Health Savings Accounts for 3Mers

At the close of a year, I like to take time to pause and reflect on the last 12-months. Where was I on January 1, 2020? Where am I now? Did I accomplish the goals I set for myself?

It would be an understatement to say 2020 has been a challenging year. But with the light in sight, we can turn the page and look towards the future. As Eleanor Roosevelt said, "With the new day comes new strength and new thoughts."

As a 3M employee, you inhabit an ecosystem with financial benefits enabling you to accomplish your goals. One of the tools at your disposal is a Health Savings Account.

Level 1: Intro to the 3M HSA

What is a Health Savings Account (HSA)?

An HSA is a tax efficient savings vehicle used to pay for medical expenses.  It is like a piggy bank for doctor’s visits, medications, physical therapy, etc.

Who is eligible to participate?

To qualify, you must be enrolled in a high deductible health plan. Below are the three 3M health plans and their HSA eligibility status.

  1. Choice Advantage – Eligible
  2. Prime Advantage – Eligible
  3. Basic PPO – Not Eligible

If you have either of the Advantage plans, you can contribute.

What are the benefits of participating?

  1. Triple Tax Advantaged
    • Pre-tax Contributions – Contributions through payroll are federal, state, Social Security, and Medicare tax-free. If your salary is $50,000 and you contribute $3,000 to an HSA, you do not pay taxes on your contribution i.e., you are taxed on $47,000 rather than $50,000. 
    • Tax-free Growth - The yearly dividends, interest payments, and investment gains you receive?  Not taxed! 
    • Tax-free Withdrawal – Provided you use funds for qualified medical expenses, you will not pay taxes on withdrawals.  Even 401(k)s/IRAs do not offer this feature.
  2. There Is Such a Thing as a Free Lunch
    • Each year, in the first week of January, 3M contributes $600 (employee) and $1,200 (family). You must re-enroll annually to receive it.      
  3. Accumulation 
    • Balances roll over from one year to the next.  This differs from the “use it or lose it” Flexible Spending Account (FSA) where balances return to $0 at the end of the year, even if you had money left over.  
  4. Portability 
    • This means that the HSA is 100% yours.  If you retire, quit, etc. you bring the funds with you. 
  1. Age 65 “Icing on the Cake”
    • After turning age 65, you can use HSA money for non-medical expenses without penalty.  Essentially, the HSA becomes like a 401(k)/IRA—it is funded with pre-tax dollars, grows tax-free, and when withdrawn is taxed as ordinary income.

Level 2: HSA Contributions

How much can you contribute?

For 2021, the maximum contribution is $3,600 (employee) and $7,200 (family).  This includes 3M’s contribution.

Example 1: Jeff is 26 and single. He receives 3M’s $600 contribution. The maximum he can contribute is $3,000 ($3,600 - $600 = $3,000).

Example 2: Marla is age 45 and her family is enrolled in the plan. She receives 3M’s $1,200 contribution. The maximum she can contribute is $6,000 ($7,200 - $1,200 = $6,000).

A special “catch-up” provision allows those age 55 and older to contribute an additional $1,000/year i.e., $4,600 (employee) and $8,200 (family).

Example 3: Bill is single, age 55, and receives 3M’s $600 contribution. He can contribute $4,000 ($4,600 - $600 = $4,000).

Example 4: Betty is age 60 and her family is enrolled in the plan. She receives 3M’s $1,200 contribution. She can contribute $7,000 ($8,200 - $1,200 = $7,000).

How much should you contribute?

This depends on your unique circumstances and goals. However, below are a few guidelines that can help point you in the right direction.

  1. Expected Medical Expenses
    • You can estimate medical expenses over the next 12-months and use that to determine deferral amount.
    • Example 5: If Jeff expects medical expenses of $1,500, he can elect to deduct $75/pay period [($1,500 - $600)/12 = $75].
  2. Deductible
    • You can use your annual deductible to determine deferral amount.
    • Example 6: Marla is enrolled in the Choice Advantage plan where the annual in-network deductible is $5,600 for families. She can elect to deduct $367/pay period [($5,600 - $1,200)/12 = $367]
  3. Maximize
    • You can divide your maximum contribution amount by 12 (pay periods) to determine deferral amount.
    • Example 7: Bill can elect to deduct $333/pay period [($4,600 - $600)/12 = $333].
    • Example 8: Betty can elect to deduct $583/pay period [($8,200 - $1,200)/12 = $583].

Note: Your deferral amount is not set in stone. You can change it at any point during the year.

Level 3: Using HSA Funds

Should you use what you put in your HSA or let it accumulate?

While HSAs are a tax efficient investment vehicle, that does not mean accumulating the balance is best for you. A few considerations:

  1. Purpose - HSAs were created to help people pay for rising medical costs. If you have current year expenses, using HSA funds fulfills that purpose and you pay with pre-tax dollars.
  2. Concentrated Medical Expenses - As financial planners, we live and breathe preparing for today and tomorrow. A significant portion of medical expenses occur in the last years of life. Having funds saved could be beneficial.
  3. Bequeathing - If your spouse inherits your HSA there is no adverse tax consequences—your piggy bank becomes his/hers. However, if a non-spouse inherits, the full value is taxable in the year of death.

Should you invest the funds in your HSA?

Generally, it is beneficial to hold expected short-term medical expenses in cash, so the funds are available when needed. Your annual deductible is a good target for money to keep liquid.

For excess funds, consider investing and taking advantage of tax-free growth. Fidelity is 3M’s HSA custodian and provides a broad array of low-cost investment options. Ensure investment selections align with your risk tolerance and overall portfolio.

Level 4: Next Steps

Where to go from here?

  1. Determine which health plan you have. If you are enrolled in either of the Advantage plans, consider contributing to an HSA.
  2. Select an appropriate contribution amount.
  3. Consider investing funds that are not for the short-term.

Moving into 2021, think about utilizing 3M’s HSA within your personal finances. It could be a key pillar allowing you to navigate storms and reach the destinations you set out for.

 

From PrairieView to all of you, we wish you and your families health and happiness in the upcoming year.

In the words of Frank Sinatra, “The Best Is Yet to Come.”