Health Savings Accounts (HSAs) first hit the scene back in 2004, and since that time they’ve grown at a steady pace. Every year, more and more brokers get on board with consumer-directed health plans and HSA plans in particular. Still, not every agent is a fan. It’s not easy to create conscientious healthcare consumers. Americans have shown an unwillingness to save their money, and, without up-front copayments, some people go without needed care.
But, like it or not, our clients are gravitating towards high deductible health plans (HDHPs) these days. At the bronze level, which price shoppers tend to gravitate to, that’s really all that’s available in the individual market. Many of those who aren’t receiving a subsidy have trouble affording anything else.
What that means, of course, is that insurance agents need to understand how Health Savings Accounts work so that they’re full equipped to explain them to their clients. In this post, we’ll provide a general overview of these tax-advantaged accounts. For more information, you may want to take a look at IRS Publication 969.
HSAs give people a way to set aside pre-tax dollars to pay for future medical expenses. The contribution amount is capped on an annual basis but typically goes up each year. In 2016, people with single coverage can deposit $3,350 and people with family coverage can contribute $6,750. Those age 55 and older can contribute an additional $1,000 per year in catch-up contributions.
To contribute to a Health Savings Account, you must be an adult who is not claimed as a dependent on someone else’s taxes, have an eligible High Deductible Health Plan and not have other coverage that pays for medical expenses prior to the minimum deductible. That “other coverage” that isn’t allowed could be a government program like Medicare or Medicaid, a spouse’s group health plan or another tax-advantaged account like an FSA or HRA.
High Deductible Health Plan
Some would say that nearly all plans these days are high deductible health plans, but there’s an actual definition. An HDHP is a plan with a minimum deductible of $1,300 for single coverage and $2,600 for family coverage and a maximum out-of-pocket of $6,550 for single coverage and $13,100 for family coverage. Those limits are also trending up.
The pre-tax funds in an HSA are meant to replace the up-front copayments that most people are familiar with, but you can actually use HSA money for a wide range of eligible expenses, including dental and vision. IRS Publication 502 provides a pretty good list of eligible 213(d) expenses. HSA money can even be used for family members’ eligible expenses (spouse and tax-dependent children), whether they’re covered under the primary’s High Deductible Health Plan or not.
Partial Year Contributions
One thing that really confuses people about HSAs is the contribution amount if they only have a qualified plan for part of the year. The rules actually differ based on when the individual is covered by the High Deductible Health Plan.
- Coverage ends before December 1: If you have HSA-qualified coverage for one or more months during the year but that plan ends before December 1st, you must prorate your contribution based on the number of months you were actually covered. For instance, if you had a qualified plan for the first six months of the year but then lost your coverage or switched to a copay plan, you could contribute 50% of the maximum amount. For single coverage, that would be $3,350 x 50% = $1,675.
- Covered on December 1: If you have HSA-qualified coverage on December 1st, you can contribute the full single or family maximum, depending on what type of coverage you have at the beginning of December, even if you only had coverage for part of the year. However, you must remain HSA-eligible for the entire next calendar year or face a ten percent penalty on the excess contributions. This is known as the testing period.
People participate in Health Savings Accounts, obviously, for the tax advantages. Those who contribute through payroll deductions get an instant tax break, but any money individuals deposit directly into their accounts can be deducted when they file their taxes.
When people have an HSA, they do have some additional tax responsibilities. For instance, HSA account holders must file form 1040 or 1040-A rather than form 1040-EZ. They must also complete form 8889, which provides the IRS with information about the HSA contributions and deductions during the year.
If you spend HSA money on ineligible expenses, you will pay taxes plus a 20% penalty on those amounts. As already mentioned, there are other penalties that could kick in if you contribute more than allowed or fail to maintain eligibility during a testing period.
Health Savings Accounts were created as part of the trend toward healthcare consumerism. The idea is that people who are responsible for a greater share of their medical costs will make better buying decisions: they’ll shop for lower-cost services and prescription drugs; they’ll have candid conversations with their providers about diagnostic tests and recommended treatments and they’ll adopt healthier lifestyles. There is some evidence that those things actually do happen, though it’s not immediate.
From a broker’s standpoint, it’s important not only to encourage clients to get their accounts set up so they can pay for their out-of-pocket costs with tax-free dollars but to also share some ideas about how to successfully use their HSAs funds. Advising on the difference between name brand and generic drugs, the cost of urgent care centers versus emergency rooms and the fact that different providers contract with insurance companies at different rates can really help them save some money. Additionally, making sure they know about some of the price and quality transparency tools that are available in the market can help them become better consumers of healthcare.
Again, these plan designs are pretty commonplace now—and becoming more so every day—so your clients will need some guidance, not just on the health plans you sell, but the accounts they can pair with those plans. There is more to learn, but taking the time to ensure you can be the expert they’re looking for is crucial to client retention. If you’re not yet advising your clients about the benefits of a Health Savings Account, spending a little time brushing up on the rules will serve you well in 2016.