A high-deductible health plan (HDHP) combined with a health savings account (HSA) is one of the best ways you can keep health care costs down while at the same time making an investment in your future. We believe in “consumer-driven health care,” and an HSA offers you more freedom when it comes to deciding how your health care dollars are spent.
The first HSA was established in 2003. Since that time, this secret weapon of managing out-of-pocket medical costs while building tax-favored savings has steadily gained in popularity. Today, over 9 million Americans hold an HSA plan, accounting for a whopping $18 billion in contributions. Plans and assets of HSAs are reported to increase by 29 percent every year. This secret weapon isn’t so secret anymore!
The History and Benefits of HSA Plans
HSA plans were originally part of the Medicare Prescription Drug, Improvement, and Modernization Act. HSAs were designed to replace medical savings accounts, which were similar in design. An HSA is what is called a tax-favored account, which means that people who own one are given tax benefits that people without one do not qualify for.
An example of the tax benefits afforded to consumers in this case is that the dollar amount deposited into the account is tax-free. Additionally, the amount left in the account at the end of the tax year results in an income deduction of that amount. If you fully fund your account with the maximum allowable amount, you receive an automatic deduction of that amount. This also serves to lower your modified adjusted gross income (or MAGI) by that amount.
An HSA is linked with a high-deductible health plan. These plans have deductible amounts anywhere from $2,500 to $10,000. In exchange for a lower monthly premium, health care consumers choose to pay a greater portion of their medical expenses before the insurance policy kicks in. The funds from the linked HSA account can be used to pay any out-of-pocket medical expenses like copayments, deductibles, prescriptions and more.
The Triple Tax Advantage of an HSA
High-deductible health plans combined with an HSA offer a triple threat in saving you money on taxes and health care costs. Tax-deductible deposits into your account, tax-deferred growth of funds, and tax-free withdrawals for out-of-pocket medical expenses make the HSA an attractive strategy.
With the higher premiums of Obamacare plans looming, choosing a high-deductible, lower-premium plan with an HSA is just plain smart.
Why Are They So Popular?
HSAs have been an integral part of the health care industry over the past 10 years as people realize the significant benefits of this type of health plan. More employers are combining an HDHP with an HSA as part of their employee health benefit because the premiums for these types of plans are much more affordable. Individuals are choosing them more often for the same reason.
As the Affordable Care Act kicks into high gear and requires that every individual either purchase insurance or pay a penalty, I think that HSA-qualified health plans are going to become even more popular for employers and individuals alike. For one thing, the premiums associated with an HSA plan are typically less expensive. This is an important factor as insurance rates in general are rising now that the ACA has been implemented.
While an HSA-qualified health plan still has to comply with the requirements of health care reform, the higher deductibles translate into lower premiums—plus you’ll have the safety net of HSA funds you can draw upon to take care of copays, deductibles and other extras your insurance does not cover.
People with HSAs can enjoy the freedom to choose how their health care dollars are spent while also having coverage in place in the event of the unexpected—from broken glasses to a hospital stay. The list of qualified expenses for which you can use your HSA is quite generous, in fact.
Significant Tax Benefits
The tax benefits of an HSA plan are also what make them popular with many people. I like to call an HSA a triple-tax benefit plan. The amount you deposit in your HSA is tax-deductible, which is an instant benefit each time you deposit. The growth of the funds is also tax-free. Last, any withdrawals used for qualified medical expenses are exempt from taxes.
These tax benefits allow you to keep more of your money in your own pocket rather than hand it over to the government in the form of taxes!
Long-Term Medical Expenses
People are also turning to HSA-qualified health plans to be proactive for care they may need in later years. Medicare may not always be a viable insurance option down the line—especially if you need long-term care, a senior living community with memory care, or assisted living.
Additionally, health networks are becoming more restrictive as health care reform laws are implemented. An HSA is an excellent way to make sure you have the financial means to seek the services of a specialist or any other out-of-network provider in the event it becomes necessary.
Control Where Your Health Care Dollars Go!
Now that the Affordable Care Act is officially in place, it has perhaps never been more important to have control over your health care budget. If you have an HDHP, you have the ability to choose the provider you see, shop around for the best prices, see an out-of-network specialist, and even use alternative medicine that a traditional heath plan would not typically cover.
If you choose to pay all of your expenses up to your deductible amount out of pocket, you can leave your HSA funds in your account to add interest or even use as an investment. If you withdraw your funds for non-medical expenses, you will have to pay a penalty up until you reach the age of 65 years old. At that point, you can withdraw HSA funds for any reason you like without a penalty (although you will have to declare it as income and pay taxes).
As far as the Affordable Care Act goes, an HSA can also mean the difference between qualifying for a premium subsidy or not. If you fully fund your account with the maximum allowable amount, your MAGI is decreased by that amount. Since your MAGI is how your premium subsidy is calculated, this has a definite impact on your qualification for a subsidy.
Had Your HSA since before December 1, 2013?
Keep in mind that if you have a 2013 HSA account that has been in effect since before December 1, 2013, you have until April 15, 2014 to fully contribute to your account for 2013 tax benefits. Even if you established your HSA after December 1, 2013, we still encourage you to continue funding it to the maximum allowable amount to reap the benefits sooner and for years to come.
Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.