As Shell's open enrollment season begins, our advisors' conversations with clients shift focus from savings and tax to how leveraging benefits effectively can help clients save more. Within these conversations, we often educate folks on a fantastic yet underutilized opportunity that many Shell employees are simply not taking advantage of — using a Health Savings Account (HSA) as a retirement savings vehicle.
What is a Health Savings Account, and How Does an HSA Work?
A Health Savings Account is like a personal savings account for qualified medical expenses that you can contribute to on a pre-tax basis each year if you enrolled in a high-deductible health plan (HDHP). As you pay medical-related costs out-of-pocket, you can reimburse yourself from your HSA to cover those expenses each year. Health savings accounts were signed into law by President George W. Bush in 2003. As of June 30, 2021, there is now an estimated $92.9 billion held in over 31 million HSAs, according to research conducted by Devenir.
Tax Benefits of an HSA
The beauty of HSAs is that when used for qualified medical expenses, it offers a triple tax advantage. But, you may ask, what's the triple tax advantage?
When an HSA is used for qualified medical expenses and reported correctly, the contributions, investment growth, and withdrawals are tax-free.
Tax-Free Contributions: HSA Limits
Similar to the 401(k) contribution limits imposed by the IRS, contribution limits to an HSA are set by the IRS each year with adjustments for inflation.
Contributions vary based on the type of coverage, with 2022 limits set at $3,650 for individuals, $7,300 for family coverage. Employee and employer contributions to an HSA cannot exceed these limits in 2022. Additionally, if you are 55 or older, you can contribute an additional $1,000 a year as a "catch up." This "catch-up" applies to each spouse, allowing the max contribution to be $9,300 per household.
In addition, Shell provides a $500 contribution for participant-only coverage and a $1,000 contribution for any other type of coverage to help pay for medical expenses.
The funds you contribute to your HSA are tax-free because you contribute them on a pre-tax basis. Like IRA contributions, HSA contributions can be deducted from your taxable income when you file your tax return.
Tax-Free Growth: Investing HSA Funds
When utilizing an HSA, a few critical elements are when and how you can invest the funds. Many HSA providers have predetermined thresholds you must reach before you can make investment selections. Additionally, similar to a 401(k), there may be restrictions or limitations on how you can invest your funds. Working with an advisor who can offer insight into your investment allocation and the tax implications of that decision can help you make the most of your HSA to reach your goals.
Tax-Free Withdrawals for Qualified Medical Expenses
One of the best benefits of an HSA is the ability to withdraw for qualified medical expenses at any time tax-free. However, for those under age 65 who withdraw money from their HSA for ineligible expenses, they'll face a 20% tax penalty and be taxed at ordinary income rates.
Strategies to Get More from Your HSA
Most folks know that HSAs are used to cover medical costs and that there are tax advantages. However, most are unaware of other crucial benefits that can provide tremendous value to one's overall investment portfolio if optimized.
HSA Investment Strategy – Invest & Watch it Grow
After making contributions to an HSA, Shell employees can invest the funds through NetBenefits, and they will grow tax-deferred. At the end of the year, any unused funds will be carried over to the next year and continue to grow without incurring any taxes (just like an IRA). This ability for compounding growth creates an opportunity to build a sizeable investment to compliment your existing portfolio!
Investing within HSAs, however, is incredibly underutilized. According to a recent study, Denvenir discovered that only 6% of total HSA accounts are invested.
Should You Max Out Your HSA or 401(K)?
When it comes to saving vessels, we often hear people wanting to spread their contributions across channels to make the most of their options. However, there is often a hierarchical order for where Shell professionals should invest their savings. The investing sequence looks something like this:
Step 3) Max out HSA
Consider if you're age 55 or older what impact this strategy could have for you. You can save up to $9,300 annually per couple within your HSA. This $9,300 is over and above what you are already contributing to your Provident Fund 401(k). If you're maxing out the pre-tax, Roth, and after-tax sources in your Provident Fund ($35,500 for 2021), and if each spouse performs a Backdoor Roth ($14,000), you could be making $58,800 of tax-favorable contributions!
While the HSA can offer a significant benefit, the opportunities for tax-efficient savings in the Provident Fund and through Backdoor Roth Contributions are even more powerful. Therefore, if you are looking for additional tax-beneficial savings opportunities after maxing out your Provident Fund and Backdoor Roth vessels, and if you mostly visit the doctor for preventive care, you should consider switching to the HDHP during open enrollment this fall.
Enrolling this fall will allow you to start taking advantage of the tremendous benefits offered by an HSA beginning in January 2022.
HSA Reimbursement: Reimburse Yourself Now or Later
When utilizing an HSA, many people take advantage of the benefit by reimbursing themselves annually for the expenses they accrue throughout that year. An additional strategy would be to delay taking annual reimbursements from your HSA, invest the funds in a growth-oriented portfolio, and make a one-time reimbursement sometime in the future. This strategy allows the funds invested inside your HSA compound over time while deferring taxes.
Let's consider two examples to illustrate the impact this approach could have.
Let's say that Jessica is an avid HSA contributor. She contributes the maximum amount to her HSA each year ($7,300 each year from ages 45-55, and $9,300 each year from age 55-65). She also pays $3,000 out-of-pocket for healthcare-related costs each year for 20 years.
Scenario 1: Instead of reimbursing herself the year she incurs these expenses, she saves her receipts to reimburse herself down the road —It's a lot of receipts to hold on to, I know, but it can pay off. If Jessica invests her monthly contributions into a growth-oriented portfolio that grows 8% each year, after 20 years, the value of her HSA would be approximately $390,000! Let's say that, at age 65, Jessica decides to reimburse herself for the total $60,000 of medical expenses she accrued over the 20 years. By doing so at age 65, she'd have a balance of $330,000 remaining in her HSA.
However, let's assume Jessica invests her monthly contributions in the same growth-oriented portfolio that grows 8% each year, and she reimburses herself each year as she accrued expenses. In this scenario, her HSA balance at the end of 20 years would have been only $244,000.
Jessica could take full advantage of tax-deferred compounding growth by delaying her reimbursement, which adds almost $100k to her HSA!
HSA’s Withdrawal Penalty Removed at Age 65
There's one lesser-known additional benefit of an HSA hidden deep in the tax code. Let's consider what Jessica could do with the $330,000 balance in her HSA account that she earmarked for medical expenses. What if Jessica remains healthy and doesn't anticipate high medical costs in the future?
At age 65, the IRS waives the 20% penalty incurred for making non-medical-related expenses, which means you can use your HSA to cover any costs in retirement. Upon making non-medical withdrawals, you’ll be taxed at ordinary income rates. In other words, once you turn 65, your HSA effectively becomes an IRA!
This exception, cloaked in the tax code, creates a fantastic opportunity for high-income earners in good health to build an additional asset (alongside the traditional 401(k) / IRA) that provides additional flexibility during retirement.
In retirement, you can choose to reimburse yourself each year or repay yourself in multi-year increments to extend the tax-deferred growth benefits of your HSA. At death, you can pass your HSA to a spouse who can continue to benefit from the tax-favorable features of an HSA.
Shell's Medical Plan Options
In 2020, Shell introduced the option of a High Deductible Health Plan (HDHP) coupled with an HSA. Many people like the idea of using an HSA, but high-deductible health plans aren't for everyone.
PPO or High-Deductible Health Plan?
First, let's be clear on who should consider enrolling in an HDHP and who should stay with the PPO option. Before choosing between PPO and HDHP plans, it is critical to determine your anticipated health needs. For example, do you have chronic health-related issues? Do you regularly see your doctor for non-preventive care? Do you anticipate any significant one-time medical expenses? If your answer is yes to any of these questions, the HDHP may not suit you.
Under both PPO and HDHP plans, preventive care is 100% covered. The HDHP has a higher deductible, but in return, has lower monthly premiums. Therefore, under the HDHP, you will pay more out-of-pocket expenses upfront before the plan begins to pay for covered services, compared to the PPO. In addition, with the HDHP, you have access to an HSA. If you mostly visit the doctor for preventive care, enrolling in the HDHP this fall could provide you with additional tax-beneficial retirement-saving opportunities!
|Monthly Medical Premiums||Participant Only||Family|
|US High-Deductible Health Plan (HDHP)|
|Kelsey-Seybold Greater Houston **|
HSA vs. FSA
Many people confuse a Health Savings Account with a Flexible Spending Account. Many Shell employees on the PPO have been utilizing the FSA annually, which doesn't have the same opportunities as the HSA for long-term savings. While you can use both to cover costs for qualified medical expenses, a primary difference between an HSA and FSA is that HSA funds roll over each year and accumulate if you don't spend them, creating retirement planning opportunities.
Action Steps for Shell's Open Enrollment Period
Shell's open enrollment is the only time you can make changes to existing elections, so it's essential to start thinking about making changes to your elections now. For high-income earners looking to save more in tax-efficient retirement savings vessels who mainly visit the doctor for preventive care, we strongly encourage you to consider switching to the HDHP to start taking advantage of the tremendous benefits of an HSA.
Before making any changes, it's critical to note two things:
- You should make your decision to switch health plans in coordination with the other areas of your finances.
- Understand the implications of switching plans. For example, for those currently enrolled in Shell's US PPO 90 or US PPO 90 (Out-of-Area) plan, you will not be able to re-enroll in the future if you disenroll at any time.
You should make no financial decision in isolation of your other financial pieces. Therefore, we incorporate other relevant areas of your finances when making decisions to evaluate the trade-offs related to your Shell benefits adequately. When we work with our Shell clients, we provide education on their options during the open enrollment period, including determining if the HDHP is the right fit, setting up an HSA, and managing investments. The last thing anyone wants is to leave free money on the table, so start the conversation with an advisor today to review your Shell benefits and uncover any gaps or optimization opportunities.