“If you don’t have a sufficient account balance to reimburse all expenses, find some funds, contribute them to your Health Savings Account (if you’re still eligible and haven’t met your contribution limit), and immediately withdraw the money. Voila – you’ve just reduced your taxable income by the amount of that contribution. You won’t receive the tax break until you file your personal income tax return, but that’s okay – not ideal, but okay. “
William G. (Bill) Stuart
Director of Strategy and Compliance
September 3, 2020
Remember when many non-retail workers were sent home to work “for a couple of weeks” in mid-March until the COVID-19 situation passed? That seems like a lifetime ago, not merely months. And no one anticipated how our professional, financial, health, and social lives would change so dramatically in the short term and, alas, the long term as well.
The pandemic has given us new appreciation for “essential” workers – folks like retail associates, letter carriers, food producers and processors, and makers of paper products. And of institutions like hospitals and emerging technologies like videoconferencing and telemedicine.
Another thing for which to be thankful is the Health Savings Account, which helps more than 20 million families manage their finances and pay their out-of-pocket health-related expenses during this turbulent time. Health Savings Accounts may never achieve the status of an essential financial account, but those who own and have funded one have gained (or should gain) increased appreciation for the account during the pandemic. Because Health Savings Accounts, as valuable as they are during ordinary times, represent a lifeline to owners who are particularly adversely affected by the economic fallout from the pandemic.
Let’s look at some ways that these account help their owners.
Peace of Mind
Most American’s don’t have $1,000 saved to deal with a sudden emergency like a broken appliance or collision deductible. Yet a healthy Health Savings Account owner who saves $150 monthly on their share of premium can place $1,800 into their account without affecting their take-home income. They merely shift that $1,800 from the insurer to their personal tax-perfect Health Savings Account.
Yes, they may have expenses that eat into that balance. But consider two things:
First, since most employees now face deductibles no matter which group plan they choose, they’d have to find that money whether or not they enrolled on an HSA-qualified plan. They can tap those same sources to increase their Health Savings Account contributions beyond the $150-per-month level to pay those expenses with pre-tax funds.
Second, the average account balance at the end of 2019 was just under $2,300. If you include only the accounts that are funded (some people who are eligible haven’t opened an account yet, and some who have exhausted their balances and can’t contribute more haven’t closed their accounts), the average jumps to nearly $3,000, according to industry source Devenir. Accounts opened as recently as 2017 have an average balance of about $2,150 after three years or less of deposits and withdrawals. In other words, account owners tend to build balances over time. In 2019, for example, contributions were $38.5 billion and withdrawals $29.1 billion – or an additional $9.4 billion spread across about 26 million accounts.
During times of economic uncertainty (or the certainty of a reduction in hours or salary, a furlough or a layoff), consumers appreciate discounts more than usual. It’s always beneficial to receive the same product at a lower price. That’s the very definition of value.
Health Savings Account owners average about a 25% discount every time they pay for a qualified item – a physician visit or prescription drug, a dental crown, contact lenses, or time-release melatonin – with funds from their account. That’s impressive. And those discounts are on top of any other savings that you negotiate (I received $500 off my dental implant because I could pay that day with funds from a tax-saving account)
And that 25% discount – some will save more, some less – is on top of any manufacturer and retailer discounts, rebates, and other promotions.
You’d have to earn $133.33 to pay for $100 worth of medical care with taxes at 25% included. But when you pay the expense with funds drawn from a Health Savings Account rather than a personal checking account, the cost is only $100. That’s something to celebrate.
People enrolled in HSA-qualified coverage have a financial incentive to shop for care based on cost and quality. The deductible – and perhaps coinsurance after the deductible – provides the encouragement. Most don’t, but those who do benefit.
Last fall, my spine specialist was thinking of my convenience when he suggested that I undergo an MRI of my lower back close to home. He asked, “What hospital is nearest to your home?” I’d done the research a decade before for my first MRI, and the difference in price between my local hospital and the free-standing imaging center located less than a mile from it was $1,950 versus $650. I could have gone anywhere for that MRI. After all, if the image center in the network, my insurer applies the price to my in-network deductible. But I retained more than $1,000 in my Health Savings Account by choosing the lower-cost site of service.
Reimbursement in Arrears
Another benefit of owning a Health Savings Accounts during a pandemic is that you can reimburse qualified expenses that you haven’t reimbursed previously. Here’s how it works: You can reimburse tax-free any qualified expense that you incur after a certain date (usually the day that your first deposit is posted to your account). And you don’t face a deadline. So, if you’re like me and have owned an account for more than a decade, you either consciously (like me) or unconsciously have deferred reimbursement and paid the bill with post-tax dollars.
Because there’s no deadline to file claims, you can reimburse those qualified expenses at any time in the future. Let’s say you’ve lost your job and you need funds now – especially since the additional $600 weekly federal unemployment benefit expired. If you have the receipts to back up your expenses, you can reimburse yourself today.
Don’t have receipts? That could be a problem, but maybe not. Log onto your insurer’s portal and get print-outs of your EOBs as far back as you can. Or check your Health Savings Account online account if the insurer sends claims there (some do). Then print out your Health Savings Account activity. If you can’t match a deductible, coinsurance, or copay expense to a withdrawal from your Health Savings Account, you’ve just found an expense that you can reimburse tax-free.
If you don’t have a sufficient account balance to reimburse all expenses, find some funds, contribute them to your Health Savings Account (if you’re still eligible and haven’t met your contribution limit), and immediately withdraw the money. Voila – you’ve just reduced your taxable income by the amount of that contribution. You won’t receive the tax break until you file your personal income tax return, but that’s okay – not ideal, but okay. If you’re affected financially by the pandemic, you’ll probably still be feeling the effects next spring when you receive a tax refund.
If you’re collecting unemployment benefits or continuing coverage by exercising your COBRA rights, you can pay your medical premiums tax-free through your Health Savings Account. For most people in this position, the tax benefits are secondary. The primary driver is simply that their Health Savings Account has a balance and their checking account doesn’t.
If their account balance is low, they can still benefit. Rather than send a $500 or $1,800 premium payment directly to the insurer, they can deposit the funds into their Health Savings Account and then pay the premium bill. They can deduct the contribution when they file their personal income tax return to remove the payment from taxable income. Someone with self-only coverage who pulls $3,550 out of taxable income in 2020 will reduce her tax bill by about $800 – either increasing her refund by $800 or leaving her with $800 less to pay the IRS.
Finally, HSA-qualified plans usually have the lowest premiums in the nongroup market (as well as in employer-sponsored coverage). If you can enroll in HSA-qualified coverage at your company’s renewal or when you enroll in nongroup coverage, you experience a two-fer. You’ll pay less in premium than for other coverage. And you’ll receive a tax benefit on top of it.
The benefits of a Health Savings Account described above are available every day. But when your income is reduced and money is tight (whether during a pandemic-related economic slowdown, as the result of a hurricane, or simply retirement), the financial benefits of this account are especially welcome.
What We’re Reading
Did you know that when you save for retirement in a traditional 401(k) (or similar) plan or an Individual Retirement Arrangement, you have a partner? It’s the federal government. And it’ll tell you when you must start withdrawing funds and how much you need to take out each year. You can cut this unwelcome partner out of a portion of your retirement savings by adopting this approach.
What trends are emerging for 2021 employee benefits? Learn more here.
Did you know that Benefit Strategies maintains a library of Health Savings Account materials? Among the items in the library are bulletins on Health Savings Account compliance around a variety of topics. See the list here and a sample that outlines the rules about rolling over money from other accounts into a Health Savings Account.