Health Savings Accounts Are Not For Everyone
Core Components of Health Savings Accounts
Health Savings Accounts (HSA) also known as High Deductible Health Plans (HDHP) and Consumer Driven Health Plans (CDHP) have been touted as the next generation of health insurance in America. While HSA’s have some good qualities they are not for everyone.
None of the plan elements (doctor office visits, labs, imaging, prescriptions, etc.) are covered until the plan deductible is met. This is very similar to most individual and family health insurance plans.
The deductible for most HSA plans averages $5000 per individual. This is also the maximum out-of-pocket expense. Other individual and family plans (IFP) may have a similar deductible but have an added provision of coinsurance or cost sharing above the deductible. The maximum out-of-pocket on some IFP plans (deductible + coinsurance) can be double the deductible amount.
At the core, the plan member establishes a Health Savings Account through a local participating bank and makes contributions to the account. The member then pays for all qualified medical expenses from this account.
Contributions to the HSA are deductible from Federal taxes. Not all states allow the deduction. For 2012, an individual can contribute up to $3,100 ($6,250 for a family) into the account and be allowed a tax deduction.
The money in the account grows tax-free, is controlled by the account holder and rolls over from year to year. The member can continue to make yearly contributions into the account. There are provisions to let older members, over 55, make additional contributions to catch up. In addition, Medicare Part B and Part D prescription drug plan premiums can be paid out of the HSA.
There are a variety of expenses that can be paid out of the HSA that the IRS deems qualified including: hearing aids, glasses, optometrist exams, chiropractic care, dental work, in-patient substance abuse treatment and legal abortions. For a complete list of qualified expenses http://www.irs.gov/publications/p502/ar02.html#en_US_publink1000178856
Monthly premiums for a HSA plan can be less than similar IFP’s because they cover no plan elements until the deductible is met. Conversely, monthly premiums can be higher than other plans because of the lower maximum out-of-pocket provision, no cost sharing.
Under IRS rules, you can deduct on Schedule A (Form 1040) only the amount of your medical and dental expenses that is more than 7.5% of your AGI (Form 1040, line 38).
If your AGI is $40,000, 7.5% of which is $3,000. You paid medical expenses of $2,500. You cannot deduct any of your medical expenses because they are not more than 7.5% of your AGI.
However, HSA rules allow you to deduct your medical expenses without having to meet the 7.5% rule. You can replenish the HSA every year.
HSA’s are not for everyone
Folks who can not fund a HSA will find themselves paying for medical services out-of-pocket with no “tax” benefit.
Just because the premiums are lower doesn’t mean it is the right plan for your situation.
HSA’s are best suited for individuals and families who are healthy, rarely see a doctor and can afford to fund the account. A careful analysis of recurring qualified medical expenses and tax situation may reveal that some families can benefit from HSA’s in some situations.
Various studies and anecdotal evidence shows that people with HSA’s tend to delay care more than those in traditional health insurance plans.
The ideal situation happens when you can fund the HSA over time to cover the deductible of the plan. In the event of medical emergency, the HSA covers the deductible and the plan kicks in to cover expenses for all the plan benefits.
One of the goals of the HSA plan is to have people become more involved with their health care choices and decisions. Unfortunately, most people still defer to their doctor’s recommendation for tests, care and treatment. The lack of transparent information on the cost of medical expenses at the primary care and hospital level make it difficult for consumers to shop and compare.