HSAs (Health Savings Accounts) and the Affordable Care Act
by Vicki Parker
Health Savings Accounts (HSA) were developed with the Medicare Prescription Drug Improvement & Modernization Act in 2003. They replaced Medical Savings Accounts (MSA) which were created with the Health Insurance Portability & Accountability Act in 1996 and are now grand fathered. The purpose behind the development of HSAs was to help reduce the increasing costs of healthcare in the U.S. They were designed to make “able” individuals increasingly responsible for their own health care costs and choices. Part of the rationale behind HSAs was that persons pay a larger portion of their own healthcare costs, and are therefore frugal with healthcare decisions. This frugality translates to health-oriented lifestyles and a resulting reduction in the need for healthcare, which serves to drive costs downward.
This is how a HSA works:
You contribute up to a maximum allowable amount of $3100 per covered person each year. The contributions are tax deferred. What you contribute to your HSA is your money and you control when you withdraw it. Withdrawals must be health-care related (medical, vision or dental) or you subject yourself to a 20% tax penalty by the IRS. There is no limit on the amount which can accrue in an individual HSA.
How this translates to cost savings $$$:
Due to cummulative contributions into the HSA, you can afford a higher deductible on your health insurance plan. Some dedutibles are as high at $10,000. You will pay ALL of your medical costs up to your chosen deductible. Health plans vary accordingly, but generally, the higher the deductible, the greater the benefits which are paid after the deductible is met. That is, after the $10,000 deductible is met, benefits are paid at 100%.
John and Jane, a young married couple of 2 years with no prior medical conditions, apply for coverage and are quoted between $200 and $400 month by several providers for EACH of them for a standard 80/20 plan. Instead, after settling on a $7,500 annual deductible HSA with a $1,000 deductible for drugs, they were able to obtain coverage at the rate of $150 month collectively. That translates to $1800 in annual premiums versus potentially $9600 a year in premiums.
This means, however, that each of them must maintain a separate HSA. The savings they realize in premiums will be used to fund the HSA up to at least, the deductible. They will begin by depositing $3100 each year per person and let their individual HSAs grow to the $7500 level at a minimum. This extra $200+ per month then becomes their savings instead of money thrown away on a non-refundable premium. It would take 2.75 years to reach their deductible. They draw from the HSA each tax year for healthcare needs and replenish the account in the next tax year as they wish.
The amount placed in the HSA is tax-deferred and the amount spent on healthcare is tax-deferred. They are not able to claim health expenses on their taxes. They are not able to use the monies for non-medical purposes. They would be able to “bank” the money until retirement and use it for non-medical purposes then.
Pros and Cons of Health Savings Accounts
HSAs were not and still are not without opposition. Proponents believe HSAs will have the affect of making the problem of healthcare worse because individuals with ongoing health problems will simply avoid HSAs or cannot afford them to begin with. Proponents also point out that medical expenses should be tax-deductible for all individuals, and not just those who have a HSA. Proponents argue that HSAs are a high-deductible health insurance option which keeps rates low for those who could actually afford to pay larger premiums in the first place. They argue that HSAs are a tax savings for the wealthy and do nothing to solve increasing health care premiums for the average American.
Advocates believe that the overall effect of HSAs will reduce health care costs (see example of John and Jane above). Advocates feel that entrusting individuals with more control over their personal healthcare choices, will have the affect of weaning out unnecessary tests and treatment. For instance, those who run to the emergency room as though it were a doctor's office or those who seek medical attention for simple first aid, etc. Proponents would argue the converse - that those participating in high-deductible plans are more likely to delay or avoid the care they need and consequently, actually increase their overall health-care cost in the long run. Proponents argue that many families simply cannot afford to put aside a deductible for each family member. Furthermore, if you are self-employed, a HSA does not preclude the requirement to pay employment tax on your earnings.
It does appear that HSAs are best suited for the youngest and healthiest of those seeking medical coverage. If you inherited a lump sum from a relative or you are otherwise in a position to begin funding a HSA, it is a wise move toward keeping premiums down. If at any point you obtain more affordable healthcare coverage (through an employer, for example), you can use your accruals for co-pays and unexpected medical costs. You cannot use HSA monies for over-the-counter drugs, however.
If you are interested in a HSA, simply find a health insurance plan that accommodates them. Annual deductibles vary from $5000 to $10,000. This high deductible has the affect of reducing your monthly cost for premiums by half. Then find a FDIC insured bank who also accommodates HSAs. The bank will issue you a debit card to be used solely for healthcare needs. Many banks will also issue annual reports for tax or other purposes. You can then actively use this debit card at the doctor's office, hospital, or pharmacy.
The upside to using a HSA is that if you are generally healthy throughout the life of the HSA, you can use any remaining funds for non-medical reasons on a tax-deferred basis at retirement.
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