Back in December 2003—well before there was an Affordable Care Act, let alone talk of repeal and replace—then-President George W. Bush created health savings accounts (HSAs).

Still scarcely understood, HSAs have nonetheless grown in popularity. According to the Devenir Group, a Minneapolis-based industry organization, there were nearly 17 million HSAs, with an aggregate value of more than $30 billion, at the end of 2015, the most recent results available.

But as health care continues to be debated in Washington, are HSAs still relevant? More important, are they a good idea for your clients?

HSAs For Retirement Planning
HSAs are only for people with certain high-deductible health plans (HDHPs). They allow account holders to put aside money to help pay those high deductibles and other medical expenses later, as needed. But advocates insist they are also great savings and retirement-planning vehicles.

There are several reasons. First, money that goes in can be deducted from federal income taxes. Plus, it grows tax-free. And it can be withdrawn tax-free at any time, if used for qualified medical expenses. “HSAs are the only account type that gives you the tax trifecta,” says Christopher Hershey, a senior financial planning analyst at eMoney Advisor in Radnor, Pa. “Simply put, they are the most tax-efficient savings vehicles available.”

HSAs are similar to flexible spending accounts (FSAs) with one important difference: HSAs are not use-it-or-lose-it. “There’s no requirement to deplete the account by a specific date,” says Tim Steffen, director of financial planning at Baird in Milwaukee. “You can use it to pay for any health-care expenses incurred after the date you fund it. This means you can fund it today, let it grow during your working years, and then take withdrawals later in life for expenses you incurred in previous years.”

Jack Towarnicky, executive director of the Plan Sponsor Council of America, a Chicago-based industry group, further notes that HSAs compare favorably to 401(k)s. “Compared to a 401(k) plan, your HSA contributions and any employer contributions are pretax not only for federal income-tax purposes … but also for Social Security and Medicare tax purposes, FICA and FICA Med,” he says. “Similarly, all monies contributed on a tax-preferred basis coming out of a 401(k) are taxed as ordinary income, while HSA monies used to cover out-of-pocket medical expenses and certain insurance premiums are received tax free.”

HSA Limits
There are, however, a few limits to keep in mind. First, you must have a qualified HDHP—that is, a health plan with a deductible that’s greater than $1,300 for an individual ($1,350 in 2018) or double that for a family. And not all HDHPs are actually HSA eligible. It’s a good idea to double check.

Second, HSAs have an annual contribution limit. Through April 15, 2018, the maximum individual contribution is $3,400 per year and the maximum per family is $6,750. (The annual limits inch up for the 12 months preceding April 15, 2019, to $3,450 for individuals and $6,900 for families.) Those 55 or older may contribute an additional $1,000 per person per year.

Contributions can be made through a payroll deduction or separate deposits. Some prefer to transfer funds directly into an HSA from an IRA, which can be done only once in a lifetime without incurring a distribution penalty or tax. Note that only your personal contributions count toward the tax deduction; if an employer (or loved one) contributes, that amount doesn’t count toward your individual tax deduction, though it does count toward the annual contribution maximum.

Also, you can’t contribute to an HSA if you switch to a nonqualified plan, are listed as a dependent on someone else’s tax return, or go on Medicare. You can keep your HSA savings, but you can’t contribute new funds. The same goes for retirees who receive Social Security, since they’re automatically enrolled in Medicare Part A.

Not All HSAs Are Alike
As uniquely useful as they may be, HSAs vary in the range of investment choices offered, the fee structures and other important details. While most financial institutions that offer HSAs don’t charge any annual fee, that’s not always the case. Do your research.

“Financial institutions specializing in HSAs are best suited for this kind of plan,” advises Chris Ure, chief executive and managing director at HighTower Boca Raton, a financial planner in Boca Raton, Fla. “[They] give the consumer more complete access to information [and] disbursements, in a user-friendly environment. These institutions usually have lower administrative costs because of their volume of business.”

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