Patrick “Pat” Jarrett is the co-founder, partner and president of HealthSavings Administrators, an investment health savings account (HSA) administrator based in Richmond, Va.
We recently checked in with Pat to learn more about how health savings accounts work and why families looking to better manage their money should consider using them. Here’s what he had to say:
Tell us about HealthSavings.com. What services do you offer?
At HealthSavings, our purpose is simple: We help clients prepare for life’s changing health and financial needs with what we know best – investment health savings accounts (HSAs).
We started in 1996 as a medical savings account (MSA) administrator. After the legislation enacting HSAs passed in December 2003, we turned our focus to HSAs. At the time, we were one of only 16 HSA providers in the country, most of which were banks. Because we are a non-bank custodian, we think about HSAs differently. We embrace HSAs as a long-term investment solution for saving for future healthcare and retirement expenses.
Day-to-day, we educate individuals, advisors and plan sponsors about the benefits of HSAs. The way that we educate takes many forms – from individuals calling our HSA-certified member services advisors to presenting at employers’ open enrollment meetings – and everything between. Our day-to-day also includes helping customers and employers with general account management (e.g., investment changes, transfers/rollovers, contributions, withdrawals, etc.), enrollment and more.
What is a Health Savings Account? How do they work?
It’s a medical IRA; a tax-sheltered account specifically for medical expenses.
Not only do HSAs help individuals and families set aside money for healthcare expenses, but they also have major tax advantages as well. For HSAs, it’s the triple tax savings – (1) money goes in pre-tax (or is tax deductible if contributed after-tax); (2) the account earnings are not taxed; (3) and withdrawals are not taxed when used to pay for qualified healthcare expenses.
In addition, individuals can invest an HSA like they would a 401(k), IRA or other retirement plans. Some of our customers maximize their HSA contributions each year, invest the funds and pay their healthcare expenses out-of-pocket. These savvy savers and investors save their receipts (because they can reimburse themselves at any time) and let their HSA investments grow, capitalizing on the compounding interest. What differentiates HealthSavings is that we do not require a minimum balance before investing, unlike other administrators that require a minimum balance as high as $5,000 before investing. That levels the playing field and gives everyone an opportunity to maximize their dollars.
Also, after account holders reach age 65, they may continue to withdraw funds tax-free for qualified healthcare expenses. Or, if they want to use the funds for other expenses, they may do so and simply pay the same tax that they would pay on distributions from their 401(k), IRA or other retirement plans. There’s no required minimum distribution from HSAs, so account holders can let their funds continue to grow in investments if they choose.
What can the money saved in an HSA be used for?
The account holder’s HSA funds may be used to pay qualified medical expenses for the account holder as well as his or her spouse and any tax dependents, regardless of their insurance coverage or retirement status. Unlike a flexible spending account (FSA), HSA dollars can be used to pay for some Medicare premiums and long-term care premiums.
Also, after age 65, HSA funds can be used for other, non-medical expenses, and the disbursements are simply treated (for tax purposes) just like IRA or 401(k) disbursements.
How common are HSAs today? To what do you attribute this trend?
There’s been a cascading effect with regard to healthcare laws and HSAs. Roughly 83 percent of employers offer a qualified high-deductible health plan (HDHP).
More people are moving toward these plans because the premiums are more affordable; however, HDHPs also increase financial liability because there are higher deductibles to meet before the insurance company chips in. The result is that more people understand the true cost of healthcare, making smarter purchasing decisions and becoming better consumers. And that’s where HSAs become very attractive – they allow individuals and families to save tax-free for these expenses, which ultimately saves them money.
Many people, especially financial advisors, are finding HSAs attractive because they can be used as a supplemental retirement plan.
What are the benefits of HSAs?
There are four key benefits of an HSA:
First, the tax savings – account holders can contribute pre-tax (or after tax and deduct on their tax return). They enjoy tax-deferred investment growth. And they can make tax-free withdrawals for qualified medical expenses.
Second, account holders do not have to reimburse themselves in the year that an expense was incurred. Instead, they can pay incidental healthcare expenses out-of-pocket now while continuing to invest their HSA dollars. This allows funds to grow tax-free until the account holder wants or needs reimbursement in the future.
Third, HSAs are 100 percent portable. If the account holder retires, changes jobs or changes health insurance coverage, they can keep their HSA and continue to reimburse themselves tax-free for qualified medical expenses.
Last but not least, the account holder’s HSA funds may be used to pay qualified medical expenses for the account holder as well as his or her spouse and tax dependents, regardless of insurance coverage or retirement status.
What about any drawbacks?
The only potential drawback is that eligibility revolves around enrollment in an HDHP, which can be financially challenging in the early years.
Fortunately, you can carry receipts forward and reimburse yourself at a later date. Ideally, consumers would see HSAs as a long-term strategy for dealing with their healthcare expenses.
Why should families consider opening an HSA?
There are predictable expenses you can save for, such as braces for your child, contact lenses, eyeglasses, and laser corrective eye surgery.
Then there are those unpredictable healthcare expenses, which can really rock a family. The ability to put away tax-free dollars for future medical expenses can be a huge advantage.
What have you found are the biggest misconceptions people have about HSAs?
People think they can’t roll their money over year-after-year. They think it’s use-it-or-lose-it, like an FSA.
People also think the funds are only available for the account holder, when in reality, they can be used for the account holder, their spouse, and any tax dependents, even if they are on different insurance.
Another misconception is that eligible expenses need to be reimbursed right away, which is not true. HSA funds are always available to reimburse yourself tax-free for qualified healthcare expenses – no matter what your age. Many people don’t understand the fantastic tax advantages of HSAs. If the money is being used for a qualified healthcare expense, it can always be withdrawn from your HSA tax-free.
What might surprise individuals or families about HSAs?
The biggest surprise is that they can carry the money over year-to-year, with no limit on how much they can accumulate.
The second surprise is that healthcare expenses in retirement – above and beyond Medicare – can be overwhelming, and HSA savings can help to ease that burden.