money? Generally, you should have enough cash in your HSA to cover expected medical expenses and invest the rest. Here are some portfolio guidelines Fidelity uses based on age:
HSAs can travel with you if you change jobs or insurers. Use HSASearch, which is run by Devenir, to comparison shop for more than 320 providers. Just like with any retirement account, fees and investment options matter.