The Benefits of Health Savings Accounts
Health care consumers with high-deductible health insurance plans may want to consider establishing a health savings account to pay for qualifying out-of-pocket medical expenses using tax-free dollars.
"Health savings accounts can be a useful tool to help with the cost of deductibles, copayments and coinsurance if you purchased a high-deductible plan," says David Cusano, a senior research fellow at Georgetown University's Center on Health Insurance Reforms.
Bernadette Schopfer, director of taxation at the accounting firm Maier Markey & Justic LLP in New York, has seen an increase in the number of people opening health savings accounts as more employers offer high-deductible health insurance plans to their workforce.
HSAs offer a variety of tax advantages depending on your age, income and whether you have individual or family coverage. To qualify, you must be covered under a high-deductible health insurance plan, as defined by the Internal Revenue Service.
Multiple Tax Advantages
Contributions made by a policy holder to a HSA are tax-deductible, and contributions made by an employer are tax-free. Interest accrued in the HSA is also tax-free, and the accounts are "portable," meaning they stay with you even if you change jobs or leave the workforce.
Individuals can withdraw money from a HSA without paying taxes to cover the cost of qualified medical expenses. But if the money goes toward nonmedical purposes, the amount is subject to income tax and an additional 20 percent tax, according to IRS rules.
Most importantly, unspent funds can remain in a HSA from year to year, unlike flexible spending accounts and health reimbursement accounts that require consumers to spend or lose the money that was set aside each year. Plus, health savings accounts convert to typical individual retirement accounts once you reach retirement age.
"With a health savings account, the money stays with you even if you don't spend all of it during the year," Schopfer notes. "There is no pressure to 'use it or lose it,' which encourages people to be wasteful and get [health care services] they may not need."
Qualifying Plans
For individual coverage in 2015, a policy with a minimum annual deductible of $1,300 and a maximum annual deductible and other out-of-pocket expenses of $6,450 qualifies as a high-deductible plan under the IRS. For family coverage in 2015, the minimum annual deductible is $2,600, and the maximum annual deductible and other out-of-pocket expenses is $12,900 to qualify as a high-deductible plan.
As for contributions, individuals with a high-deductible health plan can deposit up to $3,350 a year to a HSA in 2015. Those with high-deductible family coverage can contribute up to $6,650 to the account. In addition, individuals who are 55 and older can increase their contribution limit by $1,000.
HSAs are not exclusive to employer-based high-deductible coverage. Consumers can buy high-deductible plans on their own in the private market and in the state and federally operated marketplaces created by the Affordable Care Act. For example, three insurers in Covered California, the state-operated marketplace, offered HSAs tied to bronze-level high-deductible plans in 2014.
Policy holders do need to take an active role in managing their health savings accounts to make sure they don't exceed contribution guidelines, and properly submit documentation for medical expenses that qualify for reimbursement. "It can become a management issue for some consumers," Cusano says.
Shop Wisely
Gerald Kominski, director of the Center for Health Policy Research at the University of California--Los Angeles, warns shoppers to think carefully before choosing a high-deductible plan, even with the tax advantages that come with an HSA.
"High-deductible plans shift the liability to the individual," says Kominski. "In some cases, these plans function more like catastrophic insurance, which means you'll need to pay all of your health care costs during the year. The insurance policy serves as a backstop if you get into a serious accident or develop a serious illness."
People should consider their overall health status and health care spending patterns before choosing any insurance plan. "If you're in good health, don't go to the doctor often and are comfortable paying out-of-pocket expenses, then you may be a good candidate for a high-deductible plan," said Kominski.
But Kominski has also seen instances where people begin to skip their medication or delay seeking medical care because they're concerned about mounting out-of-pocket costs. "That's one of the negatives of high-deductible plans," he says.
