Health savings accounts (HSAs) find themselves at the forefront of political upheaval. Republicans are attempting to repeal and replace the ACA within the next few years. And HSAs will likely play a pivotal role in any future policy decisions.
These accounts are the rare thing that both political parties have mentioned in a positive light. President Trump and Republican leaders such as Paul Ryan and Tom Price have all referenced the importance HSAs will play in the future of healthcare.
Because these accounts are going to loom large in the future of healthcare, it is important to understand them completely.
What are Health Savings Accounts? What are their advantages and disadvantages? And what is coming next for HSAs? We will break down and answer each of these questions.
What are Health Savings Accounts?
A Health Savings Account is a tax-favored account that you put money into, to help pay your deductibles and other healthcare expenses. You cannot use money in your HSA to pay for health insurance premiums. Additionally, you must have a high-deductible health insurance plan (HDHP) to utilize an HSA.
Similarly, to qualify for an HSA you cannot have any other primary medical coverage, be enrolled in Medicare, or be claimed as a dependent on another’s tax return. Contributions to HSAs are made pre-tax, and any asset growth is tax-free.
Employees are usually responsible for contributions to HSAs, but employers can add money as well. An employer can contribute the full limit if it so chooses, but generally will give smaller amounts, periodically. The maximum contribution amounts are $3,400 for individuals and $6,750 for families.
Pros and Cons of HSAs?
Health Savings Accounts, like virtually any other decision, have both advantages and disadvantages. It is important to know both sides, to make an informed decision regarding your healthcare.
The first advantage of HSAs is their tax benefits. These accounts offer three significant tax savings. There are no taxes on contributions, the growth of funds, or their withdrawal (if used for medical care).
Because money can be contributed pre-tax, it also reduces an individual’s end-of-year tax burden. If you contribute the maximum of $3,400, all of that money is subtracted from your taxable income at the end of the year.
Another advantage of an HSA is the fact that they are linked to high-deductible health plans. These plans can benefit certain people because they have significantly lower premiums. If you aren’t a high healthcare user, you will likely save money from having these smaller premiums.
A different positive of HSAs is that they require consumers to be highly educated about healthcare. Employees must now comparison shop the prices of their medical care. This process necessitates people becoming better overall healthcare consumers.
The first disadvantage of HSAs is that it all hinges on an individual’s ability to save money. Many individuals and families do not have extra money to put in an HSA. For these people, the tax advantages of HSAs are essentially nullified.
The other disadvantage of HSAs is also an advantage; the fact that HSAs are linked to high-deductible health plans. These high-deductible plans can be unaffordable for less wealthy employees. Some of your employees may be unable to support these high deductibles, especially if they have family coverage.
Another negative of HSAs is again, related to something that could be positive; actively shopping for your medical care. Being a more educated healthcare consumer is a good thing.
Still, the amount of time and effort that goes into comparison shopping could be very stressful. Also, consumers will not always have the knowledge necessary to make the best decisions when shopping for their medical care.
A different disadvantage is that healthcare consumers with HSAs tend to cut back on all healthcare services. According to Paul Fronstin, with the Employee Benefit Research Institute, policyholders cut back on everything, including high-value services they need.
ER visits increase, and many will even forego preventative screening exams. People forego these exams despite the fact that under the ACA, they are free to the consumer. Bypassing any care, especially preventative, could lead to higher medical costs in the future.
What’s Next for HSAs?
One thing seems to appear sure for Health Savings Accounts; they are here to stay. Employee Benefits News reports that HSA participation has grown from 3.2 million in 2006 to over 20 million in 2016. Similarly, total HSA investments have grown to over $4.7 billion.
HSAs are also increasingly attractive to younger employees. According to Yahoo, millennials contribute up to 20 percent more to their accounts than other generations. Also, the election rate for those under the age of 26 rose from 41 to 45 percent.
Similarly, the newly released American Health Care Act keeps HSAs in the forefront of the healthcare discussion. The proposed replacement for the ACA would increase contribution levels and overall plan flexibility.
Contribution levels for HSAs would be $6,550 for individuals and $13,100 for families. Additionally, policyholders would be allowed to contribute excess money from premium tax credits to their HSAs. This money would not count toward their contribution limit.
Also, you could use money in your HSA for over-the-counter drugs. Under the ACA, money in an HSA could only be used for over-the-counter drugs if you had a prescription for that drug.
The American Health Care Act increases HSA flexibility through two other provisions. One of these provisions allows both spouses to make catch-up contributions to one HSA. Currently, only the employee/policyholder can make catch-up contributions.
Finally, policyholders can now reimburse themselves for qualified medical expenses incurred before HSA-qualified coverage begins, as long as the account is established within 60 days. As of right now, the ACA does not permit this action.
No matter how you feel about Health Savings Accounts, one thing is for sure. They are not going anywhere. Even if healthcare doesn’t undergo any radical changes, HSAs have been increasing in number and use.
Get to know the ins and outs of HSAs and high-deductible health plans, so you’ll be ready for whatever the future of healthcare holds. If you have any questions contact us or call 402-289-1012.