This quick read is not meant to help you evaluate a lower deductible health insurance plan versus the higher deductible “HSA Eligible.”
Instead, this article assumes that you have already decided that the HSA plan makes sense for your household. Which, for many Walmart leaders and executives, is true.
Though the annual contribution may be a relatively modest amount of your overall investment strategy, it is arguably the best tool you’ll have available if appropriately managed.
What exactly is an HSA?
Here are the cliff notes:
Your annual contributions to an HSA are free from federal and state income taxes, the account’s growth is tax-deferred, and the “qualified distributions” are 100% tax-free.
Using the HSA for a long-term investment strategy is becoming much more commonplace. Here, we will explain how to use them to build your liquidity while still using it for a long-term investment account.
The Strategy
One of the most powerful ways to maximize an HSA is to treat it as an extension of your savings by fully contributing each year, paying medical expenses out of pocket, and keeping a record of the unreimbursed expenses.
Math Coupled With Mental Accounting:
Just as financially undisciplined people can underestimate how large their debts add up to, it has been my experience that great savers can also underestimate whether or not their assets are accessible – often leaving them in a lurch when they need the funds.
Underestimating your liquidity can cause you to fret unnecessarily or even miss future financial opportunities. This article’s goal is to make the math work and help you “feel” as liquid as you are.
How It Works:
- Fully Fund Your HSA – Contribute the maximum allowed each year.
- Pay Medical Expenses Out of Pocket – Instead of withdrawing from your HSA immediately, cover medical costs using after-tax dollars.
- Track Unreimbursed Expenses – Use your HSA provider’s website or mobile app to document every eligible medical expense that you pay out of pocket. Keep a running total of these unreimbursed expenses.
- Build Your Liquidity – The total amount of unreimbursed expenses represents an accessible, tax-free pool of money.
Example: If you have $100,000 in your HSA and have accumulated $40,000 in documented, unreimbursed medical expenses, then $40,000 is available at any time for any purpose, tax-free.
Two Potholes to Avoid
The last thing you want is to waste the benefit of your unreimbursed expenses. Below are two significant potholes to avoid:
- Track Expenses: This is the most common mistake. Be sure to:
- Communicate: In married households, it’s very important for both spouses to understand what the strategy is and for each spouse to know where the documentation is and how to access it.
The Next Generation:
HSA as an Inherited Asset: When an HSA owner dies, the account can be transferred tax-free to a spouse as the beneficiary. The spouse can continue using the HSA for qualified medical expenses, including old unreimbursed receipts.
Non-Spouse Beneficiary Rules: Unlike retirement accounts, the distributions for a non-spouse (e.g., children) cannot be spread out over a number of years. The HSA ceases to be an HSA. The full balance is included in the beneficiary’s taxable income in the year of death, and the tax-advantaged status is lost.
Impact on Unreimbursed Receipts: Once the HSA is no longer an HSA (when passed to a non-spouse), the funds can’t be used for tax-free medical reimbursements anymore. This means any unreimbursed medical expenses from the deceased HSA owner (or their spouse) can no longer be reimbursed.
Planning Considerations:
- Reimburse Before Passing: If the HSA owner or their spouse has old medical receipts, it’s best to withdraw those funds tax-free while they are still alive.
- Name a Spouse as Beneficiary: If the HSA owner’s spouse is still alive, naming them as the primary beneficiary preserves the tax benefits.
- Use the HSA Strategically: As you age or have declining health, keeping good records and strategically withdrawing for past expenses before the second spouse passes is smart.
Into The Weeds:
- Catch-Up Contributions (55+): Unlike retirement accounts, where catch-ups start at 50, HSA catch-ups start at 55. The extra $1,000 per year is per person, not per account. If both spouses want to contribute the extra amount, they must have separate HSAs—one spouse cannot contribute $2,000 on behalf of both. This is an easy mistake many couples make.
- Employer Contributions Reduce Your Limit: Any employer contribution, including an HSA match, counts toward your annual IRS limit. If the limit is $8,300 for a family and your employer contributes $2,000, you can only add $6,300. Unlike a 401(k), there is no separate employer limit—it all falls under the same total cap.
- Payroll Deduction is Best: If your contributions go through payroll deduction, they are not subject to payroll taxes (Social Security & Medicare). If you contribute directly from your bank account, you lose these extra tax savings, though you still get a federal and state tax deduction.
- Penalty-Free Withdrawals at 65: After age 65, you can withdraw HSA funds for any reason without penalty, though non-medical withdrawals are still taxed as income. Medical expenses remain 100% tax-free, making the HSA an even more valuable long-term tool.
- Prior Year Contributions: You can contribute for the prior year, such as IRAs and Roth IRAs. This allows you to ensure you’ve taken full advantage of it while keeping yourself under the limit.
- COBRA: Distributions to pay for COBRA insurance also count towards qualified distributions. This can be particularly helpful if you are bridging health insurance between employers or just to give you more time should you need to shop for new coverage.
- HSA Eligible Health Insurance Timing: You only have to have the HSA-eligible health insurance plan in the years you contribute to the HSA. You can have any plan you want when you take distributions.
- “Qualifying Expenses”: For a comprehensive list of qualifying expenses, visit: https://www.irs.gov/publications/p969
Walmart Specific:
- Match: Walmart offers a dollar to dollar match up to $350 for an individual or $700 for a family.
- HealthEquity: Walmart uses HealthEquity as its HSA administrator. They have several investment options available, including:
- Mutual Funds: As of this writing there are 20 low-cost mutual fund options plus 11 Target Date Funds. The expense range for these funds are .02% – .14%.
- SCHWAB: HealthEquity also has a relationship with Schwab. Within HealthEquity, you can transfer assets to the Schwab brokerage platform to access other stocks, ETFs, and mutual funds.
There are, of course, a few additional items to keep in mind, as well:
- Friendly Interface: Both the online portal and mobile are user friendly.
- Adding Providers: One tedious thing is that you are required, at least once, to add the medical provider’s full address. This can feel tedious at first, especially if you’re using the app. After that information is entered, you will not have to enter it again.
- No Running Tally: As of now, HealthEquity does not give you a running tally of your total unreimbursed expenses. This creates a little more work on your end if you want to keep track of how much you have available.
Need Help?
Leveraging an HSA can be a critical component of a strong retirement plan for Walmart leadership team members. If you have any questions about using your benefits, funding your HSA, or investing your HSA contributions, we’re here for you! Schedule a call with our team today to learn more about how we can help.
Disclosure: This blog post is for informational and educational purposes only. It is not intended as financial, investment, or tax advice. Please consult a financial advisor, accountant, or attorney before making any decisions based on this content.
