Federal Employees News Digest

Investor Some Employees Should Consider Health Savings Accounts

Health Savings Accounts or HSAs were created in December 2003 before there was an Affordable Care Act (ACA). As health insurance continues to be debated in Washington, the question becomes whether HSAs are still relevant and which individuals should consider enrolling in HSAs. This column discusses what HSAs are and how they can be beneficial to both employees and annuitants as they make their health insurance choices for 2018 during the current benefits “open season." HSAs are similar to health care flexible spending accounts (HCFSAs) but with some major differences. While any employee can enroll in an HCFSA, HSAs are for employees who are enrolled in high deductible health plans (HDHPs). HSA owners contribute to their HSAs to pay deductibles and other out-of-pocket medical, dental and vision expenses as needed. But HSA advocates emphasize that HSAs are also great savings and retirement planning vehicles.

These are several reasons why HSAs are great savings vehicles. First, the money contributed to an HSA is before-taxed money. Second, the earnings generated in an HSA grow at least tax-deferred. Third, all withdrawals from an HSA used to pay qualified medical, dental and vision expenses are tax-free. Because of these three reasons, HSAs are the only savings vehicle that gives the account owner the “tax trifecta”; namely, tax deductible contributions, tax-free growth, and tax-free withdrawals.

There is also the retirement savings advantage of an HSA. Unlike HCFSAs, HSAs are not “use it or lose it”. There is no requirement to deplete the account by a specific date. The HSA can be used at any time after it is funded to pay any qualifying expenses, including during retirement when most annuitants incur most of their significant medical, dental and vision expenses. This means an employee can fund it during their working years and make withdrawals for expenses incurred in retirement years.

A federal employee who funds an HSA during his or her working years and retires keeps the HSA in retirement. Similarly, an employee with an HSA who leaves federal service also keeps the HSA and can transfer it to another HSA with a new employer. In that sense, an HSA is identical to a traditional or a IRA that stays with the IRA owner for the owner’s life.

However, there are HSA minimum requirements and limitations that employees need to keep in mind. First, an employee must enroll in a FEHB plan that offers a qualified HDHP. For 2018, that is a FEHB health plan with a deductible of at least $1,350 for self only coverage and a deductible of at least $2,700 for self plus one or self and family coverage. Second, HSAs have an annual contribution limits. For plan year 2017, January 1 through December 31,2017, HSA owners have until April 15, 2018 to make their maximum self only coverage contribution of $3,400 and for self plus one or self and family coverage their maximum contribution of $6,750. The contribution deadline for plan year 2018 is April 15, 2019. HSA owners age 55 and older may contribute an additional $1,000 per individual per year.

Contributions to HSAs are associated with FEHB program-sponsored HDHP plans. OPM has a list of which FEHB plans are associated with HDHP plan and the agency contribution to an employee’s HSA, called the agency’s  HSA “premium pass-through”. Voluntary employee contributions count towards the annual contribution limit. Employees are allowed to make a once-in-a-lifetime transfer of funds from a deductible traditional IRA to an HSA. Note that a voluntary employee contribution to an HSA is tax deductible, reportable on IRS Form 1040 as an adjustment to one’s income. The agency contribution to an employee’s HSA is not  deductible, though it counts towards the annual contribution maximum.

HSAs are not necessarily appropriate for every employee. HSAs are not appropriate for employees who need frequent and specialized medical care or employees with dependents who need such care. Assessing whether an employee or annuitant should enroll in an HDHP associated with an HSA can be tricky. This is because illness is unpredictable in most cases and may in the end cost an employee with a high deductible more than an employee and enrolled in preferred provider plan with a significantly lower deductible.

Another concern of HSAs is that HSA owners may focus so intensely on preserving their HSA savings that they may neglect their and their family’s health. In other words, they do not want to withdraw from their HSAs and in so doing forgo visits to their doctors for any medical care.

Perhaps the most important disadvantage to HSAs are their added degree of complexity. With some HSAs, the account owner or family member must show a doctor his or her FEHB insurance card and pay for the doctor visit every time with the HSA card. Any withdrawals made for non-medical purposes are taxable and may be subject to a 20 percent penalty. The 20 percent penalty is waived for post-age 65 withdrawals used to pay nonqualifying expenses.

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Contributors

Edward A. Zurndorfer Certified Financial Planner
Mike Causey Columnist
Tom Fox VP for Leadership and Innovation, Partnership for Public Service
Mathew B. Tully Legal Analyst

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