You may have heard in the press or from a politician that, “The American healthcare System is broken.” It seems that, politically at least, neither side of the aisle can agree on what solution would be best for the nation.
There are some staggering statistics from The Henry J. Kaiser Family Foundation: By the end of 2016, over 28 million Americans remained uninsured; and research suggests this number may be increasing. This does not take into account the many more Americans that are underinsured, or have less insurance than is suitable for their situation. (https://www.kff.org/uninsured/fact-sheet/key-facts-about-the-uninsured-population/)
Additionally, there has been very little headway in congress on the topic of healthcare and talks have recently stalled in political gridlock. Any plan that is released is met with intense scrutiny, from both Republicans and Democrats, and fails to find common ground.
One silver lining is that there is one topic of consensus and common ground among both Democrats and Republicans: health savings accounts, or HSAs. Republicans have even positioned these accounts as an integral part of their Obamacare overhaul.
HSAs empower individuals to save money in a tax-free account1 to pay for their qualifying medical expenses. One reason for the bipartisan celebration of HSAs is that they can benefit anyone with an HSA-qualified plan, from any walk of life.
HSA-qualified plans have cheaper premiums with higher deductibles (above $1,350 for an individual or $2,700 for families for 2018 plans.) This means that every year at least the first $1,350 for individuals or $2,700 for family’s medical expenses are out-of-pocket, before their insurance kicks in.
By paying these expenses with tax-free money, the net result is greater buying power for medical expenses: premiums are usually lower and tax savings makes dollars go farther, and can result in having money left over in an HSA to save for the future.
Let’s look closer at some of the tax benefits of HSAs:1
- If your employer supports payroll deductions for the HSA, contributions go into the account on a pre-tax basis, meaning your taxable income is lowered. This means that the earnings amount subject to payroll taxes is less than if you didn’t put money into an HSA. When contributions are made by an individual they are also fully tax-deductible.
- Earnings and interest is also tax-free.
- Finally, the funds withdrawn from an HSA and used for qualifying medical expenses remain tax-free.
HSAs work similar to regular savings accounts, and they accumulate modest interest. However, to maximize earning potential, they can be invested in . This is where the power of compounding returns can increase the long-term earning potential of HSAs.2
For retirement, participating and growing an HSA over time is as a viable part of an effective strategy. Although studies vary, couples retiring today at age 65 can expect to spend around $245,000 on healthcare during retirement, excluding dental, vision, hearing, copays, and other out-of-pocket costs. Include these expenses and estimates can be as high as $400,000 during retirement. With a longer life expectancy, women can expect to pay more. The worst part is that these costs are projected to continue to increase over time.
Opening an HSA (especially early in your career), making generous contributions, and investing those savings until retirement can help individuals prepare for increasing retirement healthcare costs.
For example, if your employee opens an HSA today and contributes the maximum amount every year ($6,750 starting in 2017 - for family coverage), they could have about $38,340 in their HSA after four years (assuming a 7% growth rate and .005 annual fees). Of course, if they take advantage of the investments available with an HSA, that number could be even higher.
So how do we fix American healthcare? Education about the power of HSAs is a great place to start. Understanding individual healthcare costs and enabling individuals to effectively prepare for those costs with a tax-free savings account is a powerful way to empower Americans to help themselves. Taking this approach means HSAs can be an advantageous tool to help Americans cope with the “broken healthcare system.”
1.HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.
2.Investments available to HSA holders are subject to risk, including the possible loss of the principal invested and are not FDIC insured or guaranteed by HealthEquity, Inc.
HealthEquity does not provide legal, tax, financial or medical advice.