Health Savings Accounts:

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Andrew Zumwalt, CFP^Ⓡ

Associate Teaching Professor�PFP Program Chair

Disclaimer

• You are not my client.
• This is not an engagement.
• Do your homework before you do anything!

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How do we save for retirement?

• Individual Retirement Accounts
• Employer sponsored plans
• 401k
• 403b
• 457
• Taxable accounts
• Other***

HSAs were included in the Medicare, Prescription Drug, Improvement, and Modernization Act. What year was that?

• 1998
• 2001
• 2003
• 2007
• 2012

HSAs were included in the Medicare, Prescription Drug, Improvement, and Modernization Act. What year was that?

• 1998
• 2001
• 2003
• 2007
• 2012

Hint:

In da Club by 50 cent and Ignition by R. Kelly were the #1 and #2 songs of the year.

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HSAs were included in the Medicare, Prescription Drug, Improvement, and Modernization Act. What year was that?

• 1998
• 2001
• 2003
• 2007
• 2012

Hint:

In da Club by 50 cent and Ignition by R. Kelly were the #1 and #2 songs of the year.

Forever and For Always by Shania Twain was #57.

HSAs were passed in the Medicare, Prescription Drug, Improvement, and Modernization Act. What year was that?

• 1998
• 2001
• 2003
• 2007
• 2012

Based on a recent research report, how many HSAs are open?

• 5 million
• 10 million
• 16 million
• 22 million
• 37 million

Based on a recent research report, how many HSAs are open?

• 5 million
• 10 million
• 16 million
• 22 million
• 37 million

What is the total $$$ value of the 32 million accounts?

• $73.5 billion
• $86.7 billion
• $97.0 billion
• $123.0 billion
• $300.1 billion

What is the total $$$ value of the 32 million accounts?

• $73.5 billion
• $86.7 billion
• $97.0 billion
• $123.0 billion
• $300.1 billion

What are Health Savings Accounts in 30 seconds?

• Savings vehicle
• Similar to Medical Flexible Spending Account
• Account owner controls funds
• Not use it or lose it
• Pre-tax money contributed
• Money grows tax free
• Qualified withdrawals also tax free

Requirements to open/contribute to an HSA

• Covered by a High Deductible Health Plan (HDHP)
• No other health coverage (excluding vision, dental, cancer policies, etc)
• Not enrolled in Medicare
• Can’t be claimed as a dependent

High Deductible Health Plan (2024)

Applicable limits

Contributions

How are contributions made to my HSA?

• Payroll deduction (EE & ER)
• Account owner writes a check
• Random person writes a check
• Aunt Sally learns that you have an HSA and contributes $1,000 since you’re the favorite niece/nephew.

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Contribution limitations

Contribution through payroll

• No federal tax, MO state tax, or FICA taxes owed (EE & ER)
• Boxes 1, 3, and 5 on W2 will be reduced
• Code W on box 12
• Includes EE and ER contributions

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Contribution by check by you or stranger

• Adjustment on 1040 Schedule 1
• Reduces AGI, but not earned income
• Still pay FICA taxes (7.65%*)
• Deadline of April 15th of following tax year

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Investing your HSA

Investing an HSA

• Account balances
• belong to the owner
• rollover between years
• can be invested!
• can be transferred!
• Eligible investments?
• Stocks, bonds, mutual funds, savings accounts, cds, self-directed HSAs, etc.
• Limited by HSA trustee

HSA Providers

• Old model:
• Trustees often partner with financial institutions
• Limit the amount to be invested (leave $2,000 in HSA cash)
• Limit the types of investments
• Newcomers:
• No discernible separation between trustee and financial institution
• No limits
• Invest via brokerage, near limitless

Investing

• HSA grows tax free...for life?
• Not required to spend out of the account...

Example

• John is 24, married, contributes $7,200 to his HSA each year
• Switches to a higher premium plan at 35
• Doesn’t touch the HSA for 30 years
• Retires at 65
• Assuming 6% return, account value is ~$545,000

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Withdrawals

Withdrawals

• Tax free if spent on qualified medical expenses
• Expenses must be incurred after the HSA is opened
• No time limit on reimbursement

Example

• John is 65; he would like a boat
• Over the past 30 years, he paid over $100,000 out of pocket for medical expenses and kept all of the receipts and tax returns
• He submits a request for $100,000 from his HSA
• $100,000 withdrawn from the account tax free

Qualified Withdrawals

Publication 502 expenses:

• hospital expenses
• doctor’s visits
• legal drugs (prescription and nonprescription)
• menstrual products
• tampons, cups, sponges, etc
• bandages
• etc...

Qualified Withdrawals

• Premiums
• Long term care (subject to limits)
• COBRA
• Health insurance while on unemployment
• Medicare & Medicare Advantage

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Nonqualified withdrawals

• Nonmedical (new car)
• Premiums (not on prior list)
• Medicare supplement
• Illegal drugs

Nonqualified withdrawals

• Taxable at ordinary rates and 20% additional tax penalty!
• Exception: Disabled, over age 65, or dead
• still taxable
• no penalty

Estate Planning

• At owner’s death,
• if spouse is beneficiary
• then spouse becomes owner.
• If beneficiary is non-spouse
• HSA stops being HSA
• fair market value is entirely taxable (ordinary income) in the year of owner’s death (no stretch)
• Spend it all before death

Questions?

Strategy

HSA Strategy

• Fund the HSA early
• Quadruple tax advantage
• No federal or state (MO)
• No FICA
• No tax on growth
• No tax on qualified withdrawal
• Keep receipts
• Use the HSA in retirement

Can I have FSA and HSA?

Yes, but...

• Limited-purpose health FSA: dental and vision expenses
• Post-deductible FSA: can only be used once deductible is satisfied

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Not many takers...

How can a family save $25,900 in an HSA?

• Contribution limit is per tax return
• Anyone covered by a family HDHP can contribute the family amount...
• Chris and Pat are married with two kids, Joe and Sally

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How can a family save $25,900 in an HSA?

• Chris (over 55) and Pat are married with two kids, age 22 and 24.
• Chris and Pat file a tax return; each kid files their own return (3 tax returns)
• Everyone is on Pat’s HDHP
• $8,300 in 3 HSA accounts; married account gets an additional $1,000.

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Questions!

Zumwalta@missouri.edu