The Ultimate Guide to Health Savings Accounts (HSAs)

Mention the Affordable Care Act to people who are self-employed and buy their own health insurance and you’ll be lucky to get a kind chuckle in return.  More than likely, the response you’ll receive is frustration or even anger.  There is nothing “affordable” about the Affordable Care Act to middle income Americans who don’t qualify for a subsidy.  But, luckily, there are still fantastic ways to reduce your total healthcare expenses.  Taking advantage of a Health Savings Account is a prime example.

What is a Health Savings Account?

A Health Savings Account (HSA) is a bank account that can be used to pay for healthcare expenses.  When combined with a High Deductible Health Plan (HDHP), you and your family will experience savings and tax advantages you have been missing out on for years.

Premiums for a HDHP are similar to other standard Bronze level plans.  A 40 year old man in Orange County can expect to pay about $265 per month.  However, deductibles are usually lower.  Typical HDHP deductibles are $4,800 for individuals while standard Bronze plans are $5,500 and higher.  All Bronze plans offer little to no coverage before you hit your deductible, even for prescription drugs.  With HDHPs, you’ll need to hit your deductible first before coverage kicks in.

For those worried about high deductibles, see the Cost Containment section below.  You may also want to consider Kaiser, which offers a Silver level HDHP with a deductible of only $2,700.

Cost Containment

If you’re new to having a high deductible on your health plan, it may be a bit of a shock when you first visit the doctor.  While you’re probably used to paying a standard $30-$50 copay when visiting the doctor, you may find yourself paying $70 -$100.  The same thing happens when paying for prescriptions.  But remember that those lower copays you are used to came with much higher monthly premiums.  Our sample 40 year old man above saves on average $700 a year if he switched from a Silver plan and $1,800 a year if he used to have a Gold plan.  For someone who doesn’t visit the doctor frequently, the premium savings outweigh the higher copays.

If the higher copays are still a concern, consider enrolling in a service such as Call A Doctor Plus.  They offer 24/7 access to doctors via phone, video, or mobile app with no co-pays or deductibles.  For only $20/month, it is a great way to limit your out of pocket costs.

What most people fear with a high deductible, however, are major costs such as surgery or hospitalization.  Well fear no more because there are products to help with these costs as well.  I’m sure you have seen the Aflac duck commercial a hundred times.  Their Accident and Hospitalization plans offer cash payments direct to you if you get hurt or end up in the hospital.  The lower monthly cost of an Aflac plan may be exactly what you need to feel more comfortable with a high deductible.

Without Aflac, a broken leg could be just the beginning. pic.twitter.com/ML1YkYIFiC

— Aflac (@Aflac) November 24, 2016

Tax Benefits

Now that we know what a High Deductible Health Plan is, let’s take a look at it’s most impressive feature…what it can do for you come tax time when combined with a Health Savings Account.*

Each year, you decide how much money you want to contribute to your Health Savings Account.  It can be as little as $0 but can be as high as $3,450 for an individual or $6,900 for a family.  If you’re over 55, you can add $1,000 more to that limit.  Once you open an account, you will receive a debit card or checks that you can use to pay eligible medical expenses, described in the next section below.

HSAs allow you to lower your tax burden in three different ways:

1. Contributions to your Health Savings Account are tax-deductible, lowering your taxable income each year that you make a contribution.
2. Money grows inside of your Health Savings Account tax-free.
3. Money can be taken out of your Health Savings Account tax-free if it is used to pay for eligible medical expenses.

Investment/Retirement Benefits

Contributions to Health Savings Accounts don’t have to just sit in the bank.  They can be invested in a wide range of securities, including mutual funds, stocks, bonds, and more.  As the money grows inside of your HSA, it accumulates like a retirement plan.  And just like a retirement plan, withdrawals for non-qualified expenses can be hit with a hefty penalty.  But once you reach the age of 65, money can be removed from the HSA penalty-free, subject only to income tax.

The benefits of an HSA are so rich, that some experts say that their contributions sometimes should be prioritized even over 401(k) contributions.

What expenses are eligible to be paid with a Health Savings Account?

Now that I’ve got your attention and you’re sold on the benefits of a Health Savings Account, let’s take a look at which expenses are eligible to be paid from an HSA.  You’ll find this list from HSA Bank to be pretty extensive.  Because we are not tax professionals, before using money from your HSA, make sure to double check with your CPA or the IRS to make sure your expense is qualified.

• Acupuncture
• Alcoholism treatment
• Ambulance services
• Artificial limb or prosthesis
• Birth control pills
• Chiropractor
• Childbirth/delivery
• Crutches
• Doctor’s fees
• Dental treatments
• Dermatologist
• Drug addiction therapy
• Fertility enhancement
• Guide dog
• Hearing aids and batteries
• Lactation expenses
• Lodging (away from home for outpatient care)
• Nursing home
• Pregnancy test kit
• Prescription drugs and medicines (over-the-counter drugs are not IRS-qualified medical expenses unless prescribed by a doctor)
• Psychiatrist
• Psychologist
• Smoking cessation programs
• Special education tutoring
• Telephone or TV equipment to assist the hearing or vision impaired
• Therapy or counseling
• Medical transportation expenses
• Vision care (including eyeglasses, contact lenses, lasik surgery)
• Weight loss programs (for a specific disease diagnosed by a physician – such as obesity, hypertension, or heart disease)
• Wheelchairs
• X-rays
• Plus Much More

Is a Health Savings Account right for me?

High Deductible Health Plans combined with Health Savings Accounts are great but they are not for everyone.  People who use their health insurance frequently such as those with chronic medical conditions or those expecting a surgery or hospital stay may be better off with a health plan with no deductible such as a Gold or Platinum plan.  Also those that can’t afford the higher copays or who don’t have the extra room in their budget to contribute to a Health Savings Account may feel the higher deductible to be too much of a burden.

So how do I get started?

To see if a Health Savings Account is right for you, start by comparing premiums online.  Look for plans that have the letters “HDHP” behind them.

You can get quotes online in just a couple minutes.

After you have chosen your plan, you can apply online too.  You’ll only be asked to provide some basic information.  There will be no medical questions.

Open enrollment runs through January 31 but effective dates vary depending on when your application is received.

Need help?

Please feel free to contact us at any time if you need help deciding if a Health Savings Account is right for you and your family.

*Castaline Insurance Agency is not qualified to give tax advice.  Always check with your CPA before making any decisions about tax implications of any insurance or financial product.