As HSA-qualified health plans increase in popularity and availability, employees who select them are frequently faced with decisions about how to manage their new HSA. First, employees have to understand some of the basics; account balances carry over every year, funds can be used for a spouse or tax dependent, the fact that there are annual contribution limits, etc. These details inevitably lead employees to ask the critical question, “how much should I contribute to my HSA?
So...how much should one contribute to an HSA?
There is no universal answer, but there are some key facts that individuals should consider when deciding how much to contribute to the account. Anticipated medical expenses and future savings goals can both play a role. Additionally, the IRS restricts contributions based on the coverage type (individual or family) and other factors like the number of months of coverage.
HealthEquity offers a free contribution calculator that individuals can use to help determine what amount might be appropriate. Employers can offer the tool to their employees during open enrollment and in key communications throughout the year if questions arise (since HSA contributions can be adjusted anytime).
Why would I contribute more than I spend on medical expenses?
It is estimated that a couple retiring today will need $265,000 for medical expenses in retirement.1 For employers that have offered an HSA for a number of years or that have employees who are more retirement-focused, the tax savings provided by the account are an obvious advantage to using an HSA to prepare for those expenses.2
It can be a valuable exercise to see just how the savings in an HSA can grow over time. To help individuals see the long-term impact of an HSA, HealthEquity offers a free future balance calculator that models savings over time (including tax savings).2 Here’s an example of two potential outcomes based only on different annual contributions:
Simplified HSA planning can make a difference
Employees who understand the impact and value of their HSA are better positioned to prepare for future medical expenses. This can result in greater benefits satisfaction since employees who save for these expenses in advance will be better able to meet the financial obligation of their medical care and save taxes on funds contributed to an HSA. The contribution calculator and future balance calculator from HealthEquity both provide valuable insights for employees to further their understanding.
1.The average American couple will need $265,000 to have a 90 percent chance of having enough money to cover out-of-pocket health care costs in retirement. Based on median prescription drug expenses. Source: Employee Benefit Research Institute (https://www.ebri.org/pdf/notespdf/EBRI_Notes_Hlth-Svgs.v38no1_31Jan17.pdf)
2.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.
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.