Your Next Healthy Habit: The HSA

One of the top 10 questions I get from clients is should I open an HSA (Health Savings Account)? It is open enrollment season and HSAs have risen in popularity over the last few years, so let me take the opportunity to address the question here.

First, what are HSAs?

HSAs are personal savings accounts that can only be used for qualified health care expenses and out-of-pocket costs not covered by health plans. They offer tax benefits, spending flexibility, and portability.

Second, who is eligible?

To contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan (HDHP). For 2022 the HDHP for individuals must have a deductible of at least $1,400 and an out-of-pocket medical expense limit of $7,050, and the HDHP for families must have a deductible of at least $2,800 and an out-of-pocket medical expense limit of $14,100.

Third, how do I get one?

You can enroll in an HDHP and an HSA through your employer if available, or find an HDHP on the health insurance marketplace and an HSA through a financial institution.

Here is a summary of the advantages and disadvantages of HSAs:

Advantages:

  • If you make contributions with pre-tax dollars, they are excluded from your gross income.
  • If you make contributions with after-tax dollars, you can deduct them from your gross income on your tax return.
  • Contributions can earn interest and be invested.
  • Your investments can grow and compound on a tax-deferred basis, which means there are no capital gains taxes on earnings.
  • Withdrawals are tax-free for qualified health care expenses.
  • You don’t have to make withdrawals in the year that the expenses are incurred (just save the receipts for the year in which you do make the withdrawals).
  • Any unused money at the end of the year rolls over to the next year (unlike Flexible Spending Accounts (FSAs)).
  • The account is always owned by you even if you change employers or terminate employment.
  • When HSA money is used to pay for health care costs in retirement, it has more buying power than money from retirement plans like 401ks where you will owe income taxes on withdrawals.

Disadvantages:

  • It can be challenging to budget how much to save as medical expenses are often unpredictable.
  • HSAs have low contribution limits – the 2022 contribution limit is $3,650/year for individuals with additional catch-up contributions of $1,000 between ages 55 and 65. (This amount is reduced by any employer contributions excluded from gross income.)
  • Once you enroll in Medicare at age 65 you can no longer contribute.
  • If you withdraw funds for nonmedical expenses before age 65, you will have to pay income taxes on the money and an additional 20% penalty. If you withdraw funds for nonmedical expenses after age 65, you don’t have to pay a penalty but you will have to pay income taxes on the money.

For an HSA to be worth it, you should be relatively healthy and good with recordkeeping. If this describes you, consider adding HSAs to your financial to-do list. “I don’t like tax savings” said no one ever.

The Medicare Roundup

Medicare is a federal health insurance program that was established in the 1960s for individuals age 65 or older and for individuals under age 65 with kidney failure, ALS or certain other disabilities. It is funded by the taxes that workers pay to Social Security and Medicare, by the premiums that Medicare beneficiaries pay for their coverage, and by the federal budget.

Medicare has four parts: A, B, C and D. Part A and Part B are considered Original Medicare as they are provided directly through the federal government and Part C and Part D are not considered Original Medicare as they are not provided directly by the federal government.

Part A covers hospital insurance. This includes inpatient hospital care, skilled nursing, hospice care and home health services. This does not include long-term care. You don’t have to pay a premium for Part A coverage as long as you, your spouse, or your ex-spouse worked full time for at least 40 calendar quarters (10 years) and paid Social Security taxes, or if you, your spouse, or your ex-spouse are eligible for Railroad Retirement or Civil Service benefits. You do have to pay a premium if you worked and paid Social Security taxes for less time. If you qualify through your spouse or ex-spouse, you need to have been married for at least 10 years. Most Medicare beneficiaries qualify for this premium-free coverage.

Part B covers medical insurance. This includes outpatient medical care such as doctor visits, tests, preventative care, mental health care, medical equipment like wheelchairs and walkers, and some ambulance and home health services. You have to pay a premium for Part B coverage to the Social Security Administration. If you’re already receiving Social Security, the premiums are deducted from your Social Security benefit, otherwise Social Security bills you directly. The premium starts at a standard amount and increases for people with higher incomes. Each year the premium increases but current Medicare beneficiaries whose premiums are deducted from their Social Security benefit generally avoid the increase due to a hold harmless provision.

Part C is something of a misnomer as it doesn’t refer to a subsection of medical care like the other Parts. Instead, Part C refers to Medicare Advantage Plans, which are plans offered by private companies that have contracted with Medicare. Medicare Advantage Plans are required to provide all Part A and Part B benefits, but can do so with different rules, costs and restrictions. For example, with Medicare you can go to almost any hospital or doctor’s office whereas with Medicare Advantage Plans you can be limited to network providers. Many Medicare Advantage Plans replace Part A, Part B, Part D and Medigap coverages (more on Part D and Medigap below), as well as offering coverage for vision, dental and hearing services. You pay an additional premium for these plans on top of your Part B premium (and your Part A premium if you have one).

Part D covers prescription drugs and is offered by private companies. You can get Part D as a stand-alone private drug plan (known as a PDP) or as a part of a Medicare Advantage Plan with drug coverage (known as a MAPD). However, neither Medicare nor Medicare Advantage Plans cover prescription drug copayments or deductibles. As with Part B, the premium increases for people with higher incomes.

Medigap is supplemental insurance coverage offered by private companies that is designed to fill the gaps in expenses not covered by Medicare. Medigap covers Part A and Part B copayments, coinsurances and deductibles.

Depending on if you are employed or retired, there are different timelines for enrolling in Part A and Part B. However, once you are enrolled in Part A and Part B, there are several paths to getting enough coverage to address your long-term medical needs. If you just enroll in Part A and Part B, you would likely incur substantial out-of-pocket costs. To avoid this, you can enroll in Part A and Part B and supplement these benefits with Part D and/or Medigap coverages. Or if you have employer, retiree, or Veterans’ Administration (VA) medical benefits available to you, these programs can help defray costs. Or you can follow in the footsteps of 1/3 of Medicare beneficiaries and get your benefits through a Medicare Advantage Plan.

Estate Planning Essentials: The Advance Health Care Directive

If you are a Gen Xer or older, most likely you remember the highly publicized case of Terry Schiavo, a Florida woman in a persistent vegetative state who tragically became the center of a legal battle between her parents, who wanted to keep her alive, and her husband, who wanted her feeding tube removed because he said that would have been her wish. Since Schiavo did not have a living will, her case worked its way up through state and federal courts, eventually landing on the desk of President George W. Bush, and in the end it took seven years for her feeding tube to be removed.

I can’t think of a better example that illustrates the need for everyone to have explicit end-of-life care instructions, just in case. After all, it is your constitutional right to choose or refuse medical care, so why not exercise it? In California, the Advance Health Care Directive does just this, simply and unambiguously. This Advance Health Care Directive combines a living will and a power of attorney for health care, and following are descriptions of both parts of the document. (To be expected, each state uses slightly different terminology for these documents.)

Living Will: This document describes your health care wishes. The Living Will bears no relation to the traditional will or living trust used to leave property to your beneficiaries at death. It’s a document that lets you state what type of medical treatment you do or do not wish to receive if you are too ill or injured to direct your own care. (Among other things, you can use it to be sure that doctors do – or do not – “pull the plug.”)

Power of Attorney for Health Care: This document names someone to make healthcare decisions for you. The Power of Attorney for Healthcare, also known as a medical power of attorney, allows you to name a trusted person to make medical decisions for you if you are unable to communicate on your own. The person you name to make these decisions is usually called your agent or attorney-in-fact. You can give your agent the authority to oversee the wishes you’ve set out in your health care declaration, as well as the power to make other necessary decisions about health care matters.

Procrastinators take note and go-getters take a breather – it is a misconception that this is a costly and cumbersome process. You do not need an attorney to draft the Advance Health Care Directive for you as you can easily do it yourself. Conveniently, the Advance Health Care Directive provided by the State of California Department of Justice Office of the Attorney General is available on this website: https://oag.ca.gov/consumers/general/care#advance. Click on the link to “California Probate Code Sample Form.pdf”, download the pdf, and print. All you need to do is fill out the form, have it signed by two witnesses, and then keep it in your files. Needless to say, for most people this can be a significant accomplishment in estate planning, an oft-neglected subject.