Account Owners Have More Options during Pandemic

Newspaper Article about COVID-19 Layoffs

“A Health Savings Account balance won’t help you pay your mortgage or grocery bill during an economic emergency. At least not directly and without penalty. But you can use your accumulated balances to pay for qualified expenses, thus preserving scarce personal funds to purchase other items.”

William G. (Bill) Stuart

Director of Strategy and Compliance

April 16, 2020

Health Savings Accounts weren’t created with pandemics and other emergency medical situations in mind. But they’re tailor-made for a medical or financial crisis, as owners are discovering during the current novel coronavirus pandemic.

Tax Benefits of a Health Savings Account

The adjective used most to describe Health Savings Accounts is triple-tax-free. You’ve seen that phrase describe with these accounts in nearly every brochure or article that you’ve read.

Contributions are pre-tax or tax-deductible.

Balances grow tax-free.

Distribution for qualified expenses are tax-free.

And those attributes (plus some other tax benefits that I’ve discussed here and here) make Health Savings Accounts the most efficient accounts to which most of us will ever have access. All tax-advantaged accounts – like 401(k) and similar employment-based retirement savings plans, Individual Retirement Arrangements, and Section 529 education accounts – impose taxes on contributions, balance growth, or distributions. Often, they leave only one of these three pieces untaxed.

The Less Understood Benefit of a Health Savings Account

The other important benefit of a Health Savings Account is far less known. But that won’t be the case for long if my industry colleague Chris Byrd of WEX Health can raise his voice loud enough to be heard by millions.

Byrd has maintained for several years that too few people appreciate the role of Health Savings Accounts in delivering an important non-financial benefit: Peace of Mind. Today (actually, until sometime in March), too few Americans appreciate the importance of maintaining an emergency cash fund. An oft-cited poll by Bankrate shows that only 40% of Americans would finance a sudden $1,000 expense from personal savings. The others would charge it to a credit card, borrow the money from a bank or a friend, or reduce spending elsewhere – presumably because they don’t have $1,000 in cash savings. And 10% reported that they have no idea how they’d pay the bill.

Health Savings Account owners are far less likely to have this problem. If they follow Byrd’s advice and make regular contributions to their accounts, they’ll accumulate balances that they can use to fund an unexpected medical expense. They don’t have to contribute to the maximum ($3,550 on a self-only contract or $7,100 on a family contract, with an additional $1,000 catch-up contribution if they’re age 55 or older). The key isn’t the amount so much as it is consistency: automatically contributing through pre-tax payroll deductions $25 or $50 or $75 each pay period.

Those figures may sound like a lot, but the tax savings result in a reduction of pay not of $50, but rather about $35 to $38. Yet the entire $50 goes into the account and is available for tax-free withdrawals to cover current and future qualified expenses (as well as prior qualified expenses, back to the date that the account was established).

This isn’t a pipe dream. The most recent semi-annual report on Health savings Accounts by Devenir shows that account owners consistently build balances over time.  For example, the average account opened in 2010 has a balance of more than $6,100. The average account opened in 2016 has a balance approaching $3,000.

Spending Balances during a Financial Emergency

A Health Savings Account balance won’t help you pay your mortgage or grocery bill during an economic emergency. At least not directly and without penalty. But you can use your accumulated balances to pay for qualified expenses, thus preserving scarce personal funds to purchase other items.

Here are some expenses that you can reimburse tax- and penalty-free from your Health Savings Account during a financial emergency:

Medical premiums. Medical premiums are qualified expenses, but only if you’re collecting unemployment benefits or continuing coverage on your employer’s plan by exercising your COBRA rights. People in these circumstances often have lower or no incomes for a time, so a Health Savings Account represents a lifeline that doesn’t leave them debating between paying for food and housing or maintaining medical coverage.

Example: You were laid off or furloughed in late March without salary or benefit continuation. You can elect COBRA coverage, but the employer doesn’t contribute any more. You can pay your monthly premium with a tax- and penalty-free withdrawal from your Health Savings Account. If you don’t choose COBRA continuation, you can reimburse premiums for a plan that you purchase in the nongroup market, as along as you’re collecting unemployment benefits.

People over age 65 can make tax-free distributions for Part B, Part D, and Part C Medicare premiums as well. But if they plan to return to work and participate in an employer’s Health Savings Account program in the future, they must disenroll from Medicare and reimburse the government for all claims paid by Medicare.

Example: You’re a working senior. You were laid off or furloughed. Your coverage choices are to exercise your COBRA rights and pay, say, $650 per month in premium, or enroll in Medicare and pay monthly premiums of $144.60 for Part B, $30 for Part D, and $280 for a Medicare supplement plan. Of the $454.60 total monthly premium for Medicare coverage, you can reimburse $174.60 (Part B and Part D) tax- and penalty-free from your Health Savings Account.

Current qualified expenses. You can withdraw funds from your Health Savings Account to pay for qualified medical, dental, vision, and over-the-counter expenses as well. If you pay a copay or deductible for medical care, or face a copay for a monthly prescription, you can pay those expenses from your account and maintain the balance in your separate personal expenses bucket.

You may want to delay purchasing non-essential services, even if you can reimburse them tax-free, to preserve your balances for more pressing items like monthly premiums and your out-of-pocket responsibility for ongoing care, including prescription drugs, for a specific injury, illness, or condition.

Example: You had a tooth pulled earlier this year and need an implant and crown. This dental work typically isn’t time-sensitive (though be careful of neglecting it too long and having other teeth misalign to try to fill the gap). You may choose to delay these services, even if you have a large Health Savings Account balance, so that you can use that balance to continue to pay premiums and for other essential care.

Past qualified expenses. You can make tax- and penalty-free withdrawals for any qualified expenses that you incur beginning on the later of the date that you were HSA-eligible or you established your account. Usually, that date is the day that administrator credits the first deposit to your account. But if you have an expense that you incurred earlier than that, but after you enrolled in your HSA-qualified medical plan, check with your administrator to determine the date of establishment of your account. This date is governed by state trust law and federal tax law, so it may vary depending on the laws of the state that govern your account (often your administrator’s state).

Example: You spent $400 on bifocals and prescription sunglasses last year. You forgot to bring your Health Savings Account debit card with you to the optometrist’s shop and paid with personal funds. You can reimburse that expense now and spend the $400 on groceries, utilities, or your auto insurance. Be sure to place the receipt in a folder with your other 2020 tax documents, as you may need to produce it if your personal income tax return is audited.

“Stealth” qualified expenses. Many Health Savings Account owners are surprised at some of the expenses that are qualified for reimbursement. Travel to and from appointments is a qualified expense, for example. That’s right. You can deduct your mileage (17¢ in 2020, down from 20¢ in 2019) to and from an appointment, plus parking, as long as you, your spouse, or your tax dependent (but not an elderly parent, unless the parent is your tax dependent) was the patient.

Example: My wife visited me three days when I was in the hospital last December, recovering from spinal-fusion surgery. Her mileage and parking (which ranged from $24 the day of the surgery to $7 to $11 for visits on subsequent days) were qualified expenses. But her sister and husband couldn’t reimburse the same expenses when they visited me.

An uncommon and often overlooked qualified expense is work done on a primary residence to accommodate a medical condition. But the reimbursement is limited to the difference between the cost of the modification and the increased value that it adds to the home. Railings in hallways, larger entry or interior doors to accommodate a wheelchair, and a ramp into the home are examples of expenses whose net cost may be a qualified expense.

For more information on this topic, place the term IRS Publication 502 into your Web browser. You’ll pull up a comprehensive list and description of expenses that are qualified (and some common ones that aren’t).

Bottom Line

Your Health Savings Account offers more than mere tax benefits. Yes, those tax advantages increase the value of your account. But your account is also a financial lifeline. And in turbulent times like these, a Health Savings Account offers many owners peace of mind when it comes to managing their healthcare expenses.

What We’re Reading

Political debates around healthcare reform rarely focus on the interactions between doctors and patients.  Yet there are opportunities to increase the system’s efficiency and the patient (and doctor) experience, economist John Goodman argues in a Forbes magazine column earlier this week.

Only about one in 20 Health Savings Account owners invests balances in mutual funds, common stocks, or other financial instruments. That inaction may have paid off during the first quarter of 2020, but over the long term it’s not a good decision. Read more about the long-term benefit of building your account balances through investments by reading my HSA Wednesday Column published in LinkedIn here.

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