We discussed quite a few considerations on Tuesday that can help you during your workplace's Annual Enrollment window, information you can leverage as you elect and make your benefits decisions for 2024. I put in a few extra nuggets for you if you're reading this too that we didn't cover Tuesday. Also, read the postscripts at the bottom for me if nothing else? Thank you, Club Friends!
First, during Tuesday's session, we made an observation: Money may not grow on trees, but it can surely grow in HSAs. As such, Health Savings Accounts (HSAs) took center stage on Tuesday at The Money Matters Club.
After we broke down all the acronyms: HSAs, HDHPs, FSAs, LUFSAs, and DCAP, we outlined all the rules and ways to leverage Health Savings Accounts.
We defined HSAs, HDHPs, FSAs, LUFSAs, and DCAP...
HSAs are Health Savings Accounts. The operative word with these accounts is "Savings." You own the money you add to these for your life. You can transfer it to your beneficiary(ies) too (anyone you love and want to take care of after you pass). If I had titled these accounts, I might have called them Health Investment Accounts. Because they're not only an investment for your health care costs, your family's too, but you can invest them in investment funds that compound over time and build you even more wealth. They're the most powerful of all the acronyms on the page, in my opinion. In years you're only using preventative health care (typically free on HDHP plans), you can save up the money you put away in your HSA. In the years you need to spend on health care services, you can either use your HSA or if you have them available, you can use other funds (such as from your checking or on a mileage-earning credit card you pay right off on the next statement) and that way you let your HSA keep on growing and compounding.
Who gets to have an HSA? Anyone in the U.S. who is enrolled in a high-deductible health plan can start an HSA (so the HDHP acronym is the name of a type of health plan where the enrolled insured is paying the full price of the plan's deductible (and typically a very low-to-no per paycheck premium) before co-insurance kicks in up to the out of pocket total max cost of the health plan), and is not covered by another health plan, and is not eligible to be claimed as a dependent on another person’s tax return, and is not entitled to Medicare benefits. We didn't get many questions, and none about how HDHPs work, so if you have any, type them in the comments please.
Sidebar on HDHPs...
Typically, employers may offer a choice of a couple or few plans, including an HDHP. Really compare the costs and coverage. Ask your employer if coverage even varies at all across the plans, or is it just a matter of differences in when and how you pay for your share of the costs beyond what your employer is subsidizing for you? At my old employer, the HDHP was the same coverage as the HMO as the Co-Pay Premium Plan. The difference was only that for the HMO and Co-Pay plans, you had to pay a premium from every paycheck all year long plus additional point of service fees as applicable, like co-pays. It adds up. (Of course, providers/doctors would vary too, but not what is covered). Whereas, with the HDHP you pay 100% of the cost up front to the capped maximum and nothing else, no paycheck premiums or co-pays. Which can turn out much more affordable if not empowering and lucrative for you paired with an HSA. This was just one employer's design; read your elections carefully to compare plans and vote with your wallet!
Some more HSA facts:
HSAs are powerful in making your hard-earned dollars go farther for all medical expenses and are even better than a 401(k) in this blogger's opinion.
You never lose the money you’ve stockpiled in an HSA if you don’t use it in any given year.
HSAs foster healthy savings behaviors and healthy consumerism behavior into the national health care system.
The income you put into an HSA is not subject to income tax* so your gross annual income the government is going to view as taxable will be reduced by the amount you contribute.
The growth you enjoy in an HSA if invested will never be taxed* when you invest, grow, and compound your balance then spend it on qualified expenses, it will be tax-free if spent on qualified medical care.
The money is spendable on anything after age 65 (will be taxed like an IRA if distributions are spent on non-qualified expenses though, but without penalty after age 65) and is transferrable upon death too, but the tax benefits end with you and or your legal spouse.
* In California and New Jersey, these statements are not so true at the state level (yet!)! Side bar: I once got a California State legislator to carry a bill to align the taxation of these account with the feds' taxation treatment (free) (this bill, every time it is introduced, is killed in a rev and tax committee). If you believe these should be fair and tax-free in California too, write to your representatives.
LUFSAs are Limited Use Flexible Spending Accounts. The two operative words here are "Spending" and "Limited" and not necessarily the word "Flexible;" if money in these accounts is left unspent at the end of each plan year, you will forfeit the unspent money you set aside in this type of account, plus the money you do set aside can only be used for vision or dental expenses. So, these are limited and not very "flexible." Some employers may offer a grace period or an allowable carry over dollar amount you won't forfeit that may roll into the next year if you enroll in one again for the New Year at a minimum level.
Who gets to have a LUFSA? If offered by an employer, anyone in the U.S. who is enrolled in a high-deductible health plan (HDHP) and contributing to an HSA.
Some more LUFSA Facts:
These accounts can help you preserve the power of your HSA each year even more so, because you won’t have to touch your HSA or use after-tax dollars for dental and vision expenses each year you use an LUFSA (sometimes called a LPFSA for 'limited purpose').
These are strategic and should be considered carefully for known dental and vision expenses each year only.
They lower your gross taxable income too! You’ll reduce your social and income tax bill. But you will forfeit what you set aside in these accounts if left unspent by Dec. 31st each year except for an amount of $610 (for 2024) which will be eligible to carry forward*.
These are great when you know you will no doubt spend precise amounts of money on dental and vision each year ahead (i.e., orthodontia, prescription lenses, or Lasix, etc.).
*An employer may offer up to that much but doesn’t necessarily have to offer as much as is allowed by the IRS and may opt to provide a grace period instead (as I understand the rules for employers) but, an employer can’t offer both (again, per IRS rules, not your employer's, your employer is only choosing between what the IRS allows).
FSAs are health Flexible Spending Accounts that can be used for all medical inclusive of health care, dental, and vision care services. The operative word here is not necessarily the word "Flexible," but it is certainly "Spending;" if the money you set aside in one isn't spent, you lose it. The use it or lose it rule may allow for a small carry over (i.e., $610 in 2024) or a grace period, which will be up to your employer to set within IRS defined boundaries.
Who gets to have an FSA? Anyone in the U.S. who is enrolled in a health plan that is NOT an HDHP.
Some more FSA Facts:
Health Flexible Spending Accounts (FSAs) are a great way to further lower your taxable income if you’re not in an HDHP for all types of medical expenses, so you don’t have to pay social or income taxes on the money you’ll spend on these expenses.
These are strategic and should be considered carefully for health, dental and vision expenses each year and for that year only.
These are great when you know you will no doubt spend precise amounts of money on medical, dental, and vision each year ahead.
DCAPs are Dependent Care Assistance Program plans that are about providing care for your dependents. If you need to have children in childcare in order to go to work, some of the money you will spend can be tax-free (free of being counted as taxable in your income tax return) when you set it aside to pay for your childcare provider's fees.
Who gets to have a DCAP? Anyone in the U.S. who has qualified dependents in a care program that allows you to continue to work at least an hour a day or look for work.
Some more facts about DCAP:
Dependent Care Assistance Program (DCAP) is a type of flexible spending account designed for helping you avoid owing income tax on the money you are going to spend on child/dependent care expenses each year.
These are strategic and should be considered carefully each year and for that year only. You lose this money if left unspent after Dec. 31, each year.
An employer may allow a carryover amount they determine if funds are unspent or a grace period--but not both.
These are great when you know you will no doubt spend precise amounts of money on child/dependent care each year.
During our Club meet up, I shared this "crib sheet" I drew up for you to summarize the text-heavy paragraphs above:
We then did a deeper dive into HSAs. I outlined all the additional facts, rules, considerations, and upsides surrounding the strategic use of Health Savings Accounts.
I explained why I love my HSA even more than I love my Roth 401(k) or traditional 401(k).
When you consider that according to at least Fidelity, the average 65-year-old couple is going to need to have saved up $315k for health care expenses just in retirement, saving up for this expense in an HSA makes good sense. You can't put in more than maybe a maximum of $10,300 for a couple over 55 years old right now per year, so how this savings gets invested is key to its growth potential for the long term.
Still here reading? Oh, I'm honored! And hope I'm helping! Here's an Easter Egg: signal me if you're still reading and gaining some value from this write up please by hearting this post for me or leave this comment below, "HSA lessons like these pay off!" Or just send a 'lil note to me.
You can contribute to HSAs so long as you are contributing for a period in which you were eligible for the HSA. Contributions for a prior year can be made up until that year’s tax filing deadline. Eligibility is defined by the IRS. But essentially you have to be participating/covered by a HDHP health plan to contribute to an HSA. Eligible HSA expenses are defined by the IRS, but include COBRA premiums, Long Term Care payments, medical expenses, dental, vision care, hearing aids, labs, x-rays, eligible OTC, and prescriptions. You do not have to be enrolled in an HDHP forever in order to use an HSA on qualified expenses either, you only need be enrolled in HDHP to contribute to an HSA. See the www.irs.gov for the official HSA rules.
Prior to age 65, HSA funds not used on qualified medical expenses will incur a 20% penalty tax, plus amounts are considered taxable ordinary income. Rollovers not reinvested in the new HSA within 60 days face this risk too.
You are required to maintain a record of the expenses sufficient to demonstrate that the distributions you take from HSAs were used for qualified medical expenses. You can reimburse yourself any time you want to forever, no deadlines.
Note though: Funds used on tax-free medical expenses cannot also be claimed as deductions on your tax return. Essentially... There is no double dipping.
I told the story to attendees of having once used my HSA card accidentally at a Subway sandwich shop. The charge got flagged and I had to reimburse the account or else face tax and penalty until the money was returned. Though Jared apparently lost weight by making healthy choices at Subway, the audit flag remained, and I had to correct the mistake quickly.
So, reach for your HSA card carefully when dining out, even when making healthy menu choices. Wink! ;-) Tax-free qualified health care expenses are defined only by the IRS.
Beneficiary forms tied to your HSA will instruct what happens to your HSA balance if you were to pass with money left to spend. Don’t leave the form blank! On the form you may want to list:
Spouses - who will inherit HSA balances tax-free.
Non-spouses (like your kiddos) - who will inherit the balance but subject to full taxation and tax bracket impacts.
Charities - who can receive the HSA balance as a beneficiary or contingent beneficiary tax-free.
Trusts - which can receive the HSA and pay your outstanding qualified medical bills tax-free on your final return, but fair market value of the balance of HSA must be included on your final income tax return, which likely means that assessed taxes will need to be paid if your heirs are non-spousal.
Moving from one HSA to another HSA...
You may transfer a balance out of your employer HSA to another HSA if you wanted to. The HSA is not employer-sponsored, so is entirely your own to manage. To continue to contribute through payroll deductions, you must keep your employer HDHP’s HSA open.
Why would someone want to transfer to another HSA? Maybe you like the investment options and terms at another bank better, or maybe you’re no longer in the HDHP you started in and have an HSA balance you need/want to disposition or consolidate.
Tip: Look at maintenance fees and available investment options, as you shop around, or look at this independent catalog of HSAs and their terms (this URL is not associated with The Money Matters Club): http://www.hsasearch.com/hsa-providers/all-hsa-providers/
To move money to another HSA, just:
Open another HSA account
Call both banks to understand this process
Initiate either a rollover or a transfer to the new HSA (follow both bank’s instructions and fees may apply)
Invest your new balance at the destination bank if not transferred in-kind, continue to manage both accounts on your own, per the terms and conditions of both accounts.
Once no longer enrolled in the HDHP or making contributions to that HSA via payroll deductions, you may close that account, fees may apply if left open.
Rolling over HSA balances vs. transferring HSA balances:
Completed Rollovers and Trustee-to-Trustee Transfers are not included in your income, are not deductible, and do not reduce your contribution limit.
You can rollover amounts from Archer MSAs and other HSAs into another HSA to consolidate. You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA.
Rollovers may be done via mailed check or ACH, so are done in cash. Transfers need not be in cash (they can stay invested in kind if your destination offers the same investments).
You must report the rollover on your tax return and record the rollover of the same amount within 60 days after the date of receipt to avoid taxation. You can make only one rollover contribution to an HSA during a 1-year period.
If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer is not considered a rollover. There is no limit on the number of these transfers. You may be able to stay invested in kind. Do not: include the amount transferred in your income, deduct it as a contribution, or include it as a distribution on Form 8889.
Lesser-known considerations for HSAs:
Nearing 62? Medicare enrollment makes you ineligible to contribute to HSAs and starting six months before any Medicare enrollment, you can’t be contributing to an HSA anymore without paying an excise penalty (6% of excess contributions and their growth that remains in the account annually. To avoid the penalty, you must take out the excess including any growth, including employer contributions which are subject to return or recharacterization as an after-tax bonus, to avoid the same penalty). If you plan on taking SSA benefits as early as starting at 62, you’re going to be auto enrolled in Medicare Part A with a 6-month lookback, even if you’re still employed. Same when you’re Medicare-eligible at 65, even without commencing SSA benefits. The IRS does not let you give up this 6-month retroactive coverage in Medicare.
Living in California? Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for tax purposes, interest on this type of bonds is exempt from State of California personal income taxes too. TIPS (Treasury Inflation Protected Securities) and Muni (Municipal) Bonds are also going to be tax-free in California. So, while California doesn’t align with the feds on HSAs’ tax treatment, investing in tax-free investments can yield you the same HSAs providing you a tax-free benefit as they do with your peers in other states.
Do you need or want to pause contributing to an HSA via payroll deductions or do you need to fund your HSA not via payroll for a one-off reason? You can do a one-time lifetime rollover from an IRA to an HSA (or a 401k to an IRA to an HSA) to fund that year’s HSA contribution limit. This might be a nice way to take care of a traditional IRA conversion (tax-free though) into a tax-free HSA in a year you’ll not contribute to your HSA via payroll deductions but when you still want to max your contributions to your HSA. Careful planning and timing to make the eligibility criteria work is a must!
Do you have an adult child under 26 on your health plan that you don’t claim on your tax return as a dependent? Anyone over 18 (but under 26), still on their parents’ HDHP insurance, and not being claimed as a dependent (on tax return), is also eligible to contribute up to the annual family maximum on their own HSA. This does not prevent the parents from maxing their own HSAs each year. (Don’t have the child also enroll in an HDHP, though, because then both the parents and the child would both be subject to the high deductible, etc., just have the child open and fund their own HSA (so will not be able to fund via payroll deductions).
In general, I said, as I summed it all up, you can leverage your health care elections to help you build your wealth and reduce your taxes! As you build your HSA up, think about how it is invested in terms of across your life's complete asset portfolio. For example, should you decide as a Californian to invest your HSA in tax-free investments at the state level too, then maybe your 401(k) doesn't need as much exposure to municipal bonds, treasury bonds, and other government or tax-free type investments, because you're well-exposed to that asset class via your HSA. Think about your total portfolio and ensure you are well diversified across the entire picture or pie created by all the accounts you own.
Consider too that this season as good a time as any to re-evaluate many other elections (which may or may not be window-bound or require a life-event/change in status event to elect or make changes) across your total financial plan, such as Supplemental Life Insurance (ask yourself is basic coverage from your employer (if applicable) enough to sustain your family if they lost you?), Supplemental AD&D Insurance (the reality is accidents happen now and again), other voluntary benefits and perks (as applicable), such as: Group Legal Insurance (which was timeboxed at my former employer annually), Auto/home/umbrella bundles and discounts via payroll deductions, and other voluntary elections like long-term care, critical illness, supplemental disability, identity theft protection, etc. We will be discussing in more details these types of wealth protection measures on October 31. I hope you'll join!
Fall on my sword plea for your understanding, Club Friends: I tried to record this 'lil lunch 'n learn session of ours on Tuesday as an experiment/trial to be able to offer you a nifty playback (which would have been a Club first). I encountered some troubles. The recording did work, but it only allows me, myself, and I to access the recording for download or playback within my own instance of Microsoft Teams Business Standard. While attendees can see it in the meeting history, they can't open it. I would have to make each attendee members of my personal Microsoft Teams "organization" in order to give access (which is going to be an additional layer of cost from my family's budget/my own pocket). Or to download it and put it here or online for you outside of Teams, I would also have to edit the recording significantly first because it recorded attendee names and personal information on screen (oops), which I can't release on the web without getting each individual's permission (I care about not letting your personal information get exposed on the www on my watch without your knowledge and consent first). So, I need to learn how to crop or edit or block from view any PI on the screen too (little learning curve to get past on how to crop a recorded Teams meeting). I dunno? For now, you tell me if this Tuesday's recording is in popular demand anyway or if this here thorough blog post on its own suffices this time?
Helpers Wanted! ...to help me overcome these recorded playback production and cost challenges mentioned above in time for our October 31st session! Ping me if you can help me out with set up, editing, recording/playback solutions that can work for us that I may consider ahead of time. Thank you!
Thank you for joining on Tuesday or reading this now, my Club Friends! And all my best wishes for you as you make great wealth moves with your health benefits elections this season!
Because money matters,
el*
*not an expert, just care
PS - this was from the heart, if it helped you, go tell the others you care about...
PSS - did you find the Easter Egg above? Let me know.
PSSS- inactivity (not hearting, reading, commenting, or opening this blog) apparently expires your subscription overtime and you won't receive notifications anymore - not my choice, I guess that is how this web platform does things, I can't change it without paying more).
E.M.Powers ("el") is a regular person with no particular financial credentials or expertise who happens to be a money enthusiast and the founder of The Money Matters Club, a virtual watercooler for like-minded individuals with a thirst for building their own financial health. Since 2006, she's helped thousands of co-workers build their financial literacy and wealth by participating in The Money Matters Club, a community she built on her employer's internal network. Since 2023, she's been attempting to scale The Club's reach through its second home on the World Wide Web. Her opinions--as well as the opinions of all participants--are just that: opinions, which are subject to flawed logic, math, typos and correction. She keeps a growth mindset and is also always learning something new or bolstering her own understanding after discussions at The Club. All information shared is done so with the best intent to inspire and empower others to learn more about money considerations toward building their own financial muscles. Nothing shared is meant as individualized advice that anyone should act on without doing their own curious research and personal decision making. There are no dumb questions at The Money Matters Club. Your financial health and literacy are what this Club cares about. All investing involves risk. All results can and will vary.
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