Thoughtful Gifting: How to Help Your Family Save for Healthcare

February 07, 2025
  • Capital Partners
Principal Brett Sovine discusses an appealing savings option for family healthcare costs: the health savings account.

At BBH, we strive to help you design and implement an annual gifting plan that reinforces your financial values. If designed thoughtfully, a gifting program can encourage and reward work and productivity, financial discipline, and independence.

One way parents and grandparents can help young working family members start and boost their retirement savings is by combining tax-free annual exclusion gifting and income tax-free investment compounding in a Roth IRA early in the child’s life, which can compound and provide a sizable retirement account over time. Here, we examine another option to help children later in life – in particular, those with a career and family and who may be concerned about the escalating costs of healthcare.

While not every graduate who takes a first job decides to participate in their employer’s 401(k) or other retirement plan, almost all of them elect to participate in their employer’s healthcare plan. Years ago, most U.S. employers covered most or all of the costs associated with offering medical insurance to employees and their families. In recent decades, U.S. healthcare plans have changed significantly, with many employers implementing high-deductible healthcare plans (HDHP), which shift a much higher portion of a plan’s annual cost to employees. Under an HDHP, employees still enjoy family medical coverage but must cover a significant portion of the initial costs of healthcare utilization annually. Essentially, HDHPs cover families against a catastrophic event but shift most of the routine annual costs of family healthcare to the employees.

In recognition of this change in the marketplace, Congress created federal health savings accounts (HSAs) to help families shoulder their increased share of out-of-pocket costs related to HDHPs. An HSA allows employees to set aside pre-tax money (usually via payroll withholding) in an account that enjoys the same kind of income tax-free compounding experienced in a Roth IRA. Like many 401(k) plans, some employers will match a portion of employee contributions to their HSAs.

So, why wouldn’t a young employee who works for a company that offers an HDHP set up and fully fund an HSA account each year? Youth. Young people tend to be healthy, and have many competing uses for salary dollars (such as transportation, work clothes, rent or a down payment, home furnishings, tools, media and mobile phone plans, car seats, daycare, entertainment, and so forth). Many young employees figure they will pay out-of-pocket costs as they come due, and if they don’t get sick in a given year, the money could be better used elsewhere.

This is where a thoughtful gift from a parent or grandparent can help a young family member use the magic of tax-free compounding to build a healthcare nest egg for their family’s future needs. In 2025, federal gift tax laws allow individuals to make annual gifts of cash to anyone up to $19,000 per year. This means parents or grandparents can gift an adult child up to $38,000 annually. Many of you do this already.

Consider the benefit of conditioning a portion of the gift on the recipient’s full participation in funding an HSA. For 2025, an employee can contribute up to $4,300 for a self-only HSA and $8,550 for a family plan. For most plans, contributions must be made via an employee’s payroll withholding, so a parent or grandparent cannot directly participate in an employer-sponsored HSA plan. However, they can sit down with their working child or grandchild and talk about the advantages of saving for retirement through 401(k) withholdings and of saving for future healthcare costs via HSA plan withholding.

The conversation might go something like the following:

Your father and I are proud of you, and we want to give you the maximum amount we can each year to help you and your spouse build financial security outside the trusts that have been set up for you. We can give you $38,000 next year but would like you to elect, during your upcoming open enrollment, to fully fund your employer-sponsored HSA in 2025.

The maximum amount you can contribute to an HSA is $8,550, so we are asking you to consider $8,550 of the $38,000 we give you a reimbursement of the salary you direct into your HSA at work in 2025. That leaves you a little less than $30,000 to pay for out-of-pocket costs you incur this year and to use however else you choose.  

In other words, we would like you not to use the money you contribute to your HSA this year to pay whatever out-of-pocket healthcare costs you have to pay until your high-deductible health plan policy coverage kicks in. We are suggesting that you use our annual gift to begin building a healthcare savings account over your lifetime in an account that compounds income tax-free so that you and your family have a large account that can be used for medical surprises or your future healthcare costs when you are retired.

Tax-deferred compounding helps illustrate this concept. Consider an HSA that is funded annually at $8,550 per year for 20 years beginning when the child/employee is 25 years old. At a 7% annual tax-free compounded return, the HSA account would compound to just over $365,000 after 20 years of annual contributions. Assuming no further contributions and no withdrawals from the account, the account would grow to just over $1,440,000 when the account owner attains retirement age of 65 years. Withdrawals can be taken from an HSA income tax-free prior to age 65 provided the withdrawn funds are used for eligible healthcare expenses (e.g., generally any medical cost that is deductible by individuals on their federal income taxes).

When combined with tax-deferred HSA compounding, care and coordination among generations’ annual gifting can create a sizable healthcare nest egg for your children and their families. Assuming your child or grandchild’s family does not need to use their HSA for healthcare costs, an acceptable healthcare expense includes premiums spent on healthcare or long-term care (LTC) insurance.

According to industry professionals, most individuals who take out a standalone LTC policy do so at or after 50 years old. Currently, a relatively healthy 50-year-old can secure an LTC policy that will cover five to seven years of nursing home or in-home nursing assistance for just over $125,000. Money contributed pre-tax to an employer-sponsored HSA can be used income tax-free to secure an LTC policy that provides in-home care for five to seven years income tax-free when needed. As illustrated, the HSA would have sufficient money to fully fund healthcare for your child and their spouse.

This is what we mean when we refer to thoughtful gifting: It educates, conveys values and priorities, and provides long-term security for the families that receive the gifted assets.

If your family has questions about leveraging their retirement or healthcare savings, contact your BBH wealth planner.

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InvestorView Winter Issue 2025

In this issue of InvestorView, we cover our economic outlook and portfolio positioning for the year ahead, discuss the current credit market, and examine a strategy for saving for current and future family healthcare costs.

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