ABC's of HSAs

Although health insurance deductibles and other out-of-pocket costs continue to rise, one good thing has come out of this recent turmoil: Health Savings Accounts (HSAs). A benefit that is similar to a 401(k) plan, HSAs are growing both in the number of accounts and average contributions made to them.

Trending Up

In 2016, HSAs covered between 20.2 million and 22.6 million people, according to research from the Employee Benefit Research Institute (EBRI). Counting employer and employee contributions, the average balance soared from $1,604 to $2,532 in 2016.

This growth is an important statistic because HSAs allow account balances to roll over from one year to the next. It is just one of the features that is making this healthcare savings vehicle an attractive employee benefit.

Triple Tax-Free

The bold-faced headline about HSAs is they are triple tax-advantaged. Contributions are deducted from your pay pre-tax, earnings on your HSA balance grow tax-deferred and distributions for qualified medical expenses are tax-free. You can use your HSA to pay for copayments and deductibles, prescription drugs and lab work, and imaging and physical therapy today, next year and even in retirement.

Extra Help

The ability to roll over an HSA account balance from year to year can be especially helpful. In retirement, healthcare
expenses can consume more of your budget. If you don’t need your HSA money for healthcare because you’re exceptionally healthy, you can take distributions for non-health reasons beginning at age 65 and pay only income tax on the amount.

However, you’ll pay income tax and more if you take distributions for a non-medical reason before age 65. Distributions in this case would be subject to income tax and a 20% federal tax penalty on the amount taken.