Making the Most of Health Savings Accounts During COVID-19
How The CARES Act has made tax-sheltered HSAs even more useful
As COVID-19 sweeps across the globe, “we know now more than ever our health is at risk and that we may experience unexpected medical expenses,” says Juan Carlos Cruz, founder of Britewater Financial Group in Brooklyn, N.Y. What you may not know is that a health savings account (HSA) could help and that The CARES Act, recently passed by Congress, offers extra assistance for people using one.
An HSA is a triple tax-sheltered account to pay for certain medical expenses if you have a high deductible health plan (a minimum annual deductible of $1,400 for an individual, $2,800 for a family). You can contribute up to $3,550 as an individual or up to $7,100 for a family in 2020, with an extra $1,000 if you’re 55 or older. HSA contributions are tax-deductible; earnings on the accounts grow tax-free, similar to 401(k)s, and you can make tax-free withdrawals for health costs.
If your employer doesn’t offer an HSA you can still open one — if you have a high deductible health plan — at a bank, broker or credit union. Some financial institutions don’t charge to open the account; others levy a small opening fee or account maintenance fee. The maintenance fee is often waived, however, if you keep a minimum balance in the account.
The ABCs of HSAs
But many people are confused about HSAs and loads of workers offered them don’t sign up.
Many employees who have HSAs don’t understand how they work or how contributions can grow.
A July 2020 Optum Bank and Retirement survey found that many employees who have HSAs don’t understand how they work or how contributions can grow. And a Fidelity Investments survey found that only 50% of employees with access to health savings accounts use them. Yet 62% of HSA users surveyed told Fidelity the accounts help them pay for health care.
A key point of confusion: the difference between a Health Savings Account and a Flexible Savings Account (FSA).
While both are offered by employers, are funded with pre-tax contributions and can be used for health costs, only the HSA lets you roll over money you don’t use during the year and keep it in the account — even to use years from now in retirement.
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Also, if you have an HSA and lose your job, you can keep the HSA as long as you stay in a high-deductible health plan. By contrast, after a job loss, you forfeit any unused funds in an FSA.
Another thing that confounds some about HSAs: how to use them as investment accounts for retirement. In the Optum survey, fewer than half of those who understood that HSA contributions can be invested in mutual funds or other investments have actually considered doing so.
“Like your 401(k), your HSA account can be deposited into stocks, bonds, mutual funds and ETFs,” Cruz says. “If you are risk adverse and fear the volatility may reduce [the size of your health] savings account, you can place your savings in a cash account where it will not experience any market loss.” Then, your HSA is like having a tax-sheltered bank account.
The CARES Act and HSAs
The CARES Act broadened HSA reimbursements in a number of ways, and 13% of HSA participants surveyed by Charles Schwab said they’ve used the accounts for coronavirus-related expenses.
“The largest impact COVID-19 made on HSA regulations relates to what folks can now access their HSAs for — even if they haven’t met their out-of-pocket deductible,” says Ty Stewart, CEO and president of Simple Life Insure.
Over-the-counter products and medications bought without a prescription since Jan. 1, 2020 are now reimbursable for HSAs. That includes things like pain relievers for cold and flu-related symptoms, menstrual products, contact lenses and solution, thermometers, batteries for medical devices and bandages.
If you’ve been furloughed or laid off due to the pandemic, you can use funds in your HSA to pay for health insurance premiums through COBRA, the federal law for people who’ve left jobs. An HSA can also pay for other health insurance premiums if you’re collecting unemployment.
Should you need to buy personal protective equipment (PPE), The CARES Act says you can use HSA funds to cover the cost.
You can also use an HSA to pay for COVID-19 testing, along with treatment related to the virus.
Telemedicine is now covered, too. The new HSA rules “cover the rising use of telehealth services and virtual doctor visits for any reason,” Stewart says. And you can tap your HSA for these telehealth services even if you haven’t reached your deductible.
“For Americans struggling with their bills, [an HSA] could be a place to look for available funds that would allow their savings to stretch a little further,” says Josh Simpson, a financial advisor with Lake Advisory Group in Lady Lake, Fla.
If you have an HSA, you might have used less money from it this year than normal due to the pause on elective surgeries and doctor visits. But keep in mind that since HSA contributions can be rolled over into subsequent years, you’ll be able to use your account whenever you ultimately have postponed surgery or a medical exam.
COVID-19 may also motivate you to contribute more in your HSA than in the past. That way, you’ll be better prepared for future health expenses, including in retirement.
“You can own one forever, and when invested properly, an HSA can do very well,” Cruz says.