Talk of repealing the Affordable Care Act ushered in a round of serious discussions regarding the cost and availability of health care, the cost and availability of health insurance and which combination of health care delivery and insurance is optimal for the consumer. One part of the equation that is widely touted is the Health Savings Account. A health savings account, or HSA, allows an individual to put aside pre-tax dollars into a savings or investment account. This account earns interest or generates dividends which are reinvested in order to grow the fund. The funds that accrue are then used to pay for qualified medical and pharmaceutical costs that are not paid by health insurance.
There are three benefits to having a health savings account and a high deductible health insurance plan. The first is that the funds in the account continue to grow tax-free if they aren’t used. This serves as a wellness incentive; the fewer medical expenses the insured incur, the more funds grow in the HSA account. In addition, an HSA account can be considered part of an individual’s overall asset base. It can be passed to heirs upon the owner’s demise through a will or trust. The second benefit is that contributions to health savings accounts are tax advantaged. Like contributions to an IRA or 401(k) plan, HSA contributions reduce a person’s taxable income. The third benefit is that the premiums for a high deductible health insurance plan normally are lower than those of a health plan that is more comprehensive. This reduces the overall cost of health insurance to the individual; in some cases, it may reduce the cost of health care, as some medical facilities discount services paid for with cash.
There are three provisions that those thinking of purchasing an HDHP and HSA combination should also take into consideration. The first is that not all high deductible plans are HSA qualified. There are specific reporting requirements with which insurance companies must comply in order for their policies to be HSA compliant. Many insurance firms find the regulatory requirements too time-consuming, expensive and cumbersome. In order to ensure that the policy is HSA compatible, the insured must read the declarations page before signing the contract or purchasing the policy. Most HSA-compliant policies are marketed as such.
The second provision is that IRS rules limit annual contributions. Because the contributions are tax advantaged, the IRS doesn’t allow an insured individual to contribute more than $3350 per year; insured persons with family coverage can contribute $3,750 per year, and those over 55 can contribute an additional $1,000. The annual contributions to an HSA are equal to 51 percent of the maximum out of pocket medical expenses allowed for deductibles, co-insurance and other qualified expenses. This means it may take two years of contributions to meet the potential out of pocket expenses that could be incurred during a single year.
Finally, an HSA may not be an appropriate choice for the person who already is dealing with recurring medical expenses. The HSA was designed for the young person who 1) is unlikely to require medical care other than for wellness exams and vaccinations, job-related injuries or minor medical issues such as an infection, 2) will likely change jobs several times during his or her lifetime and will need a “portable” form of health care coverage, and 3) may not be inclined to begin saving for retirement, but does understand the need for medical coverage and will appreciate the added benefit of lower taxes afforded by the HSA. The HSA allows a young person to build a large savings account so that when he or she reaches middle age and medical conditions related to aging begin to set in, he or she will have the resources available to cover the costs of the increased medical care they will require. If an insurance purchaser is already at middle age or older and is already taking prescription drugs, requires a medical device or ongoing medical treatments, then an HSA may be of little benefit. It may be of greater benefit to purchase the more comprehensive, lower deductible policy.
Whether the Affordable Care Act is repealed, replaced or rewritten anytime soon is a mystery. As long as it is still the law, then it is a wise choice to get as much out of the health insurance coverage that is required as is possible. Open enrollment for health insurance is just around the corner, so now is a good time to speak with a benefits professional to see if an HSA-qualified plan is the best option.