The Health Savings Account is an incredible tool to take greater control over your healthcare. It is the most tax-efficient investment account on the planet.
So, if you’re eligible for it and not at least considering how to take advantage of it, you’re missing out.
In this week’s podcast, I deep dive on HSAs with Roy Ramthun. Roy is a nationally-recognized HSA expert, because he led the Treasury Department’s implementation of HSAs when they were signed into law in 2003, and then he served as a White House healthcare policy advisor.
I thought I already knew a lot about HSAs, but I still learned new things from Roy.
- How Roy got the nickname “Mr. HSA”
- Why HSAs are so special and how they work
- Tax benefits of HSAs at both federal and state level
- The 3 main eligibility criteria for HSAs
- Ways to fund HSA contributions
- What health expenses are considered qualified
- HSA bank options and factors to consider when selecting a custodian bank
- Reimbursement rules, receipt saving tips
- Tips for maximizing the growth of your HSA
- What happens to your HSA when you retire or pass away
Do you have an HSA? What kind of health expenses have you been able to save on using an HSA? Any follow up questions for Roy? (He’s offered to help answer them.) Let me know by posting a comment on the show notes page.
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Links mentioned in this episode:
- HSA Consulting Services
- Health Savings Accounts: Contribution Limits, Eligibility Rules, Benefits
- HYW private Facebook community
Read this episode as a post:
Andrew Chen 01:23
My guest today is Roy Ramthun, who is a nationally recognized expert on health savings accounts or HSAs.
Roy led the U.S. Treasury Department’s implementation of HSAs after they were enacted into law in 2003, and he served as a White House healthcare policy advisor under President George W. Bush, where he worked on expanding HSAs and implementing the Medicare Part D Prescription Drug Benefit.
He has served on the staff of the U.S. Senate Finance Committee and the U.S. Healthcare Financing Administration, which is now the Centers for Medicare and Medicaid Services.
He has also worked in the private sector in healthcare, including spending eight years at Humana, and he is a frequent speaker at healthcare conferences around the country.
Roy is currently the founder of an HSA consultancy called HSA Consulting Services.
Roy, thanks so much for joining us today to share your knowledge and insights about HSAs.
Roy Ramthun 02:11
My pleasure. Glad to join you.
Andrew Chen 02:13
All right. Well, I’d love to start just by learning a little bit more about your background.
How did you get into becoming an expert on health savings accounts and healthcare policy in general? What took you down this path?
Roy Ramthun 02:23
Well, I started out by getting a master’s degree in health policy in graduate school. From there, I came to work in Washington, D.C. and worked on the legislative side of things. That’s how I got my job on the Senate Finance Committee.
While I was there, we debated the Clinton Healthcare Reform Plan. And with my background being in healthcare and health policy, I was in the right place at the right time for those kinds of discussions.
If you can believe it, the precursor to HSAs, known as medical savings accounts, first appeared around that time in 1992. Just before the ’92 elections, there was a bipartisan bill that was introduced by six senators at that time. But then the health reform debate began and things started to get a little polarized politically at that point.
From that point on, I think Republicans have generally carried most of the water, believing that HSAs and the medical savings accounts before them were part of a movement to increase consumerism in healthcare.
We have to keep in mind that at this time, HMOs were at their heyday and HMOs were promising to control rising healthcare costs. For one year, and it’s the only year that I recall in our history, healthcare cost inflation actually was below zero, a negative number, I believe, in 1994.
I think politically the proposition was that the private sector can control healthcare costs. We don’t need the government to take it over.
And of course, that didn’t happen at that time. So the next health policy discussion was could we guarantee people’s portability of coverage dealing with preexisting conditions as well as the privacy of their medical information?
And those things were included in the HIPAA Law, Health Insurance Portability and Accountability Act of 1996, as was the demonstration project for medical savings accounts at that time.
So that was the first time that the legislature embraced HSAs and started to create something that we could start experimenting with, if nothing else.
That went on for the next seven years, pretty much below the radar. But some of the first HSA providers are still around from those days. Others have been acquired and merged into other businesses.
Fast forward to 2003, I had taken a job at the Treasury Department in the fall of 2003, and my main responsibility was to advise the Secretary on various health initiatives in the tax world. And frankly, my background being at the Senate Finance Committee, which has jurisdiction over tax matters, was most helpful to me in preparing for those discussions.
I’m not a tax expert, but I do have a background in health policy, so I was there within the world of tax policy advisors to the President. And my initial role was primarily to help implement a program that was the basis for what is now the premium tax credits under the Affordable Care Act.
At the time, it was limited to workers that had lost their jobs due to foreign trade competition. This was known as the health coverage tax credit.
But not long after I was there, the Medicare Prescription Drug Law passed, which included what we now know as health savings accounts. I remember the Chief of Staff walking into my office and saying, “This is your new number one priority.”
Having known what I already knew for then 11 years about HSAs and MSAs before that, I knew what the opportunity meant and I knew that this was a great opportunity to do something very interesting and unique within the government as well as in the entire healthcare delivery system and financing system.
And I loved it. I just really felt like it put everything that I had done in the past together.
So I took the ball and ran with it. It was probably the most fun I ever had, being out there and just trying to help people understand HSAs.
I took some steps to try to help consumers and brokers and insurance companies and employers understand it as much as possible, because as we were writing the rules, you have to be able to explain them in ways that people understand.
So I felt like I became a translator, taking the tax policies and translating them into the health policy language that I was more familiar with so that they could be communicated appropriately so that people could take advantage of them.
That started a whole series of figuring out how to get people’s questions answered, how to share the basics of what an HSA is, how it works differently from other similar types of programs. How could taxpayers take advantage of these things?
At the same time, we asked them to submit questions so that we knew what it was they were struggling with to understand, so that they could be addressed in future guidance from the Treasury Department and the IRS to help people learn about this stuff faster.
That doesn’t always happen, but if you want the program to be successful, my view was it’s a communications challenge. Anytime there’s something new, you’ve got to help people understand it or they won’t take advantage of it.
Andrew Chen 09:28
They call you “Mr. HSA.” How did you get that nickname?
Roy Ramthun 09:38
One of the strongest proponents of HSAs and originally MSAs was a gentleman by the name of Pat Rooney. He was the CEO of Golden Rule Insurance Company.
He testified before the Senate Finance Committee, which I was on the staff of back in 1992. I think it was September.
He was urging these bipartisan senators to introduce a bill to do something that he thought would work very well because he had actually experimented on it with his own employees.
Essentially, what he did was took the insurance that he was providing to his employees and raised their deductible to $500, and then he gave them the difference in cash and said, “If you don’t spend it, you can keep it.”
And he noticed a behavioral change amongst the employees. They didn’t use as much healthcare. Some of them took those dollars and actually spent it on things that weren’t even covered by their insurance because he didn’t limit it to that.
So his main goal was to try to get the tax code to support those types of arrangements by giving people a deduction for the amount that was put into their health savings account. And that’s ultimately what happened, and I think it’s the biggest innovation that HSAs brought to the table.
It was Pat Rooney who sent me a note, thanking me for everything that I had done as I was then moving from Treasury to the White House. In his note, he said, “I think you should call yourself Mr. HSA.”
I wasn’t sure I wanted to do that. I was a little bit uncomfortable about taking on that mantle, so I didn’t actually start to use that until I had left the White House and started my own consulting business.
As I talked to friends of mine, I shared with them the suggestion and everybody said, “Absolutely. Nobody knows more about HSAs as you do.” So I decided to start using it in that way to promote myself as an expert on HSAs.
I will never forget going back to the White House a couple of years later, attending a meeting that somebody had organized in one of the White House office buildings, and one of my former Treasury colleagues, who was there to answer questions about HSAs and things, said, “I don’t know why you’re asking me. You’ve got the best expert in the room right here.”
That really made me feel good. And at that point on, I didn’t look back.
Andrew Chen 13:01
That’s funny. Thanks so much for sharing that. Great.
Let’s dive in a little bit into HSAs specifically. Just to set the lay of the land, could you help listeners understand? I think most folks probably have some idea, but from the expert’s direct words, what is an HSA?
How does it work at a high level? What’s so special about it? And what are the key differences between an HSA versus a medical FSA?
Roy Ramthun 13:30
An HSA is a bank account. It’s a bank account with your name on it, but it’s a special type of bank account that we call a trust or custodial account.
The best thing that I can suggest for you to help you understand that is it is identical in form and structure to an individual retirement account, which is also a bank account with your name on it, but it is also a trust or a custodial account.
I don’t want to get into all the details about what does that mean, but the important thing is to know that you can’t open an HSA just anywhere. You can’t take a bank account that currently exists in your name and say, “This is my HSA now.”
You do have to open your account with an approved trustee or custodian. I would love to be able to tell you that every bank, every credit union, every financial institution in this country offered HSAs. Unfortunately, they don’t.
Many of them offer IRAs. So my goal has been to get all of those same financial institutions to also offer HSAs because they’re so similar.
If you want to think of your HSA as like a medical IRA, that’s great. Now, where it differs, however, is on the tax status of the account because the rules are slightly different.
With IRAs, some people can take income tax deductions for the money they put in them. Other people cannot. With HSAs, anybody who puts money into their HSA can take a tax deduction for their contributions each year.
Like IRAs, HSAs have contribution limits. However, there are no limits on the number of accounts that you can have. Not that you really need more than one, but some people might want more than one for a variety of reasons.
So we get the tax advantage when we put the money in. Like an IRA, any earnings from interests or capital gains are accrued tax-free.
At the end, though, the HSA funds are withdrawn tax-free if the funds are used for eligible healthcare expenses. And that’s where it typically differs from a traditional IRA where you have tax deductions perhaps upfront, tax-deferred growth, but then you pay income tax when you take the money out.
So in that respect, HSAs are better than an IRA.
Andrew Chen 16:43
That’s the only account that exists that has that triple tax advantage, right?
Roy Ramthun 16:47
Yes. So people get that concept.
But now let’s switch to the other kinds of healthcare accounts that people are familiar with from their jobs: the flexible spending account and the health reimbursement account. There, the tax advantages are similar, but the HSA is much more flexible.
First of all, it is a bank account that belongs to you. You change jobs, you take the HSA with you.
If you’re working for an employer that offers the flexible spending account or health reimbursement account, typically you leave that behind with that employer. And the money is “use it or lose it.” Every year, if you don’t spend all of it, you don’t get to keep it.
There are some exceptions to that, and increasingly so because of new flexibilities offered to those accounts. But HSAs, you never have to worry about losing your money. It automatically rolls over from one year to the next.
But it’s a cash-based account. If you only have $500 in there, that’s all that you can spend on your eligible healthcare expenses. But you don’t have to spend it if you don’t want to because you don’t have to worry about losing the money at the end of the year.
Andrew Chen 18:15
But one of the really great benefits is that you can actually invest the money and make it work for you so that it can grow, right? Is that a universal feature among HSA accounts?
Roy Ramthun 18:27
It is a universal feature, although the options that you have for investing depend on the financial institution where you have your account.
There is another area where HSAs are virtually identical to IRAs. You can invest your HSA account in the same types of investments that are permitted for IRAs.
It’s not required. As I said, your financial institution may put some limits on which investment options they offer you. But overall, generally, you have no other restrictions.
Andrew Chen 19:07
Are the tax benefits at the federal level and state level, or just federal?
Roy Ramthun 19:13
All but two states follow the federal tax rules. California and New Jersey do not offer a state income tax deduction for your contributions to your HSA. Those are the only two states that don’t follow the federal income tax rules.
There’s a couple of states that don’t have an income tax, so you don’t actually gain an income tax deduction or advantage in those seven or so states. But you’re not taxed on it either. So I would say basically every state but those two.
Andrew Chen 19:52
It strikes me that encouraging people to save for healthcare expenses is generally a good thing. Why do you reckon that California and New Jersey don’t allow this?
Roy Ramthun 20:12
I think it’s mostly political. Unfortunately, the longer it goes on, the more and more people have HSAs, and then it becomes a budget problem.
They would be losing tax revenue that they are currently gaining by taxing the contributions. So the more people that have them, the more dollars would be lost if they gave the tax deduction in their states.
Maybe it’s too late to fix that problem. I don’t know. I have not seen a quantification of how much it would cost in either of those states, but that’s where we are today.
Andrew Chen 20:54
One thing I was also curious about is that, to my untrained eye, the contribution limit on an HSA feels pretty low in relation to the cost of healthcare, generally how quickly it grows, how expensive it gets when you get older.
It’s generally only a few thousand dollars if you’re an individual, maybe $7000-8000 if you’re a family, per year. What was some of the thinking around capping it at that level versus allowing greater contributions?
I understand that you want to make it so that it’s not too much of a tax sheltering vehicle for the ultra-wealthy, for example. But for healthcare, it’s like a special purpose.
And if you restrict the usage to eligible healthcare expenses, I’m just curious, since you were so close to the implementation of these accounts, what some of the thinking was around capping it at these low levels.
Roy Ramthun 22:02
I think the concern from people who didn’t like the concept of greater consumer involvement in their healthcare was making sure that they did not become tax shelters.
If you go back to the original medical savings accounts, the amount you could put into your HSA was limited to 75% of your deductible. You couldn’t even put enough money in to cover your deductible.
Let’s say you had a $3000 deductible. You wouldn’t be able to put $3000 into your HSA, only 75% of that at that time.
So the people who started out with the MSAs in those early days had to realize they weren’t going to be able to cover their out-of-pocket expenses fully in year one. Now, maybe after two years they would have enough in their account to cover their deductible for the second year, but they had to take the risk in the first year.
When HSAs were created in 2003, you could put up to your deductible, but it was always the lesser of your deductible or another higher limit. Then in 2006, that lesser of requirement was taken out.
So now, for the first time, you could actually put in more money into your account than your deductible might actually require you to pay out of pocket. That’s when I think HSAs started to take off.
There’s still criticism about what about people who have chronic conditions or have a really bad year with lots of high medical expenses? They’re technically on the hook for their entire out-of-pocket limit under their policy.
For 2020, that can be as high as almost $7000 if you’re single and almost $14,000 if you have family coverage. That sounds like a lot of money, especially when you can put in less than half of that into your account each year.
So there’s been a lot of discussion about raising those annual contribution limits to at least equal the maximum out-of-pocket exposure that you would have under your policy. I think that makes a lot of good sense.
There are others who have said, “There shouldn’t be any limits. Why should there be any limit on people putting amounts in their accounts?” So we’ve got that group.
We’ve got others who think that we ought to make it $10,000 and $20,000. They’re really thinking about funding healthcare for future years and the unexpected things like coronavirus and unemployment and those kinds of things.
I think our history suggests that we’re going to raise those limits over time and somewhat incrementally. There’s a very strong case to be made that if we really want people to save for their future healthcare expenses, this is a great way to do it, and we would need to raise the limits to encourage more people to do it.
Andrew Chen 25:40
What do you think the likelihood that that could happen is? Because that all strikes me as it makes sense, especially the maximum out-of-pocket limit.
It’s just not very much money to save. There’s only a few thousand dollars that you’re putting in an HSA.
To me, one of the most attractive features of the account is that you can invest it and it can grow. And that only helps if you have a lot of time on your side and if you can almost frontload the accounts so that it can grow over a long period of time.
I almost wonder if there has ever been any discussion around if you don’t have a cap, make it a lifetime cap that allows people to contribute it all at once, let’s say, if they wanted to, and make it grow over a couple of decades so that they can really get a lot of mileage out of the investments.
And just a lot of creative ways that you could structure the contribution so that it’s not a magnet for tax sheltering because there is a cap of some form, but it still allows flexibility for people to control their healthcare costs by actually proactively saving into it.
What do you think the likelihood is that expansion of the contributions or more flexibility is likely to happen?
Roy Ramthun 26:56
That’s a tough one. I think it would have been a much easier ask before the coronavirus hit because it has put us all in a very different situation.
What we have seen from analyses of the history of HSAs is that some people believe there’s not a strong justification for doing it, only that most people are not taking advantage of those contribution limits.
I think it’s partly because there’s still confusion about the money not being “use it or lose it,” so people are being a little on the conservative side with their financing because they’re not sure.
Over time, though, we see evidence to suggest that they are starting to get it. And those people who have had HSAs for five or ten years tend to have higher average balances than people who have just had them for two or three years.
So I don’t really see a lot of evidence of frontloading, which, I would agree with you, would be a wonderful thing.
The tension, I think, is between should we allow the people who have access to HSAs today to put more money into their accounts, or should we address some of the concerns that people have that not everybody can have access to an HSA?
There’s some fairly strict eligibility rules for who can actually participate in the program. Currently, the discussion is more on the side of why can’t we let more Americans participate in this program? And then maybe over time, we would also address the contribution limits.
Given the coronavirus pandemic, there’s a big push to “decouple” eligibility for an HSA from the type of insurance that you have so that anybody with any insurance, including people on Medicare, could participate in an HSA.
I think there’s some political wisdom in that by expanding the base of people who would support keeping the program, possibly expanding it from a contribution perspective in the future, because we hear all the time from people who don’t understand why they cannot participate.
Like California and New Jersey, we fight those battles from a budget perspective here at the federal level as well. Everybody has their own school of thought as to which is the better approach. Regardless of how you expand the program, it will cost money to the federal budget.
Andrew Chen 30:05
On that note, what are the main eligibility criteria for accessing and opening and contributing to an HSA?
Roy Ramthun 30:14
They’re pretty simple. The first is that you must be covered by what I call an HSA qualified insurance plan.
I call it that because, while technically it is known as a high deductible health plan, which didn’t really exist 15 years ago, today it seems like most policies have pretty high deductibles. And not all of the ones that do have high deductibles make you eligible for an HSA, so we’ve got to look for the specific high deductible plan that makes you eligible.
I wish I could tell you that there’s a nice bright red gold star on each of those policies so you knew for sure that it would make you eligible for a health savings account. I think we’re getting better.
We’re not completely there yet, so you still need to ask questions. If you understand some of the finer details but aren’t sure, you should be asking.
People ask me all the time, “Is my policy an eligible policy?” I remind people that I can’t tell them with certainty because I didn’t design the policy.
I can certainly look at it and tell you if there’s anything that I see that’s a red flag that would make it not qualified, because those are fairly common. But beyond that, you will have to ask. Don’t assume that the policy you’re on makes you eligible until you know for sure.
Andrew Chen 31:59
The carrier will know, right? If you ask the carrier directly, they will be able to tell you?
Roy Ramthun 32:04
I’ve actually had some people who have told me that their carrier couldn’t or wouldn’t tell them. And I said, “Unless they can affirmatively say yes, then I would assume it’s not.”
But even I can’t tell you if it is or it isn’t because there may be some detail somewhere that I’m not aware of that somehow disqualifies it. I hope not, and I hope that everyone can find it out without too much trouble.
So that’s the main requirement: having the right type of insurance coverage.
The second thing is to make sure that you don’t have any other coverage that would disqualify you. The general rule of thumb is you cannot have any other insurance or coverage that does not apply a minimum deductible just like an HSA qualified policy does.
If you think of a policy that has only a $500 deductible, that’s well below the minimum that’s required for an HSA qualified policy. So if you had a second policy coordinating benefits with your HSA policy, that second one is going to disqualify you.
There are other types of insurance that may disqualify you as well, but not things like dental insurance, vision insurance, accident insurance, disability insurance, hospital indemnity insurance, cancer policies, all those are fine.
But Medicare is a problem. Other employer coverage is a problem. That includes flexible spending accounts and health reimbursement accounts because typically those do not have a deductible, but we now have variations of those two programs that are compatible with HSAs.
You have to understand those rules and navigate those waters because you may be thinking only about the coverage that you’re getting for your family through your job, but then your spouse may be getting other coverage through their employer, not realizing that it’s disqualifying you on the backend. So we have to look at both sets of coverage and be very careful.
The final thing is that you cannot be claimed as a tax dependent on somebody else’s tax return. That is a quick way of disqualifying all minor dependent children. Only adults can have HSAs.
Andrew Chen 35:02
Just to confirm, if my spouse has a disqualifying plan so that she can’t get an HSA, but I have a qualifying HDHP and I don’t have any other disqualifying plan or account, I can’t get the family plan but I can still get one for myself. Is that right?
Roy Ramthun 35:24
Yes, but you may also be able to get the family plan. You just need one other family member on your policy.
It could be your spouse who herself is disqualified because of some coverage that she has, as long as it only covers her and not you. The minute it covers you, you’re also disqualified. But if it only covers her or children and doesn’t cover you, then you remain eligible.
Now, you just need one other family member on your policy. They could be one of those dependent children who themselves can’t have an HSA. It could be your spouse who also cannot have an HSA.
But that does not change the fact that you are eligible and you have family coverage. Therefore, you are allowed to contribute to an HSA in your name at the higher family limit.
Andrew Chen 36:26
Just to make sure I understand, same scenario: Spouse has a disqualifying plan that only covers the spouse and nobody else, and I have a qualifying plan that only covers me and I don’t have anything else that disqualifies me. And we have a child.
If that child is on the spouse’s plan, then it sounds like I can only have an individual HSA for myself alone. But if I move that child to my HDHP, then I can open a family plan. Have I got that right?
Roy Ramthun 36:57
Yes. It depends on how many people are covered by your HDHP, your HSA qualified policy.
If it’s just you, then your contribution limit is the lower single amount.
If you have one other person (it doesn’t matter who that is, as long as it’s not a pet), you have family coverage because family coverage is two or more people. If they themselves are not eligible, you still are and you have a family policy.
Andrew Chen 37:37
Is that only direct family, like your immediate family?
Roy Ramthun 37:42
The law does not limit it to direct family.
Andrew Chen 37:48
How far removed could you be? Could it be a brother, sister, cousin?
Roy Ramthun 37:52
It can be anybody. There’s nothing that says who the second person must be. You just have to have a second person, hopefully living and all of those things, to give you family coverage.
Andrew Chen 38:09
I see. And they could be either eligible or not eligible?
Roy Ramthun 38:14
Andrew Chen 38:16
They just can’t be disqualified, but they could be eligible or not eligible?
Roy Ramthun 38:19
Whatever their status is as eligible person has no effect on you.
I have to look at each individual on the policy and ask, “Are you covered by an HSA qualified policy?”
First answer is “Yes.” Same for you, same for that second individual.
Then the second question, “Do you have any other coverage that disqualifies you?”
You answer that “No,” so you are good.
The second person on your policy may have to answer that “Yes.” So they are not eligible, but that does not impact your eligibility.
Andrew Chen 39:06
Right. It doesn’t impact yours, but it impacts your ability to do a family plan, right? Those two questions have to be answered consistently for both people for a family plan to happen?
Roy Ramthun 39:17
Yes and no. We’re going to look just at you.
Does your policy cover just you? If yes, then your contribution limit is the lower single amount.
If your policy covers a second person, it doesn’t matter who they are. It doesn’t matter if that person is eligible or not.
They may, in fact, have disqualifying coverage. They may be a tax dependent and can’t open an HSA.
You have family coverage, and now you may contribute at the family level, which is approximately twice the single level.
The second person on your policy can’t do any of that because they’re not eligible. But it has no impact on your eligibility or your contribution limit.
Andrew Chen 40:19
Interesting. I feel like I’m learning new stuff even myself.
Roy Ramthun 40:25
Well, that’s good. There’s a huge benefit to you.
Andrew Chen 40:27
Yeah. And certainly, I think for listeners as well.
Just to play out two scenarios, a married couple with no children and the spouse has disqualifying coverage, but I have qualifying coverage and nothing else that disqualifies me. Can I open a family plan?
Roy Ramthun 40:48
If you have the spouse on your policy, yes.
Andrew Chen 40:52
Even if she’s also covered by a disqualifying plan?
Roy Ramthun 40:56
Yes, because we’re going to ask those two questions to each of you separately. So your answers are good because you have qualifying coverage and you’re not disqualified by anything else.
So you are eligible. You have family coverage.
Your spouse has qualifying coverage but also disqualifying coverage. Therefore, she is not eligible.
However, you would literally have to drop her from your policy for you to go with a lower contribution limit, changing from family to single coverage.
And I would never encourage you to do that because you’re allowed, by virtue of her being on your policy, to contribute at the higher level because you have at least two people covered by your policy.
We don’t care what their eligibility status is. We only care about yours.
Now, if we want to talk about your spouse’s ability to open and contribute to an HSA, separate conversation, but that’s with her, not with you. And if she was eligible, then we would have a discussion about do you as a family want to open one HSA or two HSAs?
So let’s change your scenario to now your wife does not have disqualifying coverage. Do we need two HSAs? Not really.
Both of you are eligible. Both of you could contribute to an HSA up to the family limit.
But when there’s two of you, you have to split the family limit across the two HSAs. It would be great if both of you could do the maximum into separate HSAs, but that’s not how it works.
Most couples in those situations open one HSA. They put the full family amount into that HSA.
Because on the backend, I can use my funds tax-free for any eligible expense that my spouse or my dependent children incur, so it really doesn’t matter whose name the HSA is in.
It’s still going to provide the same tax deduction for your family regardless of whether it’s in one account or two accounts. So none of that matters at the end of the day.
But I want you to be able to take advantage of the same opportunity when your spouse is not eligible and they’re covered on your policy.
Yes, you would pay a higher premium for family coverage compared to single coverage, but the advantage of doing that is that you get to essentially double the amount of money put into your HSA.
And likely, all of your family members are going to have some out-of-pocket expenses. It’s worthwhile considering going with the family coverage, even though it might cost you a little bit more, just to be able to contribute more to the HSA and lower your taxes as a result.
Andrew Chen 44:33
That’s super interesting.
What exactly is the funding mechanism for an HSA? Is it payroll deduction, self-contributions, rollovers, all the above?
Roy Ramthun 44:45
All of the above. The caveat on rollovers is you can roll money from another HSA or a previously owned MSA into your HSA. You can’t roll any of your flexible spending account or health reimbursement account dollars into your HSA.
You can once in your lifetime roll over some money from an IRA into your HSA, but the amount is limited to your annual contribution limit for your HSA that year. It would be nice to be able to roll over the whole amount, but you can’t.
So no other rollovers or transfers of funds are allowed. Everything else, though, is primarily fine: cash contributions, payroll deduction contributions, employer contributions which are also tax-free to you.
Anybody else can put money into your HSA if they want. There’s no limit on who can put money in your account. There are limits, though, on some of these other mechanisms.
Andrew Chen 46:05
When is it advantageous to fund an HSA with IRA rollover dollars?
Roy Ramthun 46:12
I think we debate that all the time. On the one hand, you would be gaining a tax advantage by moving the dollars into the HSA because now you can withdraw them tax-free.
If you had $4000 in an IRA and you transferred that to the HSA, you could now take out $4000 for medical expenses from the HSA tax-free.
Had you left the same $4000 in your IRA, and let’s for the sake of easy math say you’re in the 25% bracket, you would pay taxes first on the $4000, and then what was left you could spend on eligible healthcare expenses.
So there’s a definite advantage to moving the money to the HSA, but the opportunity is not gigantic.
I think the primary reason that people look to doing it is they’re just getting started in an HSA, they see a large deductible, maybe now they see a very large out-of-pocket expense, and they don’t know where they’re going to come up with the money to put it into their HSA. So an IRA transfer is an option for them to help jumpstart the funding in their account.
As you get older, maybe that’s more attractive as you’re thinking about spending retirement dollars on healthcare expenses, which most of us probably will do compared to our younger years.
As we’re approaching Medicare age and we run out of time once we get on Medicare to be able to keep contributing to our HSA, maybe we dip into the IRA in those later years so that we increase the tax advantages for those out-of-pocket expenses.
Once I turn 65, I could start paying my Medicare premiums tax-free out of my account.
There are other people who think that maybe you should just be converting your IRA to a Roth instead of moving it to the HSA. Different schools of thought.
At this point, we’re not gaining any additional tax advantages. Transfers don’t give you payroll tax savings like the payroll deduction contributions would.
So you’ve got to really think through “Where are my payroll deductions going? How much are my tax savings from funding my HSA that way rather than from a transfer?”
The same for my IRA or maybe even a Roth. That gets a little bit more complicated, and I don’t want to go down that rabbit hole right now.
Andrew Chen 49:19
Is it ever advantageous to fund using the Roth, or can you get the tax deduction back if you did that?
Roy Ramthun 49:26
I would say why bother? Once the money is in the Roth, any distribution is tax-free. You’re not limited to healthcare expenses.
Because if you do decide that you need to use your HSA dollars for other things than health expenses, you have a 20% penalty plus income tax until age 65, and then that 20% penalty goes away.
So I would never recommend somebody converting Roth dollars into HSA dollars. I’ve never heard of a scenario that makes sense.
Andrew Chen 50:06
What healthcare expenses are considered eligible?
Roy Ramthun 50:11
It’s pretty broad. The IRS definition of an eligible expense is quite broad.
When you think of your insurance, anything that’s covered by your insurance that requires you to pay out of pocket. Copays, co-insurance, deductibles are all going to be qualified expenses.
You’re also going to be able to pay for most of your over-the-counter drugs and medicines, Band-Aids, Ace bandages. Congress just expanded the law to include feminine hygiene products, so all women who are purchasing those products can now use their funds tax-free for that. Dental expenses, vision, hearing, orthodontia, laser eye surgery.
There’s a Publication 502 that the IRS puts out each year that explains a lot of these things that you can use your HSA fund.
The area that you’ve got to be a little bit careful is that that publication is going to say no over-the-counter expenses, no drugs or medicines over the counter. You can still use your HSA funds tax-free for those.
The other is insurance premiums. HSAs generally cannot be used to pay insurance premiums unless they are Medicare, COBRA, or you are receiving federal or state unemployment benefits.
Andrew Chen 51:56
What factors should consumers consider when they are selecting an HSA custodian bank? And if they don’t like the default chosen bank selected by, say, their employer, what options do they have to get the money out to move to a different bank?
Roy Ramthun 52:14
Fortunately, everybody has complete flexibility to move their funds to another HSA of their choosing. They’re never locked in to any trustee or custodian that’s been chosen by their employer or anybody else.
Does that mean you should be moving your money every two weeks when it comes in through payroll deduction? Probably not. I don’t think you need to do it that frequently.
But beyond that, I would say, what do you want from your HSA? Do you want low fees? Do you want investment options?
There can be tradeoffs with some of these things. Maybe your trustee or custodian doesn’t offer online bill pay, and that’s how you would rather use your HSA funds rather than writing checks. There’s easy ways to go and find those different features.
We are in a low interest rate environment right now, so don’t expect to find very high interest rates. But some people who want super safe money are going to be looking for the best rate of return from an interest rate perspective.
There are fees that are charged for these accounts, so you need to understand what they are and whether you like the fee arrangement that’s set up. Typically, it does cost you more to invest your funds, but that can also give you a higher rate of return.
Just like we would with our retirement account, there would be tradeoffs there. But there’s lots of options.
The last one, which is the hardest to measure, I think, is customer service. How knowledgeable are the people who are managing my account? How responsive are they to my questions and my needs?
I don’t know that there’s a foolproof way of analyzing that upfront. Certainly there are services out there that analyze and recommend accounts for you, which you can learn from what they suggest and try it and see if it works for you. And if it doesn’t, know that there are plenty of other options out there.
Andrew Chen 54:49
I would love to talk briefly about reimbursement.
How does reimbursement work in terms of how important is it to save your receipts? When might you need to show them to anyone? And do you have recourse if you happen to lose your receipts?
Roy Ramthun 55:07
The nice thing is that you don’t have to produce your receipts to get your money out. The easiest way is to use a debit card that may be linked to your account, which is going to tell you whether or not the expense that you’re about to pay for is an eligible expense.
We’re very familiar with that at the pharmacy. If we have a debit card that’s tied to our HSA, and at the same time, we’re picking up our prescription, we’re trying to buy a drink and a magazine, they’ll swipe it and it will tell you which expenses are eligible to be taken out of your account.
Now, not all of them may be eligible to be taken out of your account. Sometimes it’s up to you to manage that. Other times, they will do it for you and ask for a second card to accept payment.
I always recommend keeping receipts because if, in fact, you are ever audited by the IRS, you would need to be able to prove that those were eligible expenses.
The best way to keep your receipts is always electronically. So scan them or take pictures of them so that you have copies of those receipts.
Paper is fine too, if that’s a better method for you. But ink may fade over time, so you want to make sure that you have a good system of records that you use consistently.
Andrew Chen 56:56
If you lost the receipt, didn’t take a picture of it, IRS audits you, are you pretty much stuck at that point? You just have to pay the 20% penalty?
Roy Ramthun 57:07
You are stuck, but hopefully you have enough receipts to offset the one that you’ve lost. So it really doesn’t matter because you’re not taking all of the money out of your account.
You have more than enough receipts to justify what you’re taking out of your account, and that won’t matter. You just need enough receipts for eligible expenses to match up with the amount that you’re withdrawing. You don’t have to do it expense by expense.
“Oh, I lost the receipt for this one.” Just pull in another receipt at that point, and that will offset it and you won’t have any problems.
Andrew Chen 57:49
Got it. Something I’m curious to get your thoughts on is that since there’s no deadline for reimbursement from an HSA, you could do it at any time.
Given that there’s tax-free compounding if you invest on top of pre-tax contributions and tax-free withdrawal, it seems the real power behind an HSA is the ability for it to grow as long as possible tax-free.
In your view, is it strategically better in terms of maximizing the size of your HSA to wait a really long time, potentially years or even decades, before reimbursing yourself for qualified healthcare expenses?
Or is that just too much hassle to track and hold your receipts for that long and it’s just easier to reimburse yourself right away when you incur the expense?
Basically, is there any benefit to timing your reimbursement claims?
Roy Ramthun 58:40
I do think that there is a benefit to that. The downside is keeping track of all of your expenses so that you don’t run into a problem later when you try to do it.
All the investment advice that we get for our retirement planning is put the money away, don’t touch it, let it grow. That means your money has a much greater return if you leave it alone.
The same applies to the HSA. If you’re constantly taking reimbursements, that money can’t grow because you’re not leaving it there to actually earn anything for you.
I myself have not taken any reimbursements, and I am trying to grow my account as fast as I can for retirement. I hope to retire in 10 years or so.
I don’t know what Medicare is going to be like. I’d like to have set as much money aside as I can for retirement through my HSA because I can spend it on my Medicare premiums and other healthcare expenses tax-free.
The same investment advice applies to the HSA as your retirement plan.
And if you can afford to pay your expenses with what seems like after-tax dollars, writing a check, putting on your credit card, paying cash, pay the expense now. Hold on to the receipt. Reimburse yourselves later when the money that you’ve put into your account has now doubled or tripled over 20 years or more.
It’s just the power of compounding. It’s grown that much for you, and you didn’t have to do anything except invest it. Historically, there’s no better way of growing a balance in any kind of account without doing some kind of investing in there.
So the same advice that applies on investing in retirement planning applies to the HSA. I wouldn’t use any different type of advice.
I might consider putting money into my HSA before I put money into my retirement plan, just because I know I can invest it pretty much the same way. And I’d gain the tax advantage on the backend when I do want to spend it.
So we have to consider whether or not the employer is matching my contributions to either my retirement plan or my HSA.
Some do both. Some do one and not the other. Some do neither.
Any financial advisor or probably accountant can tell you where those tax advantages lie given your particular situation.
Andrew Chen 1:01:54
What happens to your HSA when you reach retirement age?
Roy Ramthun 1:01:59
Nothing particular. It’s your job to decide what you want to do with your funds at that point.
If you want to keep the money in there and keep it growing, you’re allowed to do so. If you want to start taking reimbursements at that point, you can.
Again, you can start taking reimbursements for other things than healthcare. It is only taxable as income, no longer a 20% of penalty that applies.
Andrew Chen 1:02:31
That’s at 65, I believe, right?
Roy Ramthun 1:02:33
When you turn 65, yes.
Andrew Chen 1:02:33
At 65, then you can take the money out for anything. But just be aware that if you take it out for non-eligible healthcare, no more penalty, but you’re going to pay ordinary taxes on it. It basically turns into a regular IRA at that point.
Roy Ramthun 1:02:48
At that point, yeah, there’s absolutely no difference. And if you’ve invested it the same way you would have invested your IRA, you haven’t lost anything.
Andrew Chen 1:02:58
Can an HSA be bequeathed or inherited? What happens to the account when the account holder passes away?
Roy Ramthun 1:03:06
It depends on who the beneficiary is. If the beneficiary is your surviving spouse, that is the one and only person who can inherit your HSA tax-free. They take over the ownership and they can continue to use it for their expenses tax-free going forward.
But they must be named the beneficiary. I’ve had any number of situations where people forgot to name their spouse as the beneficiary and there’s no way for that spouse to get the money tax-free.
Any other beneficiary would be able to receive the assets subject to possible inheritance or estate taxes. But at that point, it’s no longer an HSA. It becomes a regular bank account.
If there is no beneficiary, then it becomes part of your estate and taxed on your last return. If there is a beneficiary, then the money will go to them after the fair market value of the account has been assessed.
But if there are inheritance taxes or other things that would apply, it will not be an HSA any longer. You will not gain suddenly this new HSA with all of its wonderful tax benefits. It’s just a bank account at that point.
Andrew Chen 1:04:47
If you do specify your spouse as a beneficiary, does it retain its HSA status?
Roy Ramthun 1:04:52
Yes, it just becomes a new account owner.
Andrew Chen 1:04:56
Got it. At the end of the day, is there a way that you could characterize the ideal patient profile of someone for whom an HSA is ideally suited versus for someone, maybe it’s not a good idea? What are the markers of the two patient profiles?
Roy Ramthun 1:05:18
Interestingly, I don’t think we always know who that is. My personal view is that an HSA can benefit anyone.
The common view is that only young and healthy people benefit. But they’re looking at the cost of the insurance.
Assuming that people save money on their premium by switching to a plan with a higher deductible, and then because they don’t think that they’re ever going to have any out-of-pocket expenses, the money that they put in the HSA just becomes a savings account, which is absolutely true.
What they’re not looking at, though, is some of the other features of the insurance. And those out-of-pocket limits become extremely helpful as well, to the point where somebody who is very ill or sick or has a high number of medical expenses in a given year could also benefit very much by being able to pay all of those out-of-pocket expenses that they know they’re going to have under any insurance policy.
No insurance policy covers 100% of anything. And they could be saving thousands of dollars on taxes with those contributions.
I did find an article in Entrepreneur Magazine back four or five years ago, which goes through the case of three people where both the very sick person and the very healthy person came out better off. The people who didn’t were the ones that were in between.
None of us know, in any given year, are we going to be an in-between person, a high user, or a low user? But if we’re looking to participate in the HSA fully every year and setting aside money every year, we can do a lot to cover all of those out-of-pocket expenses.
I can’t really figure all of that out, whether it was the better choice or not, until after the year is over, and then I’d have to be able to rerun all of my claims under the alternative insurance policy that I might have chosen to figure out, “Was I actually better off?”
And then we’ve got to factor in the tax savings and all of those other things. It becomes challenging to figure it out.
But my final remark on that would be do not assume that you would be worse off just because. When you add all of the things up, I think you’ve got to do the math to figure out whether you would or would not be better off. Do not just assume that you’re going to be worse off.
Andrew Chen 1:08:28
Okay. Roy, this has been incredibly insightful. I’ve really enjoyed our chat here today.
I think there’s a lot of good insights and tips here for folks to think about who either have these accounts now and want to further optimize them or are considering them in the future.
Where can listeners find out more about you and your work and services?
Roy Ramthun 1:08:51
If they want to, go to askmrhsa.com. They could find out more about me and my colleagues and the types of information that we have available and how we can be helpful to people.
If you want to collect questions and share with me the kinds of things that you’re hearing from people, that helps us understand what is it that people still don’t understand about HSAs. We are trying to help people understand HSAs so that they could take full advantage of them.
We think we’re doing a great job, but we want to know where we’re falling short or where people are missing something in the translation.
I do think that you almost need to get an HSA to try it out a little bit. But we can certainly help you make a wise decision before you jump into it.
Not everybody has a choice. Sometimes it’s the only option that’s available to them.
So it’s best to understand it fully so that you can take full advantage of it. And hopefully we can help you do that.
Andrew Chen 1:10:09
All right. We’ll definitely link to your website link in the show notes.
And I’ll just invite listeners who are listening or who come across the blog post page for this. Post a comment on the blog post page.
You can go to hackyourwealth.com/49. That’s going to be the webpage for this episode. Post a comment there if you have a question.
If there’s a bunch of them, I’ll follow up with Roy. Maybe he can come back and respond to some of them.
Or at least you’ll be able to share them with Roy and he’ll be able to answer them in that way. So I definitely invite you to do that.
Also, we just want to give a shout out. I’ve also written a blog post about health savings accounts, which you can check out at https://hackyourwealth.com/health-savings-account.
Check that out if you’re interested in that as well. I’ll post a link to that in the show notes.
Roy, thanks so much again for taking the time to chat with me today. I’ve really enjoyed it. And best of luck with everything.
Roy Ramthun 1:11:22
My pleasure. We’re here to help, so hopefully we can be helpful.
Andrew Chen 1:11:26
Cheers. Take care.
Roy Ramthun 1:11:28