Your Health Savings Account: It’s Not Just for Hospital Bills

Established in 2004, the health savings account (HSA) has only grown in popularity with the years. Funds deposited in an HSA come from pre-tax dollars (typically through payroll deductions by an employer) and grow tax-free as long as they are in the plan. Plus, you can make tax-free withdrawals from your HSA to pay qualified medical expenses, no matter your age. To qualify for an HSA, however, you must have a high-deductible health plan; the idea is that the funds in the HSA cover what you would normally have to pay before your deductible kicks in. And, unlike a flexible spending account (FSA, sometimes known as a “cafeteria plan”), any unspent balance in your HSA rolls over from year to year, eliminating the annual “use it or lose it” limitation of FSAs.

But for thriving retirees and those approaching retirement, HSAs have uses beyond what you might normally think of for an account intended to pay medical bills. While you can no longer contribute to your HSA once you enroll in Medicare, those HSA balances can still provide some attractive advantages that you might not be aware of.

First, retirees can use existing HSA balances to pay premiums for Medicare Parts A, B, and D, and also copays for Part D. They cannot, however, be used to pay premiums for Medigap or Medicare supplement policies. Another thing to keep in mind, especially for married couples where one spouse is 65 or older and the other is not, is that Medicare premiums are not considered an eligible medical expense unless the enrollee is 65 or older. Ideally, then, the holder of the account is 65 or older, and the premiums are being paid for their Medicare coverage, rather than for a younger spouse.

Next, HSA funds can be used to pay premiums for long-term care (LTC) insurance. To be classified as a qualified expense, the LTC policy must cover only long-term care services, and benefits must be payable when the insured either suffers cognitive impairment or requires assistance with two or more activities of daily living (ADLs). It’s very important to make sure your LTC policy meets these requirements before using your HSA to pay the premiums.

Finally, there is a way to utilize balances in your HSA to pay non-medical expenses. If you have unreimbursed medical expenses, even for previous years, you may withdraw from your HSA an amount equal to those expenses, and then use the funds for whatever you wish. The two key requirements are that you must have had an open HSA account when the expenses were incurred (in other words, expenses can go all the way back to 2004, when HSAs were first created), and you should be able to show receipts for these expenses, in case the IRS decides to verify your withdrawals. One other catch is that the balance in your HSA account must never have been at or close to zero, because the IRS would then consider that a closed account and would disallow the withdrawals, even if you opened and funded a new account. For account holders 65 or older, however, things get a little easier; you can make penalty-free withdrawals for any reason from your HSA. However, withdrawals for non-medical reasons would be taxed as ordinary income, much the same as with traditional IRAs.

I work with thriving retirees and those who are preparing for retirement to design smart, individualized strategies that can help to provide for a secure, satisfying retirement lifestyle. Most critically, I am a fiduciary, which means that I am legally and ethically obligated to provide advice and recommendations that place my clients’ best interests before everything else. Click here to download my report, “The Fiduciary Standard and the Individual Investor,” to learn why it is critical to have a trusted advisor guiding your retirement strategy for 2021.

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Empyrion Wealth Management (“Empyrion”) is an investment advisor registered with the U.S. Securities and Exchange Commission under the Investment Advisers Act of 1940. Information pertaining to Empyrion’s advisory operations, services and fees is set forth in Empyrion’s current Form ADV Part 2A brochure, copies of which are available upon request at no cost or at www.adviserinfo.sec.gov. The views expressed by the author are the author’s alone and do not necessarily represent the views of Empyrion. The information contained in any third-party resource cited herein is not owned or controlled by Empyrion, and Empyrion does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Empyrion of the third party or any of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner or investment advisor.

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