Editor's Pick: Originally published Dec. 23.
As deductibles for health insurance plans continue their upward trend even for employer-sponsored options, most consumers are choosing plans that supersede the minimum requirement to open a health savings account.
Despite the flexibility of owning a health savings account, which are commonly referred to as HSAs, only a small fraction (8%) of American consumers have one. HSAs are particularly attractive, because they cover a range of medical expenses. In addition, the contributions are not subject to federal income taxes and can be invested like an IRA. The advantage of HSAs is that any unused funds roll over each year and any remaining money can be used for retirement after the age of 65.
People who buy coverage on the public health insurance exchanges are especially good candidates since most of the plans, including silver and bronze plans under Obamacare, are high deductible plans. A high deductible plan is defined as at least $1,300 for an individual and at least $2,600 for a family in 2015, according to the IRS.
Despite the fact that so few Americans have an HSA, 50% said they are somewhat or very likely to use an HSA to lower their taxes, according to a 2014 insuranceQuotes.com report.
Popular expenses that HSAs can be used for include prescription medications, doctor visits, dentist visits and eyeglasses. They can also pay for continuing coverage such as COBRA and long-term care insurance.
“You fund it ahead of time which means you will get a discount for any medical procedures you need in the future,” said Laura Adams, insuranceQuotes.com’s senior analyst said. “It can add up to some substantial savings.”
Utilizing funds from an HSA is essentially an “instant discount” on health care, because someone who is in the 30% tax bracket will pay $100 for a doctor’s visit, but will obtain $30 back when his taxes are filed, said Jack Hooper, CEO of Take Command Health, an online health insurance exchange based in Dallas.
“HSAs also can be a smart move financially, because the money rolls over each year and earnings can accrue tax free just like a Roth IRA,” he said. “As long as you pay for qualified health expenses, which is just about everything health-related besides your plan's premiums, there are no penalties or taxes on your earnings.”
Both high deductible plans and HSAs have many advantages, especially when they are paired toether for Millennials and Gen X-ers who rarely go to the doctor, because they are healthy and do not rely on taking prescription drugs on a regular basis.Employees have been hit with a double whammy during the past five years, since both the share of workers with deductibles and the size of those deductibles rose sharply, according to the Kaiser Family Foundation/Health Research & Educational Trust survey of 2,000 small and large employers. The combination of these two factors has resulted in a 67% increase in deductibles since 2010, much faster than the rise in single premiums of 24% and about seven times the rise in workers’ wages of 10% and general inflation of 9%.
Some workers turned to high deductible plans to defray some of the costs with 46% of employees who selected a major health insurance plan with a high deductible of $1,000 or more last year, up from 34% who said the same in 2014, according to a recent Aflac survey.
The catch is that the out of pocket costs might prove to be a surprise for consumers who don’t budget for meeting the higher deductible for tests and other procedures, but opening a HSA can defray some of the costs.
Not all HSA accounts are equal and some come with more fees than others; however, ones that incur less than $5 a month are a good bet, Hooper said. Banks, credit unions and insurance companies all offer them. Some accounts are more basic and are more akin to a regular savings account, but other ones give you the option to choose from various stocks and mutual funds.
“A lot of price conscious health insurance shoppers these days find themselves forced into health plans with high annual deductibles,” said Nate Purpura, vice president of consumer affairs at eHealth.com, an online health insurance exchange based in Mountain View, Calif. “That’s because plans with more affordable monthly premiums just tend to have higher deductibles. Using an HSA to its full potential can help mitigate the risk of a high deductible by allowing you to save money on a tax advantaged basis to pay for a whole host of qualifying medical expenses.”
Contribute the maximum amount if you believe you might undergo a procedure the following year or if you have funded your retirement accounts to their fullest amounts. The maximum amount of the contribution is $3,350 for individuals and $6,650 for families each year.
“Unlike the Flexible Spending Accounts (FSAs) that many people used to have through their employers, money contributed to your HSA is yours to keep and can roll over and grow from year to year,” he said. “Contribute as much as you are able or as little as you like. The contributions to your HSA are deductible on your federal tax return.”
One of the best expenses that the money from a HSA can pay for is your annual deductible, which can be as high as $6,000 now. This is another reason why contributing more money into your HSA is beneficial, because if a serious emergency or illness occurred, there would be “at least enough to cover the deductible,” Purpura said. The funds in an account also cover your copay, but it excludes your monthly premiums.
HSAs were created for one purpose only, and if you spend the money for medical expenses that are not qualified, the tax penalty from the IRS is 20%. Patients often become better consumers, because when they are using funds from a HSA, they make a payment at the time of the procedure instead of waiting for a bill and scrutinize their costs much closer and sooner.
“It's hard to be a real consumer when the expense is so removed from the service,” Hooper said.
The immediacy of using money allocated into a HSA also prompts consumers to ask more questions during their exams such as whether they really need an additional test or if a generic drug is available.
“Having a healthy conversation with your doctors about your health needs and expenses is a good thing,” he said. “You'll be surprised when you start ‘HSA-ing’ on how much you care and how much you'll notice.”
Even doctors in the same medical building will charge “wildly” different rates for the same simple procedures and if you were not planning on spending HSA money to pay for it, the option might not even occur to you, Hooper said.
“The reality is when patients are smarter consumers, the health care system will get better and prices will get cheaper,” he said. “So many wasteful procedures and tests will cease and people can hone in on getting the most out of their healthcare dollars.”