Mercer Advisors Logo

Why You Should Supersize Your HSA (And How)

David Gardner

Sr. Wealth Advisor, Director


Nearly 20 years after their debut, HSAs offer much more than just the ability to pay medical bills with pre-tax dollars.

Woman talking with medical professional.

Consumers held roughly $100 billion in health savings account (HSA) wealth at the beginning of 2022.1 The number will surely grow in the years ahead because investors are figuring out that HSAs not only offer a practical way of setting aside money for future medical expenses, but also have generous tax advantages that allow for long-term tax-free growth. As a result, what started out as a relatively staid way of setting aside funds in an interest-bearing account for future healthcare costs has morphed into a legitimate investment category of its own.


What’s an HSA?

Established in law by President George W. Bush’s Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the HSA emerged as a tax-advantaged account designed to pay for medical expenses. Qualified expenses include visits to a doctor or dentist, prescription drugs, eyeglasses, medical equipment and supplies, and medical services such as home care. Physical therapy, quit-smoking programs, psychological counseling, and hearing aids are also covered. Vitamins, toiletries, over-the-counter medicines, and childcare (for healthy babies or children) are not qualified HSA expenses.

Expense Qualified or Nonqualified
Medicare premiums Qualified
Expenses reimbursed from other sources (such as a flexible spending account) Nonqualified
Cosmetic surgery not related to trauma or disease Nonqualified
Dental treatment Qualified
Hearing aids Qualified
Vitamins Nonqualified

HSAs may be the only account available that has four significant tax advantages:

  1. Most widely known: Those covered by a qualifying high-deductible health plan (HDHP) can contribute to an HSA with funds before they’re subject to state and federal income taxes. For 2022, an HDHP is defined as a plan with a deductible of at least $1,400 for an individual and $2,800 for a family.2
  2. Contributions made by employers and through employee payroll withholding are not subject to Social Security or Medicare taxes. Not even a 401(k) can boast such an advantage.
  3. HSAs allow tax-free growth inside of an account.
  4. HSAs offer the power to withdraw funds tax-free to cover qualified healthcare expenses, even those incurred in previous years.

In my experience, most people with an HSA tend to fund it largely through employer contributions, and use the funds throughout the year to pay for deductibles, prescriptions, and other medical costs. They max out the annual contribution and use a debit card to pay expenses. This way of thinking probably carries over from flexible spending accounts (FSAs) that have a “use it or lose it” provision—if FSA funds aren’t used by March 15 of the following year, the remaining balance is forfeited. HSAs have never had this provision; it’s always been allowable to carry the balance of an HSA from one year to the next. As the funds grow tax-free year after year, HSAs have proved handy for preparing for one-time unexpected expenses.

What’s changed during the two decades since their inception is that more investment companies have become involved in HSA management, helping to drive down costs and increase investment options. It’s now possible to invest in low-cost diversified mutual funds and exchange-traded funds. Plus, because HSAs have been available for 20 years, balances have grown. For example, instead of drawing down our HSA balance each year, my family focuses on building this asset that, if used correctly, will give us tax-free growth over our lifetimes. An analogy is that the HSA is like a Roth IRA that offers an up-front income and employment tax deduction—in other words, you can have your tax cake and eat it too.

If you still have money in an HSA after you turn 65, you can spend the money however you want, without penalty. However, if the spending is not for qualified expenses, you won’t be penalized but you’ll be taxed at your current income tax rate.3


Contributing to HSAs

If you’re covered by a qualifying HDHP, then you and your employer combined can put aside up to $3,650 in 2022 for a one-person plan, and up to $7,300 for a family. Catch-up contributions of an additional $1,000 are allowable for those who turn 55 or older this year.

Another less-known aspect of HSAs is that you can supplement the employer contribution with your own income to reach the $3,650 and $7,300 maximums. Very rarely will employers max out the annual contribution. The easiest method for most employees is to use the same account their employer has set up for its deposits. With a single HSA provider, the employer can monitor the maximum annual contribution to ensure that an employee doesn’t exceed the limit. Plus, by using payroll deductions, employees can avoid Social Security and Medicare taxes on those deferred wages.

There’s still time in 2022 to boost your contributions to the maximum. If you still have room in your HSA contribution limit after the year is over, the IRS gives you until April 15 of the following year to make contributions directly from your bank account.


Two HSA hacks

  1. For true HSA aficionados, there’s a hack that can boost a financial plan. Unlike many other tax-advantaged accounts, experts suggest that you can take a qualifying distribution from an HSA at any time after a healthcare expense has been incurred, as long as it was after the HSA was established. Some very organized HSA plan participants are documenting every qualified medical expense after establishing their plan. Instead of withdrawing funds during the current year, they’re allowing their HSA to continue its tax-free growth. At some point in the future, they plan to take a tax-free distribution to cover past expenses (again, as long as they were incurred after establishment of the HSA). This generous rule, like many other financial planning gambits, is subject to revision at any time, so make sure your tax professional is on board and aware of your “super-HSA” plans.
  2. Remember that HSAs are portable, meaning that you can always seek out a low-cost, high-service provider that has the best investment options for you. As with an IRA, you can conduct a direct rollover from one HSA provider to another. A riskier transfer method is the so-called “indirect” rollover, which requires delivery of a check from your existing HSA provider—you have 60 days to deposit the check with your new provider, or the distribution could be subject to income taxes and a 20% penalty.

If you can’t tell by now, I am a huge fan of HSAs as an investment vehicle. Given their multiple tax advantages, I encourage people to maximize contributions every year and invest for the long term once they have enough cash set aside to cover a medical emergency. For many who have their emergency fund in place and are contributing enough to receive a retirement plan match, one of their next priorities should be making a full contribution to an HSA if enrolled in a qualifying health insurance plan.

Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors.