It’s true that health savings accounts have modest annual contribution limits: $7,100 this year for clients with family coverage or $3,550 for those with self-only coverage, plus a $1,000 catch-up if the client is 55 or older. But there is no income barrier: Clients can contribute no matter how much they make.
That puts these tax-advantaged accounts on the table for big earners. “HSAs can be beneficial to the high-income individual for a lot of reasons,” says Amie Kuntz, tax senior manager at Eide Bailly LLP in Des Moines, Iowa.
For starters, the client’s contributions reduce income taxes for the year as an adjustment to income on Form 1040 or through pretax paycheck deductions at work.
“Then the funds in the account grow tax-free if they’re taken out to pay qualified medical expenses,” she says. (Withdrawals prior to age 65 used for other purposes are subject to income tax and a 20% penalty. If the patient is over age 65 or disabled, however, the penalty does not apply.)
HSAs thus provide clients tax savings for paying medical bills without them having to itemize deductions, something that’s harder for them to do since the 2017 Tax Cuts and Jobs Act cut back itemizable expenses and nearly doubled the standard deduction. “These accounts are a lot more valuable than people give them credit for,” Kuntz says.
The primary requirement for those wanting to contribute to an HSA is that they have a high-deductible health plan, said Michael Tedone, a partner at Connecticut Wealth Management LLC in Farmington, Conn. Beyond that, the client cannot be enrolled in Medicare or have other health coverage except for certain limited-coverage plans described in IRS Publication 969.
Tedone says clients are often surprised to learn they don’t have to spend HSA funds every year, a key differentiator from similarly named health flex-spending accounts.
He recommends that clients contribute to an HSA and not use it to pay current health-care bills. In other words, they should pay with other resources and let the funds in the account build so clients can use them for medical expenses later in life. “We have clients who have done that for years and accumulated $75,000” or more, Tedone says.
He notes that if a client’s employer contributes $3,000 to an HSA, the client can contribute the remainder to reach the maximum contribution amount. Because contributions for 2019 are permitted through April 15, 2020, clients have time to top off any employer contribution for last year, up to the 2019 limit of $7,000 (or $3,500 for those with self-only coverage) plus the $1,000 catch-up for older clients.
Some employers offer their workers a health savings account through a selected provider, although the employees own their accounts and can go elsewhere if they like. So-called personal or individual HSAs are available outside of the workplace at providers that run the gamut from local banks to national companies to online outfits (a popular one is Lively at www.livelyme.com).
But be careful. “Fees vary significantly across providers,” Morningstar warned in an October report that proclaimed Fidelity’s no-administrative fee personal HSA “a clear winner.” Fidelity’s product, launched in late 2018, attracted roughly $700 million in assets by the end of last year. In January, these accounts became available to registered investment advisors, broker-dealers and other clients of Fidelity Clearing & Custody Solutions, “the first full-service HSA for financial intermediaries,” declares the Boston-based firm.
Beyond the numbers, a health savings account provides something psychological to clients whose income routinely bars them from tax breaks. “They like knowing that once in a while they’re able to take advantage of a tax benefit,” Tedone says.