COVID-19: That ‘Someday’ Event Clients Were Told To Prepare For

By Tom Torre

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.

Thoughtful Discretionary Spending

It is reasonable to believe that the economic situation will continue to worsen before it gets better. With this in mind and regardless of what type of savings your client might have, it’s a good idea for them to be thoughtful about discretionary spending.

Whether it’s online shopping while they are spending more time than usual at home, or something else that might be a luxury, reducing overall spending is a good approach to financial management through the next few months. This is especially prudent for those who entered this crisis with little or no savings to fall back on.

Learn From The Crisis

If your client has realized that they are not financially prepared for a global pandemic – or really any economic disruption - it may be helpful to take this opportunity to help them rethink their approach to savings.

It’s never too late to begin personal savings, contributing to a 401(k), HSA, and more. According to the U.S. Bureau of Economic Analysis, the average American manages to save 3.5% of their income, but experts recommend saving 10% to 15% or more if you can.

Most important, it’s prudent that individuals recognize the need for some form of financial wellness or savings account no matter what. We are currently facing a global pandemic with broad reaching implications, but a simple injury, or job loss can be just as financially devastating.

Today, the virus makes the future seems uncertain. The truth is the future is always uncertain, and each of us should have a financial safety net for when things go wrong.

Leveraging an HSA as part of that safety net allows clients to take advantage of tax savings and financial flexibility that better positions them to weather the current crisis and build healthier financial practices for the future.

Tom Torre is CEO of Bend Financial. Tom may be contacted at [email protected].