Despite efforts to control escalating medical expenses, costs continue to rise and are passed on in the form of increasing medical insurance premiums.  This problem exists for both employers who pay the lions share of premiums and individuals who incur larger unreimbursed expenses while they work and are exacerbated upon retirement when they become personally responsible for managing their healthcare.       

According to the Fidelity Retiree Health Care Cost Estimate, an average 65 year old retired couple would require about $280,000 in 2018 to have a 90% chance of having sufficient funds to pay Medicare premiums and the 38% of medical costs that Medicare doesn't cover.  In prior years, the tax deduction for unreimbursed medical expenses could be used to subsidize these out of pocket expenses.  For taxpayers who itemized, unreimbursed medical expenses in excess of 7.5% of adjusted growth income (AGI) could be deducted.  With the standard deduction now raised to $12,000 per person ($24,000 per couple) due to the passage of the Tax Cuts And Jobs Act of 2017, many taxpayers no longer itemize.  Additionally beginning in 2019, this threshold has been raised to 10% thus further reducing its benefit to taxpayers who continue to itemize deductions.

In 2003, Congress passed legislation that created Health Savings Accounts (HSAs) as a tax advantaged vehicle to pay unreimbursed medical expenses.  HSAs are triple tax free - tax deductible pretax contributions, tax free growth and tax free distributions to pay for qualified medical expenses.  Qualified expenses include most health care related expenses plus premiums for Medicare Parts B, C and D (not Medigap), long term care insurance and COBRA coverage while on unemployment.  They also include dental and vision care.  While the tax benefits of HSAs are geared towards individuals age 65 and older, they can be withdrawn tax free by anyone at anytime for unreimbursed medical expenses.  However, if funds are withdrawn before age 65 for non medical expenses,  a 20% penalty is incurred as well as income taxes.  After age 65, funds can be withdrawn without penalties but income taxes are owed if not used for qualified medical expenses. 

In order to qualify to contribute to an HSA, the individual's medical plan must meet the criteria as a High Deductible Health Plan (HDHP).   In 2019, the plan must have a minimum annual deductible of $1,350 for an individual and $2,700 for a family.  The plan must also have a maximum annual out of pocket expense of $6,750 for an individual and $13,500 for a family.  Additionally, to be eligible to contribute to an HSA, an individual must meet the following conditions:  1) covered by an HDHP on the first day of the month, 2) not be covered by some other health coverage that is not an HDHP, 3) not be enrolled in Medicare and 4) not be eligible to be claimed as a dependent on another person's tax return. 

The 2019 contribution limits are $3,500 for an individual and $7,000 for a family with an annual $1,000 catch up provision for an individual over age 55.  These contributions are made on a payroll deduction through an employer and both may contribute as long as the aggregate contribution does not exceed the limits.  The contributions are exempt from Federal income tax, Social Security and Medicare taxes and most state income taxes.   

The accumulation of assets in an HSA can have a profound positive impact on the financial health of a retiree.  For example, rather than making taxable distributions from a retirement plan to pay for unreimbursed medical expenses, the funds can be withdrawn tax free from the HSA.  Furthermore, expenses incurred for long term care expenses that meet the conditions where individuals are enabled to perform activities of daily living can be paid from the HSA. 

Another benefit of HSAs is that contributions and gains realized from prior years can be used to pay current medical expenses.  This is in contrast to contributions made to a flexible spending account (FSA) where all of the money contributed during the calendar year must be used in that year or be lost. 

With an estimated $54 billion held in HSAs, investment firms are beginning to take notice of the growth in assets of these accounts.  Currently, there are only a handful of platforms where you can establish and fund an HSA.  A main reason for the limited number of options has been the relatively small account balances that are not economically feasible for firms to administer.  Banks have been the most active providers of HSAs.  While funds can be invested in equities, real estate, gold, etc., only 20% of HSA assets are currently invested in these vehicles with the balance held in cash. As more firms recognize the opportunity presented by the projected growth of HSAs, I anticipate that the number of platforms will significantly increase and accompanied by an expansion of investment options.    

While they have existed for more than 15 years, the benefits of HSAs are just now being appreciated by the public.  As deductions are eliminated due to the new tax law and medical premiums and expenses continue to rise,  I expect that the use of HSAs as a valuable tool in retirement planning will increase dramatically. 


Clifford L. Caplan, CFP®, AIF®                                                                                                                                                                       Stephen Caplan

In the News: On November 10th, I was quoted extensively on about the benefits of Keogh Plans, a retirement plan for individuals who own and operate unincorporated businesses.

Note: For the 8th time, Cliff has been named as a Five Star Wealth Manager in Boston. His name appears on the roster of honorees in the February edition of Boston Magazine.

2019 Five Star Wealth Manager Award, created by Five Star Professional. Presented in 1/2019 based on data gathered within 12 months preceding the issue date. 3619 Boston area advisors were considered, 566 advisors were recognized. Advisors pay a fee to hold out marketing materials. Not indicative of advisor’s future performance. Your experience may vary. For more information, please visit