The Internal Revenue Service announced new, higher contribution limits for health savings accounts for 2020 today. HSAs are the best way to save courtesy of Uncle Sam, with triple tax benefits. You put money in on a taxfree basis (usually through salary deferrals), it builds up tax free (you can invest it), and it comes out taxfree to cover out-of-pocket healthcare expenses. It’s your account; it’s up to you to use it wisely.
Here’s a link to the IRS revenue procedure with the official numbers. For 2020, you can contribute $3,550 for individual coverage, up from $3,500 for 2019, or $7,100 for family coverage, up from $7,000 for 2019. If you’re 55-plus, you can sock away an additional $1,000 a year. That catch-up amount isn’t subject to inflation adjustments.
You can contribute to an HSA if you’re in a qualifying high-deductible health plan. For 2020, that means a plan with a minimum annual deductible of $1,400 for individual coverage or $2,800 for family coverage.
At a minimum, you should contribute enough to cover your deductible. Got an unexpected doctor’s bill? You can put money into your HSA, take it right out, and the government just paid 25% of the bill. (The higher your tax bracket, the bigger your savings.)
But the real juice to an HSA is to use it as a retirement savings kitty. You can invest and let your money grow for decades tax-free, so long as you, or a surviving spouse, eventually use it for medical expenses. An HSA can even serve as a backup rainy-day fund; if you suddenly need cash, you can take money out tax-free to reimburse yourself for any prior years’ medical expenses paid from outside the account. Plus, once you turn 65, you can withdraw money for nonmedical uses, paying the same tax as you would on withdrawals from a pretax 401(k).
At the end of January, Americans held $60 billion in 26 million HSAs, an average of $2,300 per account, according to HSA advisory firm Devenir. Most HSAs are offered as an employee benefit. But Fidelity Investments and a fintech newcomer, Lively, both also offer fee-free individual HSAs for self-employed folks and job hoppers.
“Most people are rolling over money, building up an account balance despite the fact that they are taking distributions,” said Paul Fronstin, director of health research at the Employee Benefit Research Institute at the Institute’s spring policy forum. That’s smart.
But there’s evidence that HSA owners are making a costly mistake: After reaching their deductible, they’re more likely to spend their HSA dollars on low-value services. See the recent EBRI issue brief, Do Accumulating HSA Balances Affect Use of Healthcare Services and Spending? (Registration required.) This is a problem because some of these low-value services (increased imaging for back pain within the first six weeks, for example) are potentially harmful. Use of preventative services jumps after the deductible is met too. “We’re not getting it right,” Fronstin says. “We need to engage people before and after they reach their deductible.”
For help, check out the American Board of Internal Medicine’s Choosing Wisely Campaign, which lists tests and treatments appropriate for specific conditions and is meant to spur conversations between doctors and patients.