Reader JY writes in, “I was wondering if you have written anything regarding the Health Savings Account and high deductible health insurance plans. I have recently signed up for this through my new employer as the idea sounded really great. Previously I was paying for one of the more expensive plans, the Kaiser HMO. Now I’m going a completely different route with an HDHP combined with an HSA. The HSA allows for tax free savings for medical expenses and I have been trying to learn more about it. Unlike the FSA it is not use a it or lose it savings account.”
Health Savings Accounts have been around for a while and many employers now offer them as a standard option. I’ve had one for 3 years now and I’ve amassed almost $9,000 of tax free money for my future medical expenses. The HSA is a tax advantaged medical savings account available to taxpayers who are also enrolled in a High Deductible Health Plan(HDHP). As reader JY alluded to, unlike an FSA, the funds deposited into your HSA account rollover from year to year and accumulate if not spent. And since the individual owns the HSA, if you were to leave the company those funds go with you, unlike an HRA.
Benefit to Employer and Employee
Employees generally only see the cost of health care they are forced to pay each paycheck. But most companies tend to subsidize health care so that employees only see a fraction of the cost. The basic HMO option at my workplace costs the employee $70 per paycheck(pre-tax) while the employer pays around $280, or 80% of the total biweekly cost. By switching to an HDHP, my premium goes down to $35 per paycheck and my employer also gives me a $500 annual contribution into my HSA. The employer premium will also go down to $180.
So my premium goes down, the employer premium goes down and I get $500 a year. Sounds like a win-win for everyone right? Well, it is! These plans are typically best suited for young, healthy, single(no kids) individuals. I haven’t seen a doctor in three years for anything other than routine check-ups and my HSA balance has grown accordingly. I’ve realized $1,500 in free money from my employer that can be used for any future medical expenses. We all know the cost of healthcare is skyrocketing, and the HSA is one of the best tools to combat that. If you’re still on the fence, take a look at this example:
An Example of the Tax Savings:
Jose is a 25 year old male. His work offers a Basic HMO for $80/per paycheck or a HDHP for $40/per paycheck with a $500 contribution to a HSA. If Jose chooses the HMO plan, he will pay $2,080 pre-tax after one year. With the HDHP/HSA combo his yearly cost is cut in half, to $1,040. Jose can take that $1,040 along with his employer contribution of $500 and at the end of one year, his HSA is valued at $1,540. For the same cost as the HMO plan, if Jose never sees the doctor, he has accumulated $1,500 in his health savings account.
Although every plan is different, the savings are generally around the range mentioned above. For 2012, an individual is limited to a HSA contribution of $3,100, which includes the employer and employee contribution. The contribution limit for a family plan is $6,250.
Additional Benefits of a HSA(Yes there are more!)
Although I never needed braces when I was little, my eyes weren’t so lucky. I have horrible vision: nearsighted and astigmatisms in both eyes; my last prescription for contacts came in at -9.00! When I visit the optometrist, I have to get some additional expensive tests done and my bill, with insurance, usually ends up around $200. And then I have to spend another couple hundred dollars on contacts. Luckily, I can withdraw money from my HSA to pay for all of this. So depending on your tax bracket, you could get a 30-40% savings on all of this necessary healthcare. Should I decide to buy a Groupon for laser eye surgery in the future 😉 I can use my HSA to pay for it tax free.
HSA’s can also be used for many other expenses not covered by traditional medical plans including vision, dental, chiropractic, accupuncture, medical equipment and even transportation costs related to medical care. According to the IRS, you can even pay for medical expenses out of pocket and save the receipts for reimbursement at any point in the future. I max out my HSA every year, and pay for all my medical expenses out of pocket so that at some point in the future, I can take out that money tax free. During that time frame, I can invest the money in my HSA in stocks, bonds, or anything my provider offers.
The Drawbacks
HSA’s are tax advantaged federally, but in certain states, you will have to pay state taxes on the money you put in and any gains you may realize. There aren’t too many financial drawbacks to an HSA, but they tend to favor young, healthy individuals. I like the idea of a HSA, because they are part of consumer driven healthcare. The idea is that you use your HSA account to pay for the small routine expenses and your HDHP will cover the large catastrophic events.
If you’re constantly visiting the doctor, or have monthly prescriptions you need to fill, the HSA may not be the best option for you. But for most young, healthy individuals, the HSA should be a no brainer if it’s offered by your employer. The HSA is the only tax advantaged account that allows you to put your money in tax free, withdraw your contributions tax free and withdraw your gains tax free, as long as it’s for medical expenses. There is no other tax advantaged account that offers this type of triple-tax savings.
Readers, have you thought about switching to a HSA? Does your employer offer you comparable plans?
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My employer finally offered a HDHP/HSA plan this year, but I stuck with my HRA plan. The cost of my birth control is so high ($90/month) that the HSA plan would cost me a lot more money per year since the deductible is higher than on my HRA plan. Other than my birth control, I don’t have a lot of health expenses though and the HSA plan would make sense if I didn’t have to pay for the birth control.
So really these HDHP/HSA plans are good for single, healthy men, not single, healthy women.
Hi Leigh, interesting stuff, thanks for the comment. I didn’t know the cost of BC could be so high, but I think this is where an HSA could come in handy. If you can find any clinic, local office, etc that can offer it for less, you can use your HSA to pay for this tax free. The great thing about the HSA is it allows you to shop around and find the exact service you need for the price you are willing to pay.
If you’re buying a new flatscreen tv, you wouldn’t just go out and buy the first one you see at Best Buy would you? You would shop around at a couple different stores, compare prices online, etc.. E-mail me and maybe I can help you 🙂
That’s very true, but the deductible is just enough higher on the HDHP that it just isn’t worth it, especially with using a FSA since it’s planned spending.
There’s a difference between buying a new flatscreen TV and picking up a prescription every month – it needs to not be too inconvenient. I’ve tried mail order, but it’s not that much cheaper (it actually can be more expensive even!) and it is so finicky to get it set up and working.
When I tried to get my new prescription set up in January, it took me 14 calls between the health insurance company and the mail order pharmacy to not get any prescription filled, so I finally ended up taking my business to a local pharmacy. I’m moving again soon, so I’ll shop around at pharmacies to see what is cheaper. I think there are around 3-4 pharmacies on my walk home from work, so I should be able to find something that’s convenient! The catch though is that the negotiated rate from the health insurance company could be different every month and then what if that bill really does go into effect August 1st and I don’t have to pay co-pays/co-insurance/deductible on birth control anymore? Then I don’t really care how much it costs.
My husband’s former employer offered an HSA option so we signed up for it and grew to appreciate the benefits you list above. Now we have a complicated question for you. We had two events last year (2011) that exceeded the annual contribution amount of $6150, so after speaking with our HSA administrator, we learned we could continue contributions into 2012 and pay those medical bills for 2011 as long as we complete them by April 17th, 2012 (which we did). Here’s the complication: He left that employer to take a new job out of state, and the new employer does not offer a HDHP/HSA plan. Our new family coverage went into effect on Feb. 1st, 2012. The HSA administrator knew our situation when she said we could continue contributions to our existing HSA to pay 2011 medical expenses, up to April 17th. Now I’m concerned that we may not have been eligible to do this while not covered by a high deductible plan. What was the correct thing to do?
Next, I’m wondering how to report these contributions and disbursements in 2012 for the 2011 medical bills. I am currently completing our 2011 tax return (since we’re getting a refund, we got an extension). I don’t know if I can or should report these extra contributions/payments on the 2011 tax return, and if so, how do I do this? Or do I report it next year on our 2012 return?
Any tips or advice would be appreciated! Thanks.
Katie, thanks for the tough question! Obviously, I have to state the obligatory please see a tax advisor for this situation, as I am not a tax professional and my advice may be completely wrong. And if it were me, I would see a tax pro for this.
To the best of my knowledge, if you incur an expense of say $6,150 in 2011 and your account balance is only $4,000 at the time, you may only withdraw $4,000 to pay for that and use $2,150 of after tax money to pay the rest. As your HSA administrator said(correctly), you have until 4/17/12 to contribute up to the $6,150 family maximum for 2011 and then you may take out at any time the $2,150 tax free(since you’ve already paid this amount with after tax money). Does that make sense?
Now, as soon as you left that employer, you no longer are able to contribute to an HSA. You may keep whatever’s in the HSA at the time and use it on qualified medical purchases but as soon as the HSA is no longer paired with an HDHP you can not contribute to it. All of these contributions were done in tax year 2011 so they need to be reported accordingly, the distributions though would be tax year 2012 I believe b/c you may take distributions at any time in the future, you just need to be able to prove they were for a qualified medical expense and that you didn’t take an itemized deduction or anything like that for that same expense.
This info and more is available in IRS Bulletin 2004-33 : http://www.irs.gov/irb/2004-33_IRB/ar08.html/
See question 39.
My employer is not offering me any such plans.
Do you work for a small or large compnay? Most large companies in the US have started offering HSA’s because the premiums are so much lower with an HDHP. It’s a win-win for employer and employee(I really love HSA’s haha)
Thank you for the nice write up. I just recently signed up for a high deductible plan with an HSA, and I was wondering about a comment you wrote. How would you pay for a health service purchased through a site like Groupon using your HSA? (I’m looking into getting Invisalign). Can you just pay with your credit card first (since I think that’s all sites like Groupons take), then pay the balance with your HSA, and is just keeping the receipt for the Groupon sufficient in case the IRS wants documentation come tax time that the expenditure was HSA-eligible? Thanks for fielding my question!
PS I think a potential answer is that you can type in your HSA debit card info as a form of payment for the Groupon, but mine hasn’t arrived yet and I’m looking into a deal right now.
No problem, I love HSA’s haha! As for your question, yes that is exactly what you would do. As long as your HSA has been established when you pay for the service, you can pay by any means you want(in this case a credit card) and save the receipt. Once you have the funds in your HSA, you can write yourself a check or pull money out of the ATM just like a normal debit card. Make sure you save a digital copy of the receipt though, I save them all in my e-mail account so if Google goes down then I’m screwed, but if not, I’m good to go.