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Under both House and Senate bills, the relaxing of rules for health savings accounts (HSAs) lead to convincing reasons to use an HSA.
By the end of 2016, the number of health savings accounts (HSAs) in the United States reached 20 million – an increase of 20 percent from the previous year. As healthcare coverage options become more limited, some people are turning to HSAs to help them cover their healthcare expenses. And, if successful, the passage of the Senate healthcare bill may convince some hesitant consumers with compelling reasons to use an HSA.
Last week, Senate Republicans unveiled the Better Care Reconciliation Act (BCRA) – their response to the House’s healthcare bill, the American Health Care Act (AHCA), and their proposed replacement for Obamacare. While a bulk of media coverage has been focused on the reductions to Medicaid, the status of those with pre-existing medical conditions, and the end of Obamacare subsidies for those earning above 350% of the Federal Poverty Level (FPL), there’s been little discussion about the future of HSAs under the Senate healthcare bill.
What Is an HSA?
Introduced under George W. Bush’s presidency, an HSA is a form of savings account that lets consumers set aside pre-tax funds for use on qualified medical expenses. These qualified medical expenses include anything from doctors’ visits and prescription drugs to psychiatric care and weight-loss programs. For many, the flexibility of an HSA is a big enough draw to utilize them – especially since any purchases made through an HSA are tax-free.
In order to qualify for an HSA, you first have to be enrolled in a high-deductible health plan (HDHP). HDHPs require you to pay for all your healthcare services out-of-pocket until your annual deductible has been met (which is $1,300 or more), at which point your plan’s benefits kick in. HSAs are often used to pay for those services before meeting your deductible. Generally, this means that younger, healthier people with a comfortable level of financial means tend to go for HSAs.
Reasons to Use an HSA
1. Opportunity to Invest
The biggest reason to use an HSA: they allow consumers to invest their healthcare dollars rather than simply spending money on high insurance premiums. For many, the primary allure of an HSA is its many tax advantages. Firstly, contributions you make to an HSA are tax-deductible. Secondly, those contributions inevitably turn into investments and are allowed to grow tax-free. Lastly, any expenses paid from your HSA aren’t taxed as long as they’re used for qualified medical expenses (you’ll pay penalties on any expenses that are considered non-medical).
Admittedly, such an opportunity is often only available to those with the actual means to afford contributing regularly to an HSA. According to Timothy Jost, professor emeritus at Washington and Lee University School of Law:
“They are great for people in higher tax brackets that are looking for a great tax shelter for retirement savings. They are worthless to people in low tax brackets or people on Medicaid who don’t have discretionary income and won’t benefit from the tax deduction.”
For a majority of consumers, though, HSAs aren’t a feasible option.
“HSAs provide tax savings, which is the benefit many people tout,” says April Seifert, president of Decision Analytics, a healthcare-focused analytical consulting company. “However, when you consider that nearly 70 percent of Americans have less than $500 in any kind of savings account, you start to realize that a special savings account with money set aside that can only be used on healthcare expenses is a pipe dream for most people.”
But for those that have the means to contribute monthly to an HSA and can risk paying a higher deductible, investing in an HSA provides a great opportunity. For 2017, the HSA contribution limits are $3,400 for individuals and $6,750 for families.
2. Cheaper Than a More Standard Health Plan
“[HDHPs] are about one-half less expensive in terms of premiums than a standard PPO,” says Joel White, president of the Council for Affordable Health. “No first dollar coverage requires consumers to be more prudent shoppers.”
Because HSAs can only be used in conjunction with an HDHP, those who choose to use a health savings account are subject to lower premiums than more standard health plans like a PPO. Of course, this means that you’re subject to higher deductibles (because, duh, “high-deducible health plan”) and higher out-of-pocket maximums.
Save On Medical founder Matt Schneider recommends using an HSA, but adds that “only in that it is crucial for patients to set up a fund for emergency healthcare situations”. By putting money into an HSA, consumers can save up for medical expenses that are more unlikely to occur – an emergency fund to be used if and when something does happen to them. This means that people who are younger and generally healthy – the ones unlikely to get sick or injured on a regular basis – often are the ones that drawn in by the lower monthly premiums.
For those who have a chronic condition or those 65 and older, HDHPs (in coordination with HSAs) likely aren’t the right choice for healthcare coverage.
3. Covers Medical Costs Not Usually Covered Under Most Health Insurance Plans
“HSAs allow the majority of consumers to treat health insurance as just that – insurance, a mechanism for covering rare, expensive events – while using tax preferred dollars to cover more common needs such as a primary care doctors visit for the flu,” says Katie Allen, executive director of the Council for Affordable Health. “[They] also help people build up funds over time to cover larger expenses that are both covered and not covered by insurance, such as surgery or LASIK.”
HSAs provide consumers with the flexibility to use funds on various medical expenses not typically covered by standard health plans. For example, home improvements that may be necessary in order to help a person deal with a certain health condition may be considered a qualified medical expense under HSA rules.
Changes to HSAs under AHCA and BCRA
In the Senate healthcare bill (BCRA), Senate Republicans adopted the same changes to HSAs initially proposed in the House bill (AHCA). These proposed changes would make it even more attractive for some consumers to invest in HSAs. Some of these changes include:
- Allowing both spouses to make catch-up contributions to a single HSA beginning in 2018;
- Expanding HSA contribution limits to $6,650 for individuals and to $13,300 for families;
- Letting people get reimbursed for qualified medical expenses they spent before getting an HSA (as long as they establish an HSA within 60 days);
- Removing ACA-established restrictions on using HSAs for over-the-counter medications; and
- Lowering the tax penalty for unqualified medical expenses from 20 percent to 10 percent.