Only a short time ago, COVID-19 began having an impact across the globe. Now considered a global pandemic by the World Health Organization, the virus has unfortunately forced communities, businesses and even countries to shut down to keep the illness from spreading further.
While researchers across the world work to find a cure, many Americans are concerned about the potential health care costs associated with the virus. These concerns are further highlighted by the recent stock market sell-off, adding more economic uncertainty to an already financially difficult situation.
The U.S. health care system is already the most expensive in the world, costing about $1 trillion more per year than the next-most-expensive system, according to Princeton University economists. Unfortunately, these statistics mean Americans could face meaningful expenses if they test positive for the virus.
In fact, a recent study reviewed typical costs for pneumonia cases in 2018 to better assess what admission and treatment for an insured patient might cost with COVID-19. The total cost for an insured patient, including out-of-pocket costs averaged just over $20,000 per person. Paying this large of a medical bill would be a hardship for many.
Although much is still unknown at this point, there are concrete steps that Americans can take right now to help prepare for unexpected health care costs, while also improving their overall financial wellness.
Leveraging A Health Savings Account
COVID-19 is a great example of the mythological “event” that everyone tells you to prepare for “someday.” In the case of COVID-19, an HSA is the ideal tool to help individuals pay for health care and provide financial wellness support.
These tax-advantaged savings accounts – which are available to any taxpayers in the U.S. enrolled in high-deductible health plans – allow individuals to contribute funds tax free upon deposit, and tax free upon withdrawal as long as they’re used to pay for qualified medical expenses.
If an individual enrolled in an HSA tested positive for COVID-19, they would be able to easily withdraw and use funds for their health care expenses untaxed, without penalties or the need to pay it back.
If an individual tested negative and did not need to use the account to pay off medical bills, the funds already contributed will continue to grow similar to how money grows in a retirement account, providing a nest egg to fall back on for the next health care event that may occur. Having this type of nest egg can be especially comforting during difficult financial times.
While a 401(k) is another great savings tool, it is not intended for pre-retirement spending and accessing the funds during a crisis is generally not cost effective.
If you take out a loan against your 401(k), you have to pay it back plus interest in after tax dollars, which reduces the tax benefit of the account. If you make a hardship withdrawal, you will pay taxes on the withdrawal plus penalties.
For some, setting aside money today in an HSA may be difficult given the realities of the economic situation. If your client is unable to put money aside in an HSA to save for health care expenses, they should at least pass funds through the HSA prior to paying for health care expenses to get the tax benefit associated with HSA contributions.