Health Savings Accounts and COVID-19

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As Americans join the rest of the world in grappling with the COVID-19 pandemic, those who have unfortunately fallen ill may be faced with healthcare concerns that could not have been predicted mere weeks ago.

Health Savings Accounts (“HSAs”) were designed for times such as these. HSAs offer many of the same benefits as IRAs or 401(k)s, but they allow tax-advantaged savings and investments specifically to address medical expenses, short and long term. As with other savings vehicles, you can deposit money into an HSA and deduct contributions from your income for tax reporting. However, that’s just the beginning of what HSAs have to offer.

Save and Invest for Qualified Medical Expenses, Tax-Free

Like Roth IRAs, HSAs offer tax-free distributions. However, while Roth IRA holders need to be at least 59 ½ years old and the account itself must be at least five years told to qualify for tax-free distributions, HSA holders need only apply their withdrawals toward qualified medical expenses (“QMEs”) to avoid tax ramifications. This is true regardless of the HSA holder’s age. Further, the list of QMEs is quite extensive (more on QMEs in IRS Publication 502), and generally an expense that relates to the “cost of diagnosis, cure, mitigation, treatment or prevention of disease, and for the purpose of affecting any part or function of the body.” See “What are Medical Expenses?” in IRS Pub 502.

Even before the unfortunate spread of the virus, just about every expense related to testing for and treating COVID-19 falls under the QME umbrella. These expenses are therefore covered by HSA distributions, which would occur without tax consequences.

Diversifying Your Investment Portfolio for Short and Long-Term Expenses

Self-directed investing gives you the power to choose the assets you know and trust, all while enjoying the tax benefits of an IRA, 401(k)…and an HSA. As long as your account custodian allows it (which New Direction Trust Company certainly does), a self-directed HSA can hold real estate, private notes, or any other alternative asset appropriate for your investment objectives. This can help you achieve true portfolio diversification and hedge against volatility in the publicly traded equity markets.

The rise of COVID-19 has led to a fall in the stock market, bringing undiversified portfolios down with it. The S&P 500 fell approximately 35% from its all-time high in mid-February before enjoying a moderate upward bounce at the time of this writing. This whipsaw of the markets can be troubling to stock holders and may warrant exploring other available avenues when it comes to investing for the future.

In addition to providing a broad range of asset choices to investors, self-direction enables HSA holders to build a portfolio that can address the variety of health needs that may arise for you and your family:

  • Cash producing assets like rental properties and private loans can help maintain liquidity for short- and long-term expenses.
  • Longer term strategies, such and buy-and-hold real estate and private equity, can help prepare you for larger or ongoing expenses that may occur later in life.
  • New Direction Trust Company does not provide investment advice, but we encourage you to consult your financial advisor to determine a portfolio composition that will satisfy your risk tolerance.

You can take advantage of legislative changes

The U.S. government has already taken action to help self-directed investors in response to COVID-19, and further maneuvers may still be yet to come.

  • The tax filing deadline has been extended to July 15 from its original date of April 15. Accordingly, HSA holders have until July 15 to contribute for the 2019 tax year if they haven’t already made their maximum allowable contributions.
  • Per IRS Notice 2020-15, high-deductible health plan (“HDHP”) participants may receive insurance benefits for COVID-19 expenses prior to satisfying their deductibles, and may receive said benefits without jeopardizing the plan’s eligibility as an HDHP. For HSA holders, this HDHP eligibility means they could still make HSA contributions.
  • As of now, holders must be enrolled in HDHPs to contribute to their HSAs. However, H.R. 6338, a bill in its fledgling stages as of this writing, could alter or remove the HDHP requirement.

Looking Ahead

Although the COVID-19 has proven to be a generational (potentially multi-generational) event, it has highlighted the importance of considering medical expenses no matter how unlikely or far down the road they may seem.

Don’t have an account with us? Open an HSA today with our simple online application! You can also contact our dedicated customer service team at 877-742-1270 or if you have questions about HSAs or self-directed investments.