An HSA and high deductible plan are individuals and can be one in the same. They are also very hot topics in a very tumultuous healthcare market. The Obamacare law has driven up premiums and put many states with one provider. How do you choose which plan is right for you?
The HSA and high deductible plan are intertwined because of the regulations on a Health Savings Account.
What is an HSA?
A Health Savings Account (HSA) is an account that is tax-advantaged. The account is established to pay for qualified medical expenses of an account holder who is covered under a high-deductible health plan.
A high deductible plan is a plan that lives by its name. A high deductible is required to receive the “free” portion of the health insurance.
Deductible and Out-of-Pocket Costs
The minimum deductible is the deductible that has to be met for the benefits to be, well, beneficial. This is where the HSA becomes important.
The high deductible minimum deductible and the maximum out of pocket costs have not changed in 2017. The table below will show the numbers for this year.
The maximum out-of-pocket shows maximum amount the insurance will require an individual to pay. So if there were a $30,000 procedure even for out of network, the individual wouldn’t have to pay more than the max out-of-pocket.
Higher deductibles mean lower premiums. This is great for a lot of people because some people need to go to the doctor frequently, once the deductible is met, nearly everything is covered. The reduced monthly cost is good for anyone regardless of health.
The HSA is money out of an insured individual’s paycheck that can be matched by the company to pay for appropriate medical costs. Technically this avoids a traditional “out-of-pocket” cost during a visit to a medical professional.
This is especially useful for jobs that give complete packages and not high wages. When people are struggling a little bit and they have to pay some money, all the individual has to do is use the debit card affiliated with the account.
HSAs are Good
Why is the HSA good for individuals when it comes to funding their insurance?
Firstly, ALL contributions are deductible. Every single dollar contributed can be deducted from an individual’s tax return. For 2017, individuals with self-only HSA plans can deduct as much as $3,400 and individuals with family HSA plans can deduct as much as $6,750. Those numbers are the maximum contributions the insured individual can make into the HSA.
Talk about tax-protected; the money in the HSA grows tax-free. Of course, that applies if the individual uses the money for applicable medical costs or waits until he/she is 65. Basically it can be an alternate to retirement funds if it is allowed to grow enough.
HSAs enable the individual to elect ANY high deductible health plan from ANY provider. This is huge in a day and age where the marketplace is drying up because of the massive tax burden created by Obamacare. This shows that if an individual wants choice, HSA+HDHP is the way to go.
How It Stays Viable
Another perk stated above, the higher the deductible is on an individual’s health insurance plan then the lower that person’s monthly premium payments will be. Since a high deductible health insurance plan is a requirement for opening a Health Savings Account this makes monthly premiums low and more money can go towards contributions.
The beautiful thing about an Health Savings Account as compared to a Flexible Spending Account is that while Flex Spending Accounts require you to use up the money in the account every year all of the money that you contribute to an HSA rolls over from year to year.
Easy Setup
The ease of setting up an HSA is the same as setting up a normal savings. Setting it up is so easy that it’s taking longer to produce this article than to set up an HSA.
Small Business Advantages
Knowing the rules for how HSAs escape federal income tax is essential for small business owners and employees alike.
For example, if you have enough cash to supplement an HSA account over and above your employer’s contribution—and up to the maximum permitted by the IRS each year—you could build up a healthy nest egg for medical expenses incurred during retirement.
How? Don’t use the HSA during your high-income years of employment. Instead, pay for qualified medical expenses (e.g., deductibles, co-pays, prescriptions, etc.) with funds that have already been taxed, and keep the HSA growing income tax-free for as long as possible. Remember, just like an IRA, income, and growth escapes taxation when held within the HSA.
This strategy works well for a small business owner who faces high personal income taxes each year. At the current highest marginal rate of 39.6%, maximizing the HSA contribution—currently at $6,650 in 2015 for a Family HSA—simply makes good sense. While the small business owner (or employee) is in the highest federal income tax bracket, deferring the use of the pre-tax funds will be more efficient if he or she waits to use the funds during retirement when, at least in theory, his or her federal tax rate should be lower.
Disadvantages
Obviously, when money is put into an account, there can be negatives associated with a Health Savings Account.
There is a substantial 20% penalty for anyone under the age of 65 that uses the money in an HSA for anything other than qualified medical expenses. Income taxes have to be paid on any withdrawals that are not for qualified medical expenses.
Since most health savings accounts are invested in assets like stocks and bonds, the balances can fluctuate. This means that account holders could see account values decline during bad financial markets. If you rather not take that risk, many people keep their HSA contributions in regular savings accounts and don’t make or lose much extra money.
Individuals should consult with someone about what is best for them based on their past health issues and their current income.
An HSA and high deductible plan may be right for you. Always do research before making a decision on health insurance.