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April 3, 2019

The Triple Tax Advantage of the HSA – with Shobin Uralil from Lively


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For our FinTech Spotlight segment this month, we are featuring Lively, a modern health savings accounts platform designed to help you save for healthcare expenses. I've invited the Co-Founder and COO of Lively, Shobin Uralil, to tell us more about this intuitive HSA solution.

We're also going to discuss the benefits of an HSA and how it protects our families.

Andy Hill: What is an HSA?

Shobin Uralil: An HSA is a Help Savings Account. And it's intended to be exactly what it sounds like. It's a personal savings account for your healthcare expenses. But it carries a couple of very unique benefits. It's actually the most powerful savings vehicle in America today.

It's a triple tax advantage savings vehicle. If you're getting it through your employer, the money typically goes in on a pretax basis. But if you're an individual, you can actually contribute directly into your account. And the contributions are tax deductible.

Funds in your account grow through interest or potentially investment gains, and all of those accumulated interest and gains are also tax-free. And unlike a 401K where you have to wait until retirement to pull out your funds tax-free, you can actually access your money at any point in time and it remains tax-free so long as you're using it for qualified medical expenses.

Who is eligible for an HSA?

According to the IRS, HSA eligibility is really coupled with your health insurance plan itself. So, anyone who is covered under a qualifying High Deductible Health Plan is eligible to open up and contribute into an HSA account.

What are the advantages of a High Deductible Health Plan (HDHP)?

The terminology that the industry uses, it's actually a lot scarier than a lot of people think. First of all, the average deductible in America today is greater than what the IRS definition is or a “high deductible health plan”.

Insurance kind of operates the same across every single industry. The higher the deductible for any kind of coverage, the lower your monthly premiums are going to be.

One of the great things that happened several years back when Obamacare got put into place was almost every plan in America today has what's called an annual out-of-pocket maximum. So what that means is anytime you get an insurance plan, you're capped in terms of what you can be expected to pay as a consumer. So all it's really doing is it is shifting the cost from traditional payers, such as health insurance companies and employers, to consumers.

Related Article: Why Your Family Needs a Health Savings Account (HSA)

And typically, what happens is that the first X amount of dollars is expected to be paid by the consumer before the insurance company kicks in. So when you think about the benefits of a high deductible health plan, well, there are a number of people who can really benefit from it, especially those who are not going to the doctor all the time and they're leading a fairly healthy lifestyle.

Why pay for coverage that you're never going to use? You'd rather take a higher deductible because you're never really going to use that anyway. Save more money in your pocket because you're paying less from a monthly premium perspective, but you also have the inherent protection of if anything were to happen that your health plan, it kind of caps you out in terms of what you can be expected to pay.

So that's kind of one example. And one of the powerful things about the HSA is it actually doesn't matter if you switch health insurance carriers or plans. The HSA stays with you for life. And so if you're in a part of your life where you can accumulate a balance, well, you're essentially building a nest egg that you can use for future healthcare expenses. And that's something that's incredibly powerful, especially when it relates to your healthcare.

What expenses are covered by an HSA?

The reality is that there's a very long list of what you can use your funds for. The IRS has a Publication 502 that actually lists out all of the things that are eligible.

Generally speaking, you can use your funds for anything that is medically necessary. So if you have copays after you hit your deductible, coinsurance, the HSA can also go to cover things like your vision expenses and your dental expenses as well.

If you're going for that annual checkup, you can use your HSA funds to cover that. But it also includes emergency visits, X-rays, prescriptions that your doctor might prescribe to you, pharmacy-related expenses. There's a pretty broad range for what's included. Then you have probably a longer list of what could be considered eligible.

As an example, a massage may not be seen as something that is medically necessary, but if you have a chronic back condition and you go to your doctor and the doctor says, “Hey, you should go get a massage to treat your medical condition,” that expense, with a letter of medical necessity, would be considered eligible by the IRS.

And then another example is let's say you get your health insurance through your employer, you leave that employer for one reason or another, and you have to go on COBRA. Those COBRA premiums are also HSA eligible. So it really becomes this great life-planning tool because as individuals, we're always going in and out of companies thinking about change. But the HSA is this powerful tool that you get to use that underpins all of it.

What is the difference between an HSA and an FSA?

The HSA, as I mentioned before, is coupled with a qualifying high-deductible health plan, whereas the Flexible Spending Account (FSA) can be used across all insurance plans. However, there are some serious limitations to the FSA.

The FSA is a flexible spending account. This account, actually, is not owned by you as an individual. It's actually owned by your employer. So if you're not getting health insurance through a traditional source, like your employer, you don't even have the ability to open up an FSA. The FSA is “use it or lose it” money.

I think you get to put upwards of $2,600 dollars into the account, but you have to elect how much you think you'll need at the beginning of the year. And if you don't use that money, it just goes back to the company that you're getting the FSA with. So unlike an HSA where you own the account and these funds stay with you for life until you use them, there's some restrictions.

How can I invest the money in my HSA?

There are about 2,000 providers of HSAs in America today and the vast majority of them do not give investment options. I would encourage anyone reading this, if investments are a key part of your long-term savings strategy, you want to work with a provider that at least gives you the capability to put your money to work over a longer period of time.

What the IRS says is that because this is an account that you own and the unused funds roll over from year to year, you can actually invest in just about anything you want. Stocks, bonds, CDs, mutual funds, ETFs, it's the whole gamut for what might be available with any investment platform that's available to you.

The thing that we always recommend is watch out for fees. Investments, as you know, is a very fee ridden industry, and we always try and help people put their money to work over a longer period of time. We try and enable that through software and technology. But yeah, inherently, there is no limitation to what you can invest in. It just depends on who your HSA provider allows for investment capabilities.

Related Article: 3 Smart Reasons for New Investors to Choose Index Funds

How do I use my invested money for healthcare costs?

There are really two ways you can do that.

One is if you want to tap into those funds immediately, you can liquidate what you have invested, move them back into cash and then it becomes available for you to use on your debit card for example.

Here's one of the most powerful things about an HSA that very few people know. There's actually no time frame for you to reimburse yourself for a qualified medical expense. What that means is that if you have the means to pay out of pocket for an expense, you can actually use a credit card or you use cash or some other mechanism. You can log that expense as reimbursable and you can continue letting your money go to work over time.

Let's say you continue doing this and in 20 years from now, you have accumulated a much bigger balance because you're letting this money go to work. At that point, with a click of a button, you can reimburse yourself for those actual medical expenses that you incurred over that 20-year period.

It's one of the most unbelievable advantages of having an HSA account that very, very few people know about.

In theory, I could take this money out 20 years later tax-free. Correct?

Yeah. Exactly. And at that point in time, because you're just reimbursing yourself, when you take those funds out, you can use it for a downpayment on your house, or your kids' college education. I mean, what you can use it for, that's completely outside the purview of the IRS. What they care about is that you're reimbursing yourself for actual medical expenses incurred over that time period.

Do we need to scan and keep those receipts then?

You bet.

The HSA's great in that it's inherently flexible for you as the consumer. You don't have to prove to your HSA provider that these expenses were for qualified medical expenses.

However, it's important that you do hold onto the receipts and documents because in the unlikely event of an IRS audit, you will need to prove two things: (1) That when you made contributions into your HSA account, you're actually eligible to do so, and (2) the expenses that you incurred were indeed qualified medical expenses.

Can I use the invested money for anything else besides healthcare expenses?

Once you turn 65 years old, you can actually use this account for any expenses whatsoever. It is not limited to medical expenses. And at that point, all you're doing is paying ordinary income taxes. So it actually functions very similar to an IRA or 401(k) in regards to that.

What we always say is, think about the HSA in conjunction with all of the other retirement options that you have. It may make sense to max out your HSA because worst-case scenario is that it operates just like every other retirement product that's out there.

Father and son on the beach walking

What makes Lively different from the other HSA providers?

We actually came to market about two years ago. So in March of 2017, we launched our first HSA into the market. It was largely in a beta capacity. And for about six months we were heads-down, building out our investment capability.

In October of 2017, we announced a partnership with TD Ameritrade and their self-directed brokerage platform for which Lively is integrated into. I think I mentioned earlier that there are over 2,000 providers of HSAs in America and they have all grown by focusing on the employer and not on the individual consumer. We actually flipped that on its head a little bit and we said, “We care about the individual consumer and their experience.”

We've used technology focused on user experience and software to focus on giving the consumer the best experience possible and part of that is actually being a very low-cost provider.

We get a lot of questions, “How can you guys afford to be a no-fee provider when the rest of the market can't do that?” and it's very simple, we use technology. We own our technology from beginning to end. We don't white-label any third-party software where there is inherent cost. And our belief is that the people who are struggling the most are the people trying to save for their just on-going healthcare expenses. Whatever little money they have in their account, we don't feel it's our right to be able to charge them simply for the right to save money.

So that's kind of our mantra. We've gone to market that way and we've had great reception. No-fees, great customer service, a real focus on customer experience, and intuitive software. To us that's kind of what sets us apart.

As a “No-Fee Provider”, how does Lively make money?

We do focus most of our outbound attention on selling to employers who do pay us a monthly administrative fee to give HSA accounts to their employees.

The second is, because we are issuing the debit card as well, there's a portion of the spend that the Visa and Mastercard network actually payback to the issuing entity. Because we are the issuing entity, we're able to actually make money on the transactions that do occur.

That is a very established practice in credit cards, debit cards, kind of throughout the entire world. And really it comes back to the cost fees, right? Because we've been able to squeeze out the costs that other people have, we've just passed those savings on to the individual consumer. And we can build a really profitable business by focusing on those other revenue streams.

How much does it cost to invest my money with Lively and TD Ameritrade?

Up until December of 2018, it cost $2.50 per month to access investments. We actually made the decision as an organization  to drop that fee completely. So now if you want to access investments with TD Ameritrade, it is completely free, you don't pay Lively anything.

Now, you still have fees in terms of the brokerage fees that apply, but that's kind of an industry standard and that's paid directly to TD Ameritrade.

Back in October, we announced an $11 million Series A financing round. And what we've been able to do, that $2.50 monthly fee, was a cost that we had in terms of the integration which when we raised that round of financing we were able to further reduce the cost that we have so that we just simply pass that savings back to our consumers. So for us, we are very proud to say that we are truly a no-fee HSA provider. With Lively, we don't nickel and dime you for anything whatsoever.

If you’re interested in learning more about Lively, click here.

Are you taking advantage of a Health Savings Account (HSA)?

Please let us know in the comments below.

Andy Hill

Andy Hill, AFC® is the award-winning family finance coach behind Marriage Kids and Money - a platform dedicated to helping families build wealth and happiness. With millions of podcast downloads and video views, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world. When he's not "talking money", Andy enjoys being a Soccer Dad, singing karaoke with his wife and relaxing on his hammock.

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Marriage Kids and Money Podcast

About Marriage Kids & Money

The Marriage Kids and Money Podcast is dedicated to helping young families build wealth and happiness.

With over 400 episodes and counting, we share interviews with wealthy families, award-winning authors, and personal finance experts to help you find your version of family financial independence.

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