by Adam Smit

ABCs of HSAs According to the Bureau of Labor Statistics 1, the average American household spent $5,193 on health care in 2019. A trend within health care, and in an effort to control costs, is higher deductible health insurance plans. In fact, for employer sponsored health insurance policies, deductibles have increased by 111% since 20102. This is where the insured is responsible for a larger portion of the first amount of health care costs incurred. While the intention of this arrangement is to control the health insurance policy premiums, this leaves the insured exposed to a larger financial liability for initial health care costs. One solution to help cover these costs is the advent of Health Savings Accounts (HSAs). This article will explore key provisions and benefits of HSAs.

HSAs are accounts individually owned and are funded with the intention of using account balances to pay for out of pocket health care costs. Not everyone is eligible to fund an HSA.

In order to qualify to fund an HSA, you must be covered by a qualifying High Deductible Health Plan as defined in US Tax code 223. Before funding an HSA, it is wise to review if your health insurance plan meets this criteria and/or ask the health insurance provider if your plan is “HSA Eligible”.

A key benefit of HSAs are their tax-advantages. HSA contributions allow for an “abovethe- line” deduction meaning the contributions are tax deductible regardless of if that individual takes an itemized or a standard deduction. Additionally, earnings on the HSA balance are tax deferred. Lastly, withdrawals from HSA account balances are not taxed as long as the withdrawal is used to cover eligible medical expenses. In general, eligible medical expenses include those expenses incurred by the HSA owner or dependent which are not reimbursed by the health insurance policy. Eligible medical expenses may also include certain health insurance premiums and Medicare Advantage premiums. Distributions taken for non-eligible medical expenses are subject to taxation as well as a 20% penalty.

Unused balances in an HSA can be used in future years. Once the HSA owner turns age 65, withdrawals may be taken from the HSA balance for any reason without penalty (however distribution would be subject to taxation if the withdrawal was taken for a non-qualified medical expense). The deadline to fund HSA contributions is your tax filing deadline, generally April 15th for the previous plan year. HSA balances can be invested in various investment vehicles such as stocks, bonds, mutual funds, and commonly savings or short-term interest bearing accounts.

For tax year 2021, contributions are limited to $3,600 for self-only coverage plans and $7,200 for those covered by family plans. Additional catch-up contributions of $1,000 are also allowed for those age 55 or older.

HSAs are a tax efficient way to help cover out-of-pocket medical expenses. Health care costs are inevitable and recognizing and planning for these costs are an important part of the risk management portion of a financial plan.

Adam Smit is CERTIFIED FINANCIAL PLANNER™ with Adam Smit Investment Management LLC and a registered principal ofLPL Financial. This article is for general information only and not intended to provide specific advice or recommendations for any individual. Adam Smit Investment management LLC and LPL Financial do not provide tax or legal advice. Securities offered through LPL Financial. Member FINRA/SIPC.

1 -www.bls.govlnews.releaselcesan.nrO.htm 2 – www.kff.org/health-costs