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Legal Notes: The benefits of a Health Savings Account

Seunghee ChaAttorney Seunghee ChaWith the graying of baby boomers, and an estimated one out of eight expected to develop Alzheimer’s disease, the cost of medical expenses, including long-term care, has become an essential aspect of preparing for aging.

Health Savings Accounts

An emerging strategy is the Health Savings Account (HSA), a medical savings account designed to defray the cost of medical expenses not covered by insurance. It was established as part of the Medicare Prescription Drug, Improvement, and Modernization Act and signed into law in December 2003.

To be eligible to contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). Once you turn age 65 and enroll in Medicare, you are ineligible to contribute. Contribution limits in 2019 are $3,500 for single coverage and $7,000 for family coverage, with an additional $1,000 catch-up contribution for people age 55 and older.

HSAs offer significant tax advantages:

  • Funds contributed by an employer’s payroll deposit are pre-tax contributions and not subject to federal income tax (some employers also contribute to their employees’ HSAs).
  • In most states, including Massachusetts, your contributions to an HSA are excluded from your gross income.
  • You can invest the money in your HSA, which grows tax-free, and use it for qualified medical expenses for you, your spouse, and qualifying dependents.
  • Withdrawals for qualified medical expenses are tax-free; withdrawals for unqualified expenses are subject to income tax—if you are under age 65, a 20% penalty applies also.
  • Starting at age 65 you can withdraw funds for non-medical expenses tax-free and without penalty.
  • Funds in an HSA can be used to purchase long-term care insurance (limits apply and increase with age), which is important for taxpayers who cannot itemize deductions—premiums for long-term care insurance paid with non-HSA funds are deductible but only for taxpayers who take itemized deductions.
  • At your death if you name your spouse as beneficiary, the HSA can continue in their own name even if your spouse is not enrolled in a HDHP; alternatively, your spouse can take the remaining funds in a lump sum tax-free (non-spouse beneficiaries cannot continue the HSA in their own name and are taxed on the entire remainder account in the year of your death).

The tax-free advantages, with the enhanced benefits for people age 65 and older, make the HSA a more attractive investment vehicle than a taxable account like a 401(k) for savers who can maximize contributions and invest in long-term investments. HSAs incentivize saving for future medical expenses and can make long-term care insurance more affordable. If you are eligible to contribute to an HSA, start early, and it should be an integral part of a comprehensive plan for retirement and aging well.

The views expressed in this column represent general information. To address your particular and specific needs consult your own attorney. If you need help with referral to an attorney, contact the Franklin County Bar Association at (413) 773-9839 or the Worcester County Bar Association at (978) 752-1311. Elder law resources may be found through the National Academy of Elder Law Attorneys, Massachusetts Chapter, at massnaela.com or 617-566-5640.

Community Legal Aid (CLA) provides legal services free to people age 60 and older for civil legal matters with an emphasis on access to health care coverage (MassHealth and Medicare) and public benefits as well as tenants’ rights. A request for legal assistance can be made by phone at 413-774-3747 or toll-free 1-855-252-5342 during their intake hours (Monday, Tuesday, Thursday, and Friday from 9:30 a.m. to 12:15 p.m. and Wednesday from 1:30 p.m. to 4:15 p.m.) or any time online by visiting www.communitylegal.org.