As consumers scramble to determine what direction Obamacare will take after the election of Donald Trump, one thing is evident, health savings accounts (HSAs) will play a prominent role in healthcare reform. To help provide information on HSAs, we are republishing a previously posted Q&A from August 2015, which helps explain what an HSA is, how it works and other frequently asked questions. While some of the information below references Obamacare, the facts about HSAs remain relevant.
Although HSAs were established under federal law in 2003 and originated in the early 1980s, they remain a relatively new and somewhat confusing concept to Americans. Reports show that 86 percent of consumers say they don’t understand HSAs. Nonetheless, HSAs have become increasingly popular among individuals, families and employers, and more than 15.5 million Americans have an HSA health plan.
When combined with a qualified high deductible health insurance plan, HSAs allow consumers to set aside tax-free dollars for future medical expenses. Funds can be used on qualified medical expenses whenever the account holder chooses—there’s no use it or lose it.
Regardless of what happens under a Trump administration, health savings accounts are as important as ever. To help consumers better understand this benefit product, Health eDeals reached out to Michael Berry, President and CEO of American Health Value, to answer some of the frequently asked questions about HSAs.
What are the benefits of having a health savings account for those with job-based health insurance coverage and those who buy their own?
Michael Berry: The advantages for an employee and individual are similar and include the following:
- Triple tax advantage—tax-free deposits, tax-free use for qualified medical expenses, and taxable use for retirement at age 65 (all the benefits of an IRA with the added bonus of withdrawing funds, tax-free, prior for qualified medical expenses prior to age 65)
These tax benefits lower overall healthcare costs. For example, if you fund $2,000 into your HSA – you lower your federal taxable income by $2,000. In essence, that tax savings is lowering your overall healthcare costs today and into the future. Additionally, if you are receiving a tax-deferred interest return on your HSA funds, that amount can be likened to further lowering your healthcare costs. If you have a state income tax, it lowers state taxable income as well.
Maximum Annual 2020 Contribution Limits:
At age 55 and over, an additional $1,000 is allowed per year referred to as the “catch-up contribution.”
- It’s your account and your money—you’re in charge and decide if you want to spend it on medical expenses or save it
- Anyone can contribute to your HSA—you, your employer, any third party, or a combination thereof
- What you don’t spend, you keep—funds roll over from year to year
- Portable—HSAs follow you, not your job or insurance; what you have deposited into your account while you were eligible (HSA/HDHP) is your money to keep
- At 55 or older, you can add an additional catch-up contribution of $1,000 per year
- Adds additional retirement vehicle—commonly referred to as a Medical IRA
Do HSAs earn interest? Can HSA funds be invested?
MB: Yes, with the option to invest for potentially higher returns. Consumers who wish to invest their HSA funds should discuss such decisions with a financial, legal or tax professional. With American Health Value, over 6,000 investment options are available.
If you have Medicare, can you continue making contributions to your HSA?
MB: Consumers may continue to use their HSA tax-free for qualified medical expenses, regardless of age. They may take out taxable funds for non-qualified expenses starting at age 65.
Those with Medicare can use their HSA funds to pay Medicare premiums; however, this does not apply to Medicare supplement insurance. Medicare enrollment, regardless of part, disqualifies a person for continued deposits but does not disqualify them from using the funds tax-free for qualified expenses, which is often misunderstood.
How does offering an HSA to employees benefit an employer?
MB: Employers have multiple advantages to offering an HSA to their employees:
- HSAs are not under ERISA and require no claims management, plan documents or summary plan descriptions which can significantly lower administrative time and cost
- Typically lower premiums
- Employers can use those savings to fund their employees HSAs without increasing employer tax liability (like a tax-free raise)
- Employers can increase monies to employees
- Can improve employee retention and morale and attracts future quality employees
What are some key things consumers need to know about shopping for a health insurance plan and pairing it with an HSA?
MB: For the average consumer, insurance is complicated and confusing. Most consumers would not understand if they are eligible or not for an HSA. National surveys conclude the biggest challenge with Consumer-Driven Health Care including HSAs, is lack of education and understanding.,
Those shopping for HSA insurance options are best served with a team of experts for both the insurance and HSA portion of the HDHP/HSA option. This team will help consumers navigate the marketplace to find the best option for their specific needs and goals. Furthermore, they know the rules and regulations for HSAs, such as:
- Insurance minimums on deductibles (changing annually)
- Maximum annual contributions (changing annually)
- Max out of pocket
- Effects of other health insurance on eligibility—what can be included and what insurance disqualifies HSA eligibility
- VA regulations
- How to get the maximum benefit out of an HSA for unique needs and goals
- How consumers will be charged for using their HSA and maintaining their account—fees can be transaction-based or flat fee-based
When working with an HSA expert, consumers can also expect customer service for the life of the HSA and gain access to a live personal account specialist versus call centers, phone trees, automated voice/key systems, etc.
What are some common misconceptions about HSAs?
MB: National surveys reveal multitudes of misconceptions or inaccuracies concerning the HSA, including the following:
- Only for the healthy and wealthy (not as common as it used to be)
- It costs more—a misconception based on losing co-pays
- Employees going from a co-pay to an HSA feel like their employer-provided benefits are being reduced
- Confusing HSAs with FSAs and HRAs
- Deductibles are too high
- Can’t have first dollar coverage for preventive
- Only the account holder can use the HSA funds for qualified expenses
Does everyone in a family need their own HSA? Who can use the account?
MB: You have options to best maximize the HSA regulations, such as:
- A family can have one account with funds that can be used for all family members claimed on their tax return
- If both spouses are eligible for a catch-up, you can each have an account (combined deposits cannot exceed annual limits
- If spouse’s file separate tax returns, each can have their own account (combined deposits cannot exceed annual limits)
- If a child is on the insurance but cannot be claimed on the tax return, they can have their own account and would not be eligible to use their parents’ account
Why do Health Savings Accounts remain relevant in the age of Obamacare?
MB: With higher deductible plans offering the most affordable premiums, it makes practical sense to add an HSA to a high-deductible health insurance plan and receive the additional benefits it provides.
An HSA lowers overall healthcare costs for an account holder. HSA-qualified health plans are the only insurance option that, coupled with an HSA, lowers overall healthcare costs when medical costs are paid tax-free from an HSA. A simple way to understand this cost reduction is:
Whatever your tax rate is (15%, 20%, etc.), that is your reduction in medical expenses as a direct result of the HSA.
In addition, HSA health plans vary in plan design to best suit the individual needs of the consumer, i.e., 100% coverage after deductible, or 80/20, 70/30 – with an annual maximum out-of-pocket expense.
Using an HSA Health Plan gives more flexibility to the consumer for financial management and long-term planning.
How do HSAs work with ACA-compatible health insurance plans?
MB: HSA-compatible plans have made it into the ACA and are typically found in the Bronze and Silver levels. The HSA rules are compatible with the federal and state exchanges, as well as the private insurance marketplace. As long as a plan is an HSA-qualified plan, it works the same as all other plans.
If I buy health insurance coverage on or away from a state/federal exchange, as opposed to receiving employer-based health insurance, how do I enroll in an HSA?
MB: You can work with a company such as American Health Value, which allows you to enroll online.
To fully cover the HSA rules and regulations, as well as how to maximize all their benefits to each unique consumer, cannot and should not be one statement that is accurate for all. Although there are specifics that govern, there are interpretations that can change from one individual to another. For example, “I take heart medicine to prevent heart attack or stroke. Is that considered preventive and it can be paid from my HSA before my deductible is met?
Having a team of experts is the best way to navigate today’s insurance environment.
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