How to help clients navigate the choppy HSA waters

Figuring out how to utilize the full potential of these health care plan features should be part of comprehensive retirement income planning.

Preretirees increasingly rank health care as a top concern — specifically, health care costs during retirement. Your clients are currently choosing their health coverage plan for 2015. Part of a comprehensive approach to dealing with health care costs should focus on Health Savings Accounts.

One of the most effective ways to prepare for health care costs in retirement is to fund an HSA. These accounts are used in conjunction with a high-deductible insurance plan. Contributions are tax deductible, earnings grow tax-free and distributions for qualified health care expenditures are tax-free. The combination of high-deductible plans with an HSA is growing in popularity as part of the consumer-directed health insurance movement in the U.S.

Most people place their HSA contribution into a money market fund, then use a debit card to pay for uncovered medical expenses over the course of the year.

(More: HSAs: Transforming health care, forcing hard choices)

I recommend two changes to that strategy. First, instead of placing an HSA contribution into a money market account, clients should invest the money in an asset class suitable for long-term growth. Second, they should refrain from using the money on current health care needs and treat the HSA as they would any other retirement savings vehicles. The 2015 contribution limits are $3,350 for an individual plan and $6,650 for a family plan. An additional $1,000 catch-up provision is available at 55.

Fully funding this account (including increased future contribution limits) for 10 to 15 years before retirement could allow clients to accumulate about $200,000. They will then be in a position to cover many types of health care expenditures with tax-free dollars at a time of life those costs will be on the rise.
The list of qualified health expenditures is extensive. If the expense is created by a legitimate health care need, it probably is on the list of qualified expenditures.

To stimulate some thought on how broad the definition is, consider the following qualified expenditures outside usual doctor visits, co-pays, deductibles and prescription drugs: vision care, dental work, orthopedic shoes, prescription vitamins, hearing aids and batteries, therapy equipment, long-term care insurance premiums (with limits), and Medicare parts A, B, C and D.

HSA participants can include amounts they pay for equipment or improvements to their homes if the main purpose is medical care.

If you understand the basics of Medicare premiums, you understand that premiums for parts B and D are determined by modified adjusted gross income. Any cash flow for qualified health expenditures from the HSA will not count toward this taxable income. That means it will not push a person into a higher tax bracket for those premiums.

In addition, an employer can fund a portion of an HSA, which stays with clients if they leave the employer and passes to their spouse when they die.

As you speak with clients, find out if they are using a high-deductible health insurance plan with an HSA. Help them use the full potential of these plans as part of a comprehensive retirement income plan.
Peter Stahl is the founder of Bedrock Business Results, which provides training to financial advisers and their clients on the convergence of health care and financial planning. He can be reached at [email protected].