HSAs Serve as Medical Expense Safety Rail for Financial Plans
Unexpected medical expenses and long-term healthcare costs are often overlooked or underestimated in financial, retirement, and estate planning, especially for affluent individuals and families. The irony is studies show that high-net-worth individuals have longer life expectancies, which suggests a greater need to budget for them properly. An unexpected medical event or condition, whether singular or chronic, can significantly impact your financial health, especially for those without health insurance. When it comes to tax-efficient healthcare coverage, Healthcare Savings Accounts (HSAs) can actually help you build wealth and view your healthcare coverage as a long-term investment rather than a cost.
The impact an unplanned medical expense ultimately has on your finances depends on legislative, economic, life, and family matters.
According to the American Medical Association, health care spending rises annually by an average of 4%. Even if your family is fully insured, you could be equally affected. In 2021, average family premiums were also up by 4%. The average cost for a 3-day hospital stay is $30,000, and the average cost for cardiac bypass surgery is $123,000.
Healthcare costs related to COVID-19 can be astronomical. According to FAIR Health, for an uninsured patient in the US, the average cost of an inpatient hospital stay for COVID-19 starts at nearly $75,000 and can escalate rapidly depending on the severity. For patients requiring ICU care or ventilation, the national average rises to nearly $318,000. In Massachusetts, the average cost of an inpatient hospital stay for COVID-19 ranges from $62,894 to $209,209.
When times are good, it is all too easy to let your guard down, leaving you and your family vulnerable to risk. For your wealth management plan to be successful in the short and long term, it cannot be based solely on what you and your family need in times of prosperity. What happens if you or a family member experiences an unexpected medical event right before or immediately after you retire or get divorced? What if an event occurs right after you tie up significant assets in an investment or business venture? If you or another family bread-winner is incapacitated, are you prepared to weather lost earnings and potential future inflows?
Healthcare Savings Accounts (HSAs) can help you offset medical-related costs and reduce your income tax liability.
Low, moderate, and high earners all pay taxes, but the rates change significantly as you move up the chain of tax brackets to high-net-worth territory. According to the Tax Foundation, even though the top 1% of income earners account for less than 21% of all the income earned, they pay approximately 40% of all federal income taxes.
The tax savings HSAs provide are threefold: contributions are pre-tax, earnings are tax-free, and withdrawals for qualified medical expenses are tax-free. Many ordinary expenditures qualify, such as copayments and prescription drug purchases. You can claim a tax deduction for your own contributions to your HSA and contributions made by anyone else other than your employer. You may also exclude your employer’s contributions to your HSA from your gross income.
Any contributions made to your HSA remain in your account until you are ready to use them, regardless of your status in the workforce. If you change employers or retire, your account follows you. Since being covered under a high deductible health plan (HDHP) is an HSA eligibility requirement, your deductibles will be higher, but your monthly premiums will be lower. If you pay out-of-pocket for and track your medical expenses, you can reimburse yourself at any time without tax or penalty. By keeping the funds in your HSA, you can continue to build wealth and use the accumulated tax-free reimbursements at a later time to meet other financial goals or pay for post-retirement healthcare costs, including Medicare premiums.
Contact Livingston & Haynes
My team at L&H provides affluent individuals and families with guidance and services that help them meet their financial goals, ensure their businesses prosper, and minimize their tax burden and exposure to financial risk. I help clients take a tax-efficient approach to healthcare by incorporating HSAs into wealth management strategies. If you would like to learn more, contact me today. I look forward to working with your family.
Maria Bunker, CPA, became a partner at Livingston & Haynes in 2017. She specializes in tax planning services for affluent individuals and families. She also provides audit and tax planning services to nonprofits and businesses across various industries, including financial services, healthcare, and real estate partnerships.