So here’s the deal. I’m a 24 year old college student who makes a small income and I dread the day I have to pay for health insurance. Thanks to the change in healthcare laws I am lucky enough to be covered under my parent’s fabulous health insurance plan until the ripe old age of 26. Like many Americans I fear that my modest income would never allow the price of the expensive health insurance plans out there. In fact, I’ve heard nothing but bad news about buying health insurance it seems.
This post is hopefully the first of many on the topic of health insurance. I want to let you know about some of the things I’ve been researching and today the topic will be Healthcare Savings Accounts. All the A’s I’m going to talk about are types of tax-advantaged accounts designed to help you save for medical costs. This one is going to be a little dry but please hang in there with me. I do my best to make health insurance regulations fun and interesting!
Healthcare Savings Accounts (HSAs)
A Healthcare Savings Account is a savings account available to people in the U.S. who have a High Deductible Healthcare Plan. Money deposited is tax deductible and can be used for various health care expenses. In 2016 an individual can contribute up to $3,350 as long as their health plan deductible is over $1,300. If the money is not used by the end of the year it rolls over to the next year, over and over until it is used.
An HSA is set up with a trustee like a bank or insurance company and the money is owned by the individual which means it will follow you even if you change jobs or move to a different insurance company. Some HSAs are held in savings accounts that earn a small amount of interest. Some companies may also provide an option to invest the money in stocks or mutual funds.
The money invested in an HSA, like a 401k or traditional IRA, is contributed pre-tax. The interest and investment earnings on the money are tax-free (like a Roth IRA). Finally, as long as the money is used for qualifying health expenses, it can be withdrawn tax-free. This is the reason money managers refer to the HSA as a “triple-tax break.”
Medical Savings Accounts (MSAs)
Ok so what’s an MSA? It’s an HSA for someone who’s self-employed or employed by a small business. A business is defined as small if it has less than fifty employees for two years. To qualify for an MSA you must also have a medical plan with a deductible of at least $2,200 for an individual.
Flexible Spending Accounts (FSAs)
A Flexible Spending Account, or Flexible Spending Arrangement, is another tax-advantaged savings account. It’s different from the HSA because it is set up by an employer. At the beginning of the year an employee decides how much to contribute (up to $2,550) to the FSA and the employer will deduct the money from paychecks throughout the year. Any money in the FSA can be used for qualifying healthcare expenses.
When FSAs first began they were use it or lose it. Any money not used by the end of the year would disappear. The Affordable Care Act attempted to help these plans a bit, now allowing the employee to carry over up to $500 to the next year. Unlike the HSA, FSAs are not just for people with high deductible insurance. They are one of many benefits an employer may offer with their health plans. People who are self-employed cannot have an FSA.
Health Reimbursement Arrangements (HRAs)
I know this is all very boring but bare with me here. An HRA is a tax-advantaged health plan account that is set up by an employer. None of the contributions to this account come from the employee’s salary. They are contributed to solely by the employer and there is no annual limit to how much can be put in. When an employee has had to pay for medical expenses they can be reimbursed for those costs via money from the HRA. HRAs may be offered in conjunction with some of these other account types or all on their own.
In case this isn’t obvious to you, I’m reminding you that unlike the HSA, HRAs cannot be carried over to different jobs because they’re explicitly connected to your company’s health insurance plan.
What’s the Point?
So now that we’ve covered this quagmire of confusing information allow me to give you a little background. All these healthcare savings account types got a major expansion with the passage of the Medicare Prescription Drug, Improvement, and Modernization Act. The law was mainly about how Medicare recipients pay for their drugs but it also had this tiny part about healthcare savings. Healthcare costs have classically gone up and up and this was an attempt to help average people pay.
How did it help the average joe pay you ask? It just made it easier for us to avoid taxes. All of these account types are tax-sheltered. In the case of the HSA even the investment returns can be withdrawn tax-free if you’re using the money for healthcare expenses.
But what if you don’t use all the money you put in? I read an article recently that praised the HSA as the new retirement account of choice. Put money in, let it grow over time, use it if you have health expenses and in the end you can cash it out for retirement income like you would your 401k. After all, it has a “triple-tax break” unlike any other account.
I think an HSA can be beneficial to you especially if you’ll need the money for health expenses. However, I don’t want you to go out of your way to try to get one. It isn’t as beneficial to contribute to an FSA because the money will go bye bye if you don’t use it. Remember that you can only have an HSA if you have a high deductible health plan. To be blunt, high deductible health plans are crappy. You will pay less monthly but more overall if you incur healthcare expenses. Most of the people who have them do so because they can’t pay for more coverage.
An insurance deductible is simply how much money you have to pay out of pocket before the insurance company will pay your bill. If my deductible is $1,000 then I have to pay all medical expenses up to $1,000 then the company will pay anything else for that year. A typical high deductible plan could have a deductible of $4,000 or more. Basically, if I have that plan I’m not going to seek medical treatment unless I’m dying.
High deductible health plans are a good option mostly for young people. The reason is because we are mostly healthy and we only really need our health coverage for check-ups and serious emergency type situations. High deductible health plans are not good for the following:
- People with chronic conditions
- People who take a lot of prescriptions
- People who need complicated or costly medical treatment
- The elderly
That list could be longer but you get the gist. What sucks about medical coverage is that you can only elect for it at the beginning of the coverage year. If you have any inkling you might need a lot of medical care in the next year don’t get a high deductible plan.
Another reason I think HSAs and their counterparts fall short is that tax breaks don’t affect average people that much. We already have a low tax rate and taxes are not eating up huge chunks of income like they are for the rich. If you have a high deductible plan (I’m going out on a limb here) I’m going to guess you don’t have that much disposable income to put away in an HSA. Most working class people live paycheck to paycheck these days and don’t even have money put away in a normal savings account much less something fancy like this.
There is one small group of people I think benefit from these types of tax-advantaged accounts and that’s young rich people. If you’re in your 20s and are making six figures you can have a high deductible health plan which you probably won’t use much. You’ll have the $3,350 to put away in your HSA and you’ll get a nice tax benefit as your tax rate is probably in excess of 40%. On the other hand, if you make that kind of money you could probably also just pay for all your medical expenses out of pocket without a lot of trouble so it’s hard to say if an HSA would really matter to you.
This was a long blog post indeed but I hope I’ve shed some light on a complicated topic. The next time you hear HSA, MSA or FSA you will be well informed. As I always point out being smart about money happens in baby steps. I hope you all will stay informed about your health plans this year and make good choices.