 Personal Finance PowerPoint Presentation Health Savings Account HSA Prepare to get financially fit by practicing personal finance Insurance is part of our long-term risk mitigation strategy where we follow the adage of measure twice, cut once, put in a formal process in place, looking something like setting the goals, develop a plan to reach the goals, put the plan in action, review the results and repeat the process periodically. Most of this information can be found at Investopedia Health Savings Account HSA which you can find online. Take a look at the references, resources, continue your research from there. This is by Julia Kagan, updated October 30, 2021. In prior presentations, we've been talking about insurance. We then moved on to the medical insurance and the HSA is going to be in alignment or in conjunction with some of those discussions. So what is a health savings account? An HSA. A health savings account, HSA is a tax-advantaged account created for or by individuals covered under high deductible health plans. Those are the HDHPs to save for qualified medical expenses. So this can get a little bit confusing. Let me see if I can recap this. This is by interpretation of it noting that with the high deductible plans, those are usually going to be the cheaper plans because and people that are going to be purchasing them are looking for plans that they can afford one and or two. They're looking for plans to kind of safeguard against that big event that might happen, meaning when you look at the classical kind of insurance such as liability insurance, life insurance, or property insurance, you're usually trying to safeguard against some event in the future that might happen, hopefully doesn't happen, might have a low probability of happening, but if did, would be financially devastating such as dying prematurely, your house burning down, or someone suing you for millions of dollars. So if you're trying to safeguard against that, you might try to get a plan that's going to kick in once you pay a higher basically deductible and try to basically self-insure against an event like that. Similar kind of thing happens with the health insurance where you might be trying to safeguard against a disease that would be financially devastating if you were to get it, hoping that hopefully you don't get a disease like that, which would be financially devastating or some kind of problems such as that, but medical insurance also kind of expands and you can see how legislation kind of pressures it to expand to cover more of the routine maintenance kind of stuff, whether that be preventative or other kind of maintenance kind of stuff. So the high deductible plans then have that higher deductible or typically cheaper. So if you get a high deductible plan, then the government, you could see why they would want to incentivize people to still do some of the routine maintenance kind of stuff, the preventative kind of stuff. And therefore you got this pressure to give tax incentives for things like a health savings account. So therefore if you get like the cheaper plan, which is the high deductible plan, you might be able to get some tax benefit possibly if you're able to line up say a health savings account to get some benefit there. That's the general recap. Let's get into the details. Contributions are made into the account by the individual or their employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses such as medical, dental and vision care, as well as prescription drugs. How an HSA works and how do we put this whole thing together? It can be a little bit confusing. As mentioned above, people with HDHPs, those high deductible plans, can open HSAs, the health savings accounts. Individuals with HDHPs, the high deductible plans, may qualify for HSAs and the two are usually paired together. So to qualify for an HSA, the taxpayer must meet eligibility standards set out by the Internal Revenue Service, the IRS. So obviously part of the HSA is tied to kind of taxes because the whole point of it is you're going to try to put money into the HSA, which is like a savings account and you might say, why in the world when I put money into a savings account where they're going to restrict me, it's kind of similar to put money in say an IRA or retirement account. You're not actually putting money into a retirement account or a 401K account or something like that because that's the way you save for retirement really because you could put money in any kind of investment to save for retirement. In other words, the things that the retirement accounts invests in, stocks and bonds are not any different and they're getting restricted if you put money into the retirement account, you do it because you get a tax benefit. So the whole point here, we might get a tax benefit in order to put our money into this restricted account that we then have to use under certain conditions. We can't just use it for anything, that's the same kind of principle here. So an eligible individual is someone who has a qualified HDHP, that's the high deductible insurance kind of account insurance plan, has no other health coverage, is not enrolled in Medicare and is not so obviously if they were enrolled in Medicare, in Medicare then they might not have that same kind of high deductible account because they might be in the Medicare for their kind of insurance coverage, is not claimed as a dependent on someone else's tax return. So if they're claimed as a dependent on someone else's tax return, that's going to have an impact on your tax filing because clearly if there's a tax advantage of this, then you're going to be claiming that through the filing of your tax return which you would expect would be, you would be claiming yourself on the tax return. So the maximum contribution for an HSA in 2022 is $3,650 for an individual, $3,600 for 2021 and $7,300 for a family, $7,200 in 2021. The annual limit on contributions applied to the total of the amount contributed by both the employer and employee. Individuals 55 or older by the end of the tax year can make catch up contributions of an additional $1,000 to their HSA health savings accounts. An HSA can also be opened at certain financial institutions. Contributions can only be made in cash while employer sponsored plans can be funded by the employee and their employer. So you might be looking at the HSA as you set it up through your employer or possibly you're setting it up outside of an employee type of situation. If you're setting it up from the employer, then the employer might then say that they're going to set it up and have the withholding which would come out when you have your W-2 or when you have your paycheck stub. It would come out of the withholdings in a similar fashion as you would see the withholdings for like your taxes or possibly the employer can say it's going to be a contributions that they're making on their side. Okay, but it doesn't have to be through the so if you don't have it through the employer then then possibly you can set up an HSA on your own. So any other person such as a family member can also contribute to the HSA of an eligible individual. Self-employed or unemployed individuals may also contribute to an HSA provided they meet the eligibility requirements. Individuals who enroll in Medicare can no longer contribute to an HSA as of the first month of enrollment. Usually if you're going into Medicare that's kind of a form of health insurance so you wouldn't be in the same kind of high deductible plan. Generally would be the general idea and therefore you wouldn't have the same eligibility because being a part of the high deductible kind of plan is one of the requirements. So but they can receive tax-free distributions for qualified medical expenses which are discussed below. For financial considerations HDHPs those are the high deductible plans have higher annual deductibles. The plan pays nothing until you reach these amounts in out-of-pocket expenses but lower premiums than other health plans. So in other words they're usually the cheaper plans as we've discussed. So that means that the people that are buying them are probably the ones either buying them because those are the ones they can afford and or because they're happy with the higher deductible that they're going to have to pay possibly because they're going to be self-insuring and or they're trying to save and they're healthy maybe and they're trying to safeguard against the big the big problem. They're looking at it as more classical kind of insurance to safeguard in the event that they have a big health issue that would come up. But again you can see from a legislative standpoint when people are trying to pressure people to have more more checkups and stuff like that that's when they kind of say well we're going to couple that they're going to try to couple that and give specific advantages to people that might have the high deductible plan and so on. So the financial benefits of an HD HP of the high deductible plan low premium and high deductible structure depends on your personal situation. The minimum deductible required in order to open an HSA health savings account is $1,400 for an individual or $2,800 for a family for 2022 tax year. The plan must also have an annual out of pocket maximum of $7,050 for self coverage and $14,100 for families for the 2022 tax year. These maximums cap your out of pocket expenses. When an individual pays qualified medical expenses equal to a plan's deductible amount, additional qualified expenses are divided between the individual and the plan. For instance the insurer covers a percentage of the qualified expenses as per the contract usually 80% to 90% while the plan holder pays the remaining 10 to 20 or a specified copay. So in other words when you're trying to think about your health insurance plan you've got these terms some of which are similar to the terms we saw for other kinds of insurance such as a deductible which usually for classical insurance like property insurance you would expect that if the home burnt down or something you might have a deductible that you'd have to pay out of pocket and then the insurance kicks in and kicks in above that amount up to hopefully the value of the home or something like that. When you're talking about the medical insurance it gets a little bit more confusing because you've got the deductible that you've got a clear before they'll pay for certain type of things the non preventive stuff generally. And then you still might have to copay over and above that amount and at that point and usually there's going to be an out of pocket maximum where the insurance company kicks in after that point in time which is kind of like the similar to the deductible or traditional deductible for like property insurance where you would hope that the insurance company starts to pay for the full amount if the medical expenses clear that threshold. So you can see that with a high deductible plan there's going to be more that possibly could be paid say out of pocket. So those out of pocket costs that you're going to have those are the things that you basically be paying with the HSA and if you paid those with the HSA you might be getting tax benefits from it. So using this guide an individual with an annual deductible of $1,500 and a medical claim of $3,500 pays the first $1,500 to cover the annual deductible. The insured pays 10% to 20% of the remaining $2,000 while the insurance company covers the rest. So we go into this in a bit more detail in some of the prior presentations but the general idea obviously if you have a higher deductible it's likely that you're going to be paying more out of pocket unless it's going to be covered by the insurance company. And then of course it's going to be capped by the deductible and you're going to have these percentages that you might pay and then it might be capped at the out of pocket maximums up top that we looked at. So once the annual deductible is met in a given plan year any additional medical expenses are typically covered by the plan with the exception of any uncovered costs under the contract such as copays and insured can withdraw money accumulated in an HSA to cover these out of pocket expenses. So advantages and disadvantages of an HSA health savings account health spending accounts have a number of advantages as well as drawbacks. The effect of these accounts depends entirely on your personal and financial situation. What are the advantages then employer contributions and an individual's contributions by payroll deduction to an HSA are excluded from the employees taxable income. That's the point. We're trying to get a tax benefit income is bad for taxes. So if we cannot have it included in income then that would be good typically and individuals did direct contributions to an HSA or 100% deductible from the employees income. So if you do it yourself. So if you go through an employer and you pay for it for example they're going to take it out of your it'll be shown on your W2 and it won't be included in like box one of the W2. So you would have got to benefit from it without it being taxable that way. If you pay for it then it's not going to then you're going to have to report it on the tax return like as a deductible amount above the line deduction. I believe schedule one deduction in other words earnings in the account also are tax free. However excess contributions made to an HSA incur a 6% tax 6% tax and are not deductible distributions from an HSA are tax free provided the funds are used for qualified medical expenses as outlined by the IRS. So it's all great that you get this tax benefit put it into the HSA. But now it's under the umbrella of an HSA kind of like under the umbrella similarly of an IRA or a 401k plan. You have to use it for specific things in order to in order to use it properly. So distributions used for medical expenses that are covered under the HD HP the high deductible plan are included in determining if the HD HP deductible has been met. So you can also use the money in your HSA to invest in stocks and other securities potentially allowing for higher returns over time. So it's kind of like it's that similar to when you're talking about the the retirement plans the earnings on it. It would be nice if you've got the money sitting in there if you can put it in like stocks and bonds and have some earnings on it which would be which would be good if the money is in there. So disadvantages the most obvious key drawback is that you need to be a good candidate for the HD HP. In other words you have to have the high deductible kind of plan in order to do that. And you got to think about whether or not that insurance plan would be right for you. So you must have a high deductible plan and low insurance premiums or your influence enough to afford the high deductibles and can benefit from the tax advantage. Individuals who fund their own HSAs whether through payroll deductions or directly should be financially capable to set aside an amount that would cover a substantial portion of their HD HP deductible. In other words you're going to kind of co-insure in essence to a degree to make sure that you can clear the higher deductible in the event that you need to. So individuals without enough spare cash to set aside in an HSA may find a high deductible amount burdensome. HSAs also come with filing requirements regarding contributions specific rules on withdrawals distribution reporting and record keeping burden that may be difficult to maintain. So obviously we're now doing paperwork stuff that we're putting money into investments that are now under this umbrella of an HSA. And they have certain requirements on when you can put the money in what you can use the money for how you take the money out and so on and so forth. You got to make sure that you're in alignment with those rules in order to just do the bureaucratic paperwork of it properly. So withdrawing permitted under an HSA. So how can I take the money out amounts withdrawing from an HSA aren't taxed as long as they are used to pay for services that the IRS treats as qualified medical expenses. Here are some basics you need to know. So obviously we want to take the money out at some point in ways that aren't going to penalize us. And that's for qualified medical expenses. That's why they let us put it in there for the tax free dollars. Qualified medical expenses include deductive include deductibles dental services vision care prescription drugs copays psychiatric treatment and other qualified medical expenses not covered by a health insurance plan. Note these are expanded by the CARES Act. So the insurance premiums don't count as a qualified medical expense. Unless the premiums are for Medicare or other health care coverage provided you are are 65 years of age or older for health insurance when receiving health care contribution coverage. Cobra for coverage when receiving unemployment compensation or for long term care insurance subject to annually adjusted limits. Premiums for Medicare supplemental or Medigap policies are not treated as qualified medical expenses. If distributions are made from an HSA to pay for anything other than a qualified medical expense such as expense that amount to subject to both income tax and additional 20 percent penalty. So you might say OK what if I take the money out and I buy a car with it or so that by my new sports car or something like that. Well then it's kind of similar to your IRA. You got to pay then you might pay the taxes on it because you took it out early and you didn't use it for what you're supposed to be using it for. And you're going to you could have a significant penalty on it as well. However once an individual turned 65 the 20 percent tax penalty is eliminated and only income tax would apply for non qualified withholdings. So in that case you might be able to take it out. But you'd be subject to tax which would still be kind of good because that would be against kind of similar to the IRA where you got a benefit when you put the money in. When you take the money out your tax on it but you got that tax deferral in that instance. HSA contribution rules contributions made to an HSA do not have to be used for withdrawn during the tax year. They are vested and any unused contributions can be rolled over to the following year which is nice. So you don't have to be like exact on the whole thing. Also an HSA is portable meaning that if employees change jobs they can still keep their HSA which is nice. An HSA plan can also be transferred to a surviving spouse tax free upon the death of the account holder which is nice. However if the designated beneficiary is not the account holder spouse the account no longer is treated as an HSA and the beneficiary is taxed on the accounts fair market value adjusted for any qualified medical expenses for the dissentance paid from the account within a year of the date of death. HSA versus the flexible spending accounts we talked about the flexible spending account which sounds similar but not quite the same thing as the HSA. The HSA is often compared with the flexible spending account the FSA while both accounts can be used for medical expenses the key differences exist between them. So the FSA are employer sponsored plans so typically if you're talking FSA then you generally have to get that through the employer as opposed to the HSA where you might have through an employer but you might have without one as well you might do it your own. Only employed individuals can sign up for an FSA an FSA unused funds in an FSA during a given year year can't be rolled over in our forfeited once the year ends. That's a huge restriction that makes you makes makes it so you have to manage it quite well. Your elected contribution amount for an FSA is fixed unlike the HSA contribution the maximum contribution for an FSA for the two thousand twenty two tax years two thousand eight hundred and fifty dollars. What's the bottom line all in all HSAs are one of the best tax advantaged savings and investment tools available under the United States U.S. tax code. That's a bold claim there. They are often referred to as triple tax advantage because contributions are not subject to tax. The money can be invested and grow tax free and withdrawals are not taxed as long as as you use them for qualified medical expenses. That is a pretty big advantage even even bigger than you know what you typically get like in an IRA because again in an IRA or a retirement plan like a 401k you usually put the money in and then you when you take it out you have to be taxed on it so you deferred the tax here. If you could put the money in not have it be taxed have it grow so that it that means the income and gains and so forth are not taxed. And then when you take it out it's still not taxed at the whole time that's that is pretty pretty nice although there's some severe restrictions in terms of what you could use the money for. So as a person ages medical expenses tend to increase particularly when reaching retirement age and beyond starting an HSA at an early age. If you qualify and allowing it to accumulate over a long period of time can contribute greatly to securing your your financial future.