Written by Andrew Roth, Financial Advisor
While our company does not manage Health Savings Accounts (HSAs), we do get questions about how they can fit into a financial plan and specifically, how they can be part of a healthcare strategy for those who retire with a Health Savings Account.
As a brief primer, HSAs act as tax-advantaged savings vehicles for individuals covered under high-deductible health plans (HDHPs) allowing them to save money for qualified medical expenses. Instead of having a health insurance policy with a low deductible and a high premium payment, you get a policy with a high deductible and a low premium, allowing the money saved by that lower premium to be put into the HSA to cover future deductibles and other qualified expenses.
In the last decade, several institutions have made it easier to invest inside of HSA accounts, transforming them from a pure “savings” vehicle into more of an investment and accumulation tool intended to cover anticipated future medical expenses. For reference, HSA contribution limits in the year 2021 are $3,600 for individuals and $7,200 for family accounts with “catch up” contributions available to those over 55.
There is a common misconception that once you turn 65, you can no longer contribute to an HSA. This is not entirely true. HSA qualification focuses on Medicare enrollment—if you are enrolled in any part of Medicare, you can no longer make HSA contributions (existing HSA balances are unaffected). If you turn 65 and are still covered by an employer insurance plan that has 20 or more participants, you may stay on that employer plan (delaying Medicare). And if that plan is a high deductible plan with an associated HSA, you can continue making HSA contributions. If your goal is to continue making your HSA contributions in this scenario, it is important to also avoid enrolling in Medicare Part A (which is free), because any Medicare enrollment will disqualify you from contributing to your HSA.
Another wrinkle in the equation is Social Security enrollment. If you are 65 or older and you elect Social Security benefits, you are required to enroll in Medicare Part A and/or Part B. In the scenario of applying for Social Security at age 65, Medicare Part A enrollment is applied six months retroactive, meaning that any HSA contributions made during this period need to be backed-out or account holders are penalized. Individuals 70 and older cannot contribute to HSAs.
What should we make of all of this? It is important to think ahead about your retirement strategy as it relates to healthcare. HSAs can be powerful tools to accumulate funds intended for medical expenses. High-deductible health plans however, usually work best for people who are healthy and also plan on staying that way. Once people start needing more involved procedures or expensive drugs and therapies, Medicare may be the better route. It’s also important to be aware of how Medicare enrollment and HSA contributions affect each other so there are no unpleasant surprises. Finally, there are circumstances where one spouse is enrolled in an employer plan with an HSA, while the other spouse elects Social Security and Medicare. Because HSAs are individual accounts, these spousal scenarios can have various outcomes on eligibility.
Healthcare is a major consideration in financial planning and we’re happy to provide our advice and expertise when it’s time to help.