In my last blog, I discussed the benefits of Health Savings Accounts (HSAs). If you missed it, you can check it out here. In this blog, I wanted to address some of the common objections that I hear about HSAs because many of them are based on misinformation and misunderstandings.
When I first started working in 1995, HSAs did not exist but the popular tax-savings vehicles to use at the time were Flexible Spending Accounts (FSAs). With an FSA, the employee could make tax-deductible contributions into an account in order to cover certain out-of-pocket health care costs. This sounds great, but there were problems. The biggest issue is that FSAs at the time were “use it or lose it”. This meant that you typically forfeited any unused funds remaining at the end of the plan year. So it would be common for people to be running to CVS in late December to stock up on a lifetime supply of medical equipment and over-the-counter prescriptions to try to get something for their FSA money before it disappeared. The other issue is that FSAs were not portable. In other words, if you left the company, the FSA dollars would not travel with you to your new company and often those dollars would have to be forfeited. Understandably, many people were left wary and skeptical of these kinds of plans after getting burned by these limitations.
Fortunately for all of us, HSAs were created without these same limitations. But the scars that remain for many people from their FSA experience color their view of HSAs. They may not understand, or may not believe, that HSA balances can be carried forward from year to year and that HSA accounts can be taken with you even when you leave your employer. It is unfortunate that the acronyms are so similar because the fundamental workings of the two products are quite different. With an HSA, you can let the account balance build and grow so that you potentially could have tens of thousands of dollars (or more!!) by the time you retire to cover pre-65 healthcare costs or the cost sharing that comes with Medicare after 65. This was never possible with FSAs!
So I hear your concerns about HSAs but my finding is that most of these are based on a lack of understanding of how the product actually works. So objection….overruled!!! Still, they are not meant for everyone in every circumstance. Talk to your financial advisor to see if HSA’s are a good option for your unique financial situation.
The information provided herein is general in nature. It is not intended, nor should it be construed, as legal or tax advice. Because the administration of an HSA is a taxpayer responsibility, you are strongly encouraged to consult your tax advisor before opening an HSA.
You’ll owe income taxes plus a 20% penalty if you withdraw funds from your HSA for non-qualified expenses before you turn age 65. Once you’re 65, you’ll owe taxes but not the penalty.
High-deductible health plans (HDHPs), which are a requirement for HSAs, aren’t always the best option for consumers, especially for those who have significant healthcare expenses.
No strategy assures success or protects against loss. Past performance is no guarantee of future results.
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About the Author
Neil Manning, CFP®, AIF®
LPL Financial Advisor
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.