What’s all the hoopla about Health Savings Accounts recently? Well, with the AHCA being continuously debated in Congress, and the ACA here to stay for the immediate future, employees and employers alike are searching for ways to cut healthcare expenses. And the Health Savings Account, accompanied with a High Deductible Health Plan, accomplishes that while providing some tax savings.
What is an HSA?
It’s 2017, and HSAs were approved by Congress in 2003, so unless you’ve been living in a foreign cave, you probably know what an HSA is. But as a refresher, an HSA offers significant advantages to both the employee and employer: both can make contributions to the account with no minimum contributions required. If an employer contributes, those contributions are not taxable to the employee (see exception below regarding California state tax). Furthermore, employee contributions are made on a pre-tax basis, with the option of making additional contributions at any time during the year up to the government’s stipulated limit. Plus, the employee owns the account, not the employer, so it’s portable. Cash balances roll over year-to-year and any interest earned is considered tax-free.
An HSA account accompanies a high deductible health plan (HDHP), usually a PPO model. A high-deductible health plan (HDHP) is a medical insurance plan with a high deductible, defined for 2017 as $1,300 for an individual and $2,600 for family. In 2018, those numbers change to $1,340 and $2,700 respectively. The good news about HDHPs is that they are generally significantly less expensive than a typical PPO plan. Not all HDHPs are HSA compatible, however, so it’s important to note that before installing an HDHP specifically for the purpose of offering an HSA. Check with the medical insurance carrier offering the plan to assure the HDHP is indeed HSA compatible. While researching your options, keep in mind that an HDHP cannot offer the following and qualify as HSA compatible:
- Office visits: A qualifying HDHP may not cover anything not considered preventive prior to satisfying the deductible. Immunizations and physical exams may be covered, but all other services must fall under the deductible.
- Prescription drugs: HDHPs may not cover any non-preventive prescription drugs with a copay prior to the individual or family satisfying the deductible.
- Emergency visits: Emergency services may not be covered with a copay prior to satisfying the deductible.
Now for Seven Surprising Facts about HSAs!
- If you change health insurance, no need to cancel the HSA: No need to close the HSA account because there was a change to a non-compatible insurance plan. In this instance, the HSA can be used to reimburse eligible medical expenses under that new plan.
- An HSA can cover more than medical expenses: Indeed, dental and vision related costs can be reimbursed from an HSA account. You can fact-find other expenses that may be available from IRS Publication 502.
- HSAs offer catch-up contributions: You may already know that catch-up contributions are available for a 401k or IRA, but you may not be aware that those 55 or older can add an additional $1,000 to an HSA.
- An HSA can pay for COBRA premiums: Anyone who has elected COBRA continuation coverage for health benefits may use the HSA to pay for their COBRA health insurance premiums, which is an exception to the general HSA rule that the account cannot be used to pay for premium.
- Balances in the HSA can be invested in stocks, bonds or mutual funds: Investment options are an important consideration when you are searching for an HSA administrator. There is a breadth of administrators to choose from, and you can find a comprehensive list here.
- The HSA is an additional retirement account: Retirement saving doesn’t have to stop once you’ve maxed out your 401(k) and IRA contributions; your HSA can double as an extra retirement account to cover health care costs when you choose to stop working. You can choose to leave funds in the account for retirement, gain all the tax benefits in the meantime, and rest easy knowing that your healthcare expenses will be taken care of in the future.
- HSA payroll deferral elections can be changed mid-year: Employees can change their deferral election status as often as monthly, if the employer allows it. HSAs allow for the employee to make changes if his/her medical expenses are higher or lower than anticipated. Something to keep in mind about pretax payroll deferral is that the employer must maintain a Section 125 plan that allows for HSA deferrals. This includes collecting employee deferrals, sending the deferred amounts directly to the HSA administrator, and maintaining proper accounting for tax-reporting purposes.
Now, let’s talk about California’s uniquely tricky tax ramifications:
- For California employees, interest earned on the account must be added to the adjustable gross income on the California tax return.
- Any contribution to an HSA made by an employer on behalf of an employee is not excluded from income for California purposes, and must be added to the employee's W-2 “California State taxable wages."
Should you consider adopting this cost mitigation strategy?
Yes, it’s worth the time and effort to obtain quotes on HDHPs to learn just how much savings they can generate. According to an American Health Insurance Plans survey in 2016, there were 20.2 million enrollees in HDHP/HSA plans as of January, 2016 and the number continues to grow. HSAs are a great way for employees, and the employer, to pay less premium for a health plan, tackling the ever-rising costs of healthcare. In addition, participation contributes to what is known as consumer driven health care, allowing employees more control over their healthcare expenditures as they analyze the cost of accessing care while satisfying their deductible.
We have more money-saving healthcare tips for you. Learn why it pays off to visit urgent care rather than the emergency room.