HSAs are misunderstood, and in some cases, downright confusing. Here are some reminders to clarify a few things and to make it clear that using your HSA is the best thing for your employees and for you, in the long run. If your company offers a high deductible health plan, everyone should be maxing this feature out, and here’s why.
1. Contributions are tax-free. HSA contributions are made pre-tax. And they are really pre-tax. Like 401(k) pre-tax contributions, state and federal taxes are not withheld. Different from 401(k) contributions – there are no Social Security taxes deducted either. When balances are withdrawn and used to pay for qualified health care expenses, they come out of HSA accounts tax-free. As a result, any amounts contributed into a HSA are completely tax free.
2. No use it or lose it. Executives may confuse HSAs with flexible spending accounts, where balances not used during a particular year may be forfeited. In HSAs, unused balances carry over to the next year. And so on. HSA balances are never forfeited due to lack of use during a year.
3. No RMDs. Different from 401(k) plan accounts, where required minimum distributions (RMDs) begin at age 70 ½ , HSAs have no RMDs. Any remaining balance in an executive’s account, when he or she dies, may be used by the surviving spouse.
4. Paying for retiree healthcare. Building a significant HSA balance is not only important from the perspective of paying for healthcare expenses as an active employee, account balances can also be used to pay for healthcare expenses in retirement. This may allow a retired executive to avoid using taxable 401(k) plan balances to pay healthcare expenses.
5. Many eligible expenses. Any executive able to accumulate an HSA balance that is carried over into retirement may use it to pay for many routine and nonroutine healthcare expenses. Eligible expenses include prescription drugs, medical premiums, COBRA premiums, dental expenses, Medicare premiums, long-term care insurance premiums and of course any co-pays, deductibles or co-insurance amounts.