*IMPORTANT NOTE: An HSA is a TWO COMPONENT Type of Health Program, consisting of a Savings Account component, and a High Deductible Health Plan (“HDHP”) component. We assist with establishing both components, and we offer several qualified HSA Plans for you to chose from, both ON and OFF-Healthcare Exchanges.
2019 & 2020 HSA – Annual Deduction Limits:
- An individual with self-only coverage under an HDHP is $3,550 in 2020 ($3,500 in 2019)
- An individual with family coverage under an HDHP is $7,100 in 2020 ($7,000 in 2019)
I. Top Reasons for Owning an HSA
II. HSAs ~ In A Nutshell
- You save money on personal taxes since annual contributions to the Savings Account component of an HSA are tax-deductible
- You save money on current and future day-to-day medical costs by using tax-free dollars to meet those expenses, and an insurance company to pay the catastrophic bills
- You also save money through lower rates on your health insurance since an HSA allows you to purchase the health plan component of the plan using a lower cost, high deductible, while protecting your higher deductible exposure through the tax-deductible Savings Account component of the HSA
- Your unused, Savings Account funds, grow tax-deferred – what you don’t spend you keep year after year (a lot like an Individual Retirement Account, except that you use it to pay for medical expenses).
- You must be or get covered by a qualified High Deductible Health Plan (HDHP) – the Minimum & Maximum Deductibles are shown in the chart below.
- You must not be covered by other health insurance (exceptions: vision, dental, long term care, disability, life and accident insurance are okay)
- You must not be enrolled in Medicare
- You must not be claimed as a dependent on another’s tax return
(Note: The health accounts also are shielded from state income taxes in most of the country, but some states have declined to provide an exemption, although this is rapidly changing; therefore, check with your State for its status on such matters).
HSAs ~ The Article
The Health Savings Account (HSA) – The Dawning of Expanded Health Care
by Paul M. League, QFP (originally drafted – January 2004, with assorted updates since).
What is an HSA?
Like its precursor MSA, or Medical Savings Account, the HSA is a two-component health plan consisting of a tax-deductible, high deductible catastrophic health insurance plan, and a tax-free claims expense reimbursement and tax-deferred savings plan.
Reimbursements from the savings plan account, for those expenses deemed eligible (as defined under a more liberal and far broader federal definition) are received 100% tax free, while all other withdrawals are taxable as ordinary income with an added penalty when taken prior to age of 65. Simply stated, the HSA is just the permanent expansion of the former MSA, but with several very meaningful enhancements.
Why an HSA, or Health Savings Account?
The primary reason is affordability, and the secondary open choice in doctors and hospitals. Many vendors of the precursor MSA required insureds to use only network-listed doctors and hospitals, making them much like the less desirable and restrictive HMO (Health Maintenance Organizations with their Staff Models or IPAs – Independent Physician Associations), or the slightly less restrictive PPO (Preferred Provider Organizations). The reason they did so is because such networks provide Insurers with pricing discounts that “may” be passed onto the consumer, either by increased benefits, lower policy premiums, or both.
Like these former MSA models there will also be versions of the new HSA offering discounted network-linked models; however, a significant advantage of an HSA that’s, “made of the right stuff”, is one that places no such restrictions on an insureds freedom to seek out and negotiate services from any doctor or any hospital of their choosing. However, for this to work out properly, there needs to be an incentive to cost control. Therefore, on the cost side of the equation, only when consumers have a good portion of their assets at stake will they be compelled to shop for and receive more cost effective and reasonably priced health care. This will mean higher first dollar deductibles, which conveniently will cause the consumer to think before spending, thereby helping to dampen spending and the associated higher costs. After all, who really needs to pay the high costs of medical insurance for an occasional, and relatively low cost check up, cold or flu? What is really needed by all is coverage that handles the more costly, catastrophic health care costs associated with surgery, hospitalization and chronic health conditions.
Government and health Insurers, have proven to be largely ineffective in controlling long-term health care costs, until perhaps now. Enticing consumers into zero, or very low co-pay HMOs or low deductible PPOs, has only wrongly reinforced the consumer misconception of the health care Medical Insurance ID Card and plan as equal to a “credit card”…but with one slight of hand; namely, that it is a one way proposition supported by, and paid for by, some fat-cat Insurer paying for all consumer excesses. Little did consumers know, until perhaps having passed through the last decade where premiums & health care costs have again reached all time highs, that all of this spending has come back with a fury to bite them in the form of reduced benefits, more cost shifting by the Insurers, and increased out of pocket expenses at the premium gas pump! Indeed, the piper has returned and is seeking inflation-adjusted payment. With cost increases once again averaging in excess of 12-20% annually, under most any health plan model, one can easily see the immediate need for a timely, longer-term solution and alternative to the present highway-to-ever-increasing-health-care-costs system.
HSAs to the rescue!
MSAs, with limited carriers who actually understood the model, have proven stable and able to control long term costs more effectively then their HMO, PPO, EPO, or other such cost-containment model counterparts. One such MSA carrier reports an industry breaking 80% policyholder persistency, with rate renewals way under their US counterparts, and they (and the few others like them), are ready to go with enhanced, and now permanently expanded, new HSA models.
The HSA Enhancements
With the permanent expansion of MSAs into HSAs, come a number of key improvements and advantages over all prior and parallel existing models, of all types, for example:
- First, and foremost, now anyone can have an HSA.
- Premiums, for the catastrophic health insurance component, are 100% tax deductible to those who are self-employed, and to those who are 2% or greater owners of an S-Corp or Partnership (this is under consideration to be expanded to cover all persons in 2005-06).
- The above do NOT have to itemize to take what is for them, an “above the line”, tax deduction.
- Personal contributions into the Health Savings Account component are 100% tax deductible for all individuals, whether or not they are self-employed, Partners or S-Corporation owners (the only ones who were eligible under the prior MSA models), and such deposits accumulate tax-deferred.
- HSA savings account contributions may be made each year up to 100% of the policy deductible. So, as of 2004 onward the highest available family deductible can be fully deducted, unlike the precursor MSA, where a single person could previously only tax deduct up to 65% of their deductible, or 75% for parties of two or more (Family).
- Individuals ages 55-65 may make additional “catch-up” contributions of up to $500 in 2004, increasing to $1,000 annually in 2009 and thereafter. A married couple can make two catch-up contributions as long as both spouses are at least age 55.
- New lower deductible limits have been introduced for Single and Family – see chart below (these newer lower deductible plans will cost more, and also do not provide the needed tax savings to make the HSA pricing equation work well, although they will help to interest virgin newcomers into looking into HSAs).
- New deductible limits will be tied to the Consumer Price Index (CPI) starting January 1, 2004 onward.
(Note: The health accounts also are shielded from state income taxes in most of the country, but seven states have declined to provide an exemption: Alabama, California, Maine, Massachusetts, New Jersey, Pennsylvania and Wisconsin).
Allowable Minimum & Maximum Deductibles (indexed annually for inflation) & Annually Indexed > Out-of-Pocket Limits & Allowable SAVINGS ACCOUNT Catch Up Contributions for Americans Age 55+ (see top of page for most current years numbers).
2017 Individual Deductible Limit: $3,400
2017 Family Deductible Limit: $6,750
2017 Catch-Up Additional Contribution Amount $1,000 (for those age 55+ and not on Medicare).
[Both spouses can contribute the following additional funds if age 55+, on a pro-rated basis beginning from the month of the year in which they turn age 55, but not past the point of enrollment in EITHER Medicare Part A or B (remember most persons are automatically enrolled in Part A if they are enrolled in Social Security)]
- New out of pocket maximums (includes deductibles and all co-pays and/or co-insurance expenses, and *indexed annually for inflation -see Maximum Out of Pocket Limits chart above).
- The broader federal definition of “eligible medical expense” remains and therefore includes, and allows for tax free reimbursements on such often non-covered or substantially reduced items of traditional health plan models of any given State, as: Dental, Vision, Chiropractic, Mental, Long Term Care services and insurance premiums, COBRA, etc.
- Preventive care services, as well as coverage for accidents, disability, dental care, vision care, and long-term care are not subject to the deductible, so they can be paid as “first dollar benefits”, and reimbursed 100% tax free from the savings component of the HSA.
- The penalty for taking withdrawals for other then tax free reimbursement of eligible medical expenses from the Savings component is reduced from the MSA penalty of 15% down to only 10% for the HSA.
- HSA contributions may be made by individuals, family members and employers and are tax deductible, even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Any savings account contributions by the employer are not subject to payroll tax (therefore not subject to State or Federal withholding, or Medicare or FICA).
- Reimbursements from the HSA Savings Account component, for eligible medical expenses, remain tax free, and also do not require that one exceed 7.5% of their AGI (Adjusted Gross Income) threshold to qualify (IRC 213(a)).
- Employees can use their Section 125 Cafeteria Plan funds to pay for their HSA insurance premiums, thereby using pre-tax Cafeteria Plan dollars over after-tax dollars. Generally, employees would make payments to the savings component of the HSA with non-Section 125 funds.
- HSAs are fully portable by employees.
- HSA savings may also be used to pay for Medicare premiums, or the cost of a Medicare HMO, but can not be used to buy supplemental insurance that is designed to pick up the gaps in Medicare, better known as Medi-Gap policies.
- Upon death, HSA ownership may transfer to the spouse on a tax-free basis.
While many will be attracted by the new lower deductibles, once priced out, they will soon realize that the higher deductibles continue to afford the “better buy”. Why? As with the prior MSA, the HSA finds its additional sizzle within the tax deduction side of the equation. With the higher deductible, and higher out of pocket plan maximums (i.e. a combination of deductibles along with all insured co-insurance & co-pay liabilities), and especially for those in higher tax brackets in need of tax deductions, the result can be the government subsidizing up to 100% of the health insurance premium component of your plan. The way this occurs is one may receive more in direct tax deductions, again depending on ones tax bracket, then the cost of the high deductible, high out of pocket, catastrophic health insurance itself that forms the foundation of the HSA. Under such scenarios, it may be preferable, and much cheaper, to simply run all health expenses through a tax deductible HSA savings account, where reimbursements are also received tax-free.
For Group HSAs, many Insurers will continue only selling “List Billed” programs, so that they can avoid the guarantee issue requirements of many State small group insurance laws (like California’s AB 1672). Employees, whose employers set up and fund an HSA, can’t deduct the health insurance premium (though they could move it to pre-tax using a Cafeteria Section 125 Plan), but can deduct the savings account (that money that is earmarked for 100% funding of their HSA plan deductible) to whatever extent they share in its funding. Many employees may even prefer that the employer and/or themselves fund the savings component of the HSA with “after-tax” dollars (i.e. neither will declare a tax deduction), so as to not have any of that money “locked up” by the pre-65 penalties, regardless of who contributed what. Certainly, owners and key personnel will want the full advantages of tax deductibility and deferred savings, though rank and file employees may fair better buying their own, private, HSA, with or without employer support. Remember too, that HSAs are fully portable, yet another advantage to owning one.
HRAs, or Health Reimbursement Arrangements, and Cafeteria Section 125 Flexible Spending Accounts (FSAs) both with reversion of unused medical expense dollars back to the Employer, will now become increasingly challenged, and, in the case of HRAs, less undesirable. Why? Well, employees will see the advantages in HSAs over HRAs where they maintain control of their savings account dollars, and where they can also access such “assets” for other then medical expenses (albeit at a penalty prior to age 65, only when withdrawn for other then eligible medical expenses), rather then having them “sacrificed” or reverted back to their employer when not fully used up for eligible medical expenses. No more lack of portability or of the “Use It or Loose It” forfeitures problems.
The Health Savings Account is indeed a welcome expansion of health care, a timely solution that will bring forth years of creative options for American health care consumers. No longer a trial program, like its precursor MSA, many Insurers will finally make the investment in both infrastructure and plan design, ramping up with a myriad of meaningful consumer offerings that will increase competition and choice for all. Will the HSA, in addition to providing important increased health care options, also end up better controlling costs? This remains to be seen, but the answer lies more likely in the consumers understanding, embrace, and utilization of the core features & characteristics that position the HSA with the ability to be distinctly better than most any other health care model heretofore available.
What about using funds within an IRA (Individual Retirement Account) to fund an HSA? Yes, this can be done – click here for a detailed explanation.
Disclaimer: The material discussed herein is meant for general illustration or informational purposes only, and is not to be construed as financial advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary; therefore, the information contained herein should be relied upon only when coordinated with individual professional advice. We are not licensed for and therefore do not provide tax or legal advice.
About the Author: Paul M. League, QFP — QUALIFIED FINANCIAL PLANNER, is the Founding Principal of League Financial & Insurance Services (www.LeagueFinancial.com), which is a privately held company, established in 1984, and located in Palm Desert, CA. Paul and his company specialize in assisting clients to create, expand & preserve assets “…in a league of our own.” Contact Information: Paul M. League, P.O. Box 11800, Palm Desert, CA 92255-1800; 800.482.5347; Info@LeagueFinancial.com. © Paul M. League. All rights reserved.
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