The costs of healthcare are going up, increasing expenses for insurers, employers, and patients. Health insurance premiums are rising, too, forcing some to forego coverage altogether.
In a 2019 survey of United States employers, researchers discovered that the annual cost of a family plan is often more than $20,000, with employees paying an average of $6000 in premiums per year.
That doesn’t include out-of-pocket expenses like deductibles and coinsurance, which averages $1,396 per year for an individual. Compare that to the average out-of-pocket expenses in 2009 – just $533 per year for an individual.
The rising cost of medical insurance premiums and other out-of-pocket expenses has prompted a search for less expensive alternatives. Enter Health Savings Accounts.
Health Savings Accounts:
The Healthcare 401k
Many individuals and families are turning to high-deductible healthcare plans, which are designed to protect patients from major illnesses and serious accidents. They offer lower annual premiums, but the deductible is quite high – and fewer basic services are covered when compared to traditional medical insurance.
The most popular solution for managing large deductibles and other out-of-pocket expenses is pairing high-deductible insurance plans with Health Savings Accounts (HSA).
HSAs are often presented as “healthcare 401(k)s”, because they offer a variety of benefits to ensure funds are available in case of a medical disaster. Understanding the benefits of an HSA, as well as eligibility requirements, is key to deciding whether this option is right for you.
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What Is A Health Savings Account?
Health Savings Accounts were introduced in 2003 as a replacement for the outdated medical savings account system. Essentially, individuals and families with high-deductible health plans (HDHPs) were encouraged to set money aside to cover out-of-pocket medical expenses.
Health Savings Account vs Flexible Savings Account
Funds deposited into an HSA enjoy certain tax advantages, and unlike Flexible Spending Accounts (FSAs), the money doesn’t have to be spent by a certain deadline.
Savings can be rolled over and invested year after year, which means people who are relatively healthy can accumulate a sizeable nest egg to cover medical emergencies.
*Note that HSAs are not the same as company-owned Health Reimbursement Arrangements (HRAs) – that is a separate program altogether.
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Health Savings Account Work?
In a nutshell, income deposited to an HSA is not subject to federal taxes, and if it is withdrawn to pay for a qualified medical expense, there is no federal tax liability.
Distributions for non-medical purposes may result in taxes and penalties depending on factors similar to those that govern tax-advantaged retirement accounts like IRAs and 401ks.
Many employers make contributions to staff members’ HSAs to offset the additional deductible expense. Some encourage employees to add their own funds to an HSA through a matching contribution system.
Aside from delivering tax savings and improved financial security against medical expenses, many industry experts believe HSAs offer larger, more global benefits. The theory is that HSAs give consumers more power to make decisions about when and where to purchase medical care.
This may drive competition and bring healthcare costs down – or at the very least, prevent the seemingly unstoppable steep upward trajectory.
HSA Eligibility Requirements
Anytime you have untaxed income, you can expect to see eligibility guidelines and distribution rules. HSAs are no different. These are the basics you need to know before deciding whether to open an HSA:
HSAs are intended for individuals and families with High Deductible Health Plan (HDHP) coverage.
HDHPs are defined as those with annual deductibles of at least $1,350 for individuals and $2,700 for families.
Family plans are those that cover the policyholder and at least one other person.
The annual out-of-pocket maximum for in-network services under HDHPs can’t exceed $6,750 for individuals and $13,500 for families. These figures apply to the 2019 plan year, and they are reviewed each year. Expect changes based on inflation and other economic factors.
Plan Members Are Responsible
In addition to requirements around deductibles and out-of-pocket maximums, the structure of HDHPs follows certain parameters. Specifically, the plan member is responsible for the first costs of healthcare, including prescriptions, up to the deductible.
Preventive Care Not Included
Once the deductible is met, HDHPs begin to cover additional healthcare expenses. An important caveat is that preventative care is not included in the “first costs” stipulation.
These services are covered whether or not patients have met deductible requirements.
If all of these criteria are met, the plan qualifies as an HDHP and members may be eligible for the HSA program.
Is an HSA Right For You?
If you are covered by an HDHP, you can determine your eligibility for an HSA by answering the following questions:
- Are you concurrently enrolled in another non-HSA qualified health insurance plan? If so, you are not eligible for an HSA.
- Do you own or use a standard or general Flexible Spending Account (FSA)? If so, you are not eligible for an HSA.
- Do you own or use a limited-purpose FSA for vision, dental, or dependant care? If so, you may be eligible for an HSA if your HDHP does not cover this sort of care.
- Can you be claimed as a dependent on someone else’s tax return? If so, you are not eligible for an HSA. However, you may be covered under someone else’s HSA program if you are covered under their HDHP.
- Are you enrolled in Medicare Part A, Medicare Part B, or Medicaid? If so, you are not eligible for an HSA.
If you are eligible for an HSA now, you can open an account today to start saving.
If your situation changes in future years and you are no longer eligible to contribute, you are still entitled to tax benefits for the funds you set aside while you are eligible.
A wide variety of medical expenses qualify for HSA payments, but it is important to be aware of expenses that are not eligible.
If you apply HSA funds to ineligible expenses, you may find yourself subject to taxes and penalties.
The following are common qualified expenses, though this list is by no means exhaustive:
- Standard/common medical procedures
- Standard prescription medications
- Standard/common vision care
- Standard vision care equipment such as corrective lenses
- Standard/common dental care
- Standard dental accessories such as dentures
- Medical equipment prescribed by a physician
- Over-the-counter medications with a prescription
HSA funds cannot be used for the following purchases:
- Medical insurance premiums
- Over-the-counter medications without a prescription
- General wellness equipment like a humidifier
Your HSA provider can advise you on any unique scenarios that you encounter.
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Health Savings Account Contribution Limits
There aren’t very many opportunities to earn tax-free income, so it can be tempting to put large amounts away in an HSA – particularly in years when you are in a higher tax bracket.
Unfortunately, the IRS isn’t willing to risk overuse of HSA plans – and a subsequent loss of tax revenue – so there are annual contribution limits.
For 2019, the maximum amount single HDHP participants can contribute is $3,500. This represents an increase of $50 over 2018 contribution limits.
Participants who have a family plan can contribute up to $7,000 in 2019 – an increase of $100 over 2018.
For 2020, the maximum amount single HDHP participants can contribute is $3,550 or $7,100 for family coverage.
As with other limits and thresholds, these figures are reviewed each year and updated as appropriate.
Other Health Care Savings Rules and Requirements
You aren’t required to open an HSA if you are covered by an HDHP, though most people choose to do so.
One of the most pressing reasons, aside from the tax advantages and financial security, is that many employers make contributions on employees’ behalf as part of a comprehensive benefits program.
If you have not opened an HSA, you cannot receive this “free money”.
As long as you meet eligibility requirements, you can continue to make contributions to your HSA – but if your financial situation changes and you are no longer eligible, don’t worry. You still own your account, and you can keep it indefinitely. There are no distribution requirements. You simply can’t continue to make contributions.
Some choose to include HSAs as part of their retirement planning efforts to ensure their ability to pay for uncovered medical expenses after they leave the workforce.
How to Open an HSA
If you meet eligibility criteria, opening an HSA is quite simple. You have a variety of providers to choose from, and you aren’t required to select the provider suggested by your employer.
Lively offers one of the easiest, most user-friendly HSA programs available. You can sign up online in less than five minutes.
All Lively HSA accounts are FDIC insured through Lively’s bank partner, Choice Financial, so you can be confident your money is safe. There are no fees associated with this account, and you can access investment options with the click of a button.
Lively is completely paperless, which makes managing your money easier and more secure. You get a free debit card to pay for qualified expenses, so you don’t have to go through the hassle of submitting for reimbursement.
Learn more about Lively HSA opportunities at Livelyme.com.
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