Five Common Pitfalls of an HSA

Chris Reddick |

Health Savings Accounts, or HSAs, are an excellent opportunity to save and pay for healthcare costs now and in the future. However, as you might know, an HSA must be paired with a High Deductible Health Plan. The idea is that you would cover more routine medical care through the HSA, and significant health expenses could be covered by insurance if they exceed the high deductible for the calendar year. In this blog post, I discussed five common pitfalls that one should know about HSA accounts.

1) Not knowing about these accounts. Many employees do not know about these accounts and do not fully understand how to use them best. HSAs are relatively new; you may have an HSA but not know what to do with it. Always check out what benefits your employer offers in annual enrollment and talk to a financial advisor to see if enrolling in an HSA makes sense for you. You might be comfortable with your current healthcare benefits and not want to switch to an HSA. But switching to an HSA might provide significant tax savings and benefits.

2) Not reviewing HSA beneficiaries. It would be best if you always assigned beneficiaries to your HSA account. For instance, when a spouse inherits an HSA, the account retains its pretax status. However, if a non-spouse beneficiary inherits the HSA, the account would be distributed, and the income would be taxable to the beneficiary in the year of the original owner’s death. So the bottom line is that you should review your beneficiaries for these accounts or at least make sure you assign beneficiaries.

3) Not funding or investing in HSAs. Many HSA account owners do not fully fund their accounts and do not invest money in them. Some HSA providers require a portion of the account to remain in cash, but the remainder could be invested according to your risk tolerance and when you need the money. The significant advantage of an HSA is that you can use the funds for future medical expenses, but investing a portion of the money now for future potential growth might make sense.

4) When cash flow is sufficient, distribute funds from the HSA to cover medical expenses. Depending on your situation, it may or may not make sense to use the HSA to cover medical costs in the current year. If cash flow permits, you may benefit from delaying reimbursements from the HSA until early retirement. This way, the account can remain invested and grow tax-free for longer. Of course, you should save receipts and records for medical expenses as they occur, even if they plan to delay reimbursement. But if you have many medical expenses each year, an HSA might not make sense as you are paying the total cost of coverage.

5) Not understanding the tax consequences of an HSA account. Many employees don't understand the tax consequences of HSA. First, there is a severe 20% penalty on distributions for nonqualified expenses. Second, there is a 6% penalty for over-contributing to the account. Third, you cannot contribute to an HSA if enrolled in Medicare, with a 6% tax penalty if you do if the money is not removed. The tax consequences are more severe for HSAs than IRAs, and you should know about them before contributing money.

HSAs are indeed really complicated. Understanding the significant pitfalls of HSAs is crucial to making wise financial decisions. Talk to a financial planner to help determine if an HSA fits your financial plan. If I can be of service, reach out on the contact page below.


This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.


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