Using Health Savings Accounts (HSAs) to Reduce Insurance Costs.

August 31, 2015 by Frank West

Health Savings Accounts, or HSAs, and their attendant high-deductible health plans (HDHPs), have been embraced by over 10 million Americans. Consumers are looking for ways to keep premiums affordable, while businesses are looking for ways to control health care expenses. HSA/HDHP combinations have been immensely successful at containing the rate of growth in health care costs, reducing the rate of increase in medical insurance expenses to 2% per year, compared to the 12% rate of inflation in traditional major medical plans since 2000.

In return, however, workers and policy owners have had to pick up more of the risk – you can only use HSAs if your plan qualifies with a minimum deductible of $1,200 (or $2,400 for family plans.)

What is an HSA?

An HSA is a tax-exempt account that is created for the purpose of paying qualified medical expenses. The HSA can be funded by the employer and/or the employee. To be eligible to create an HSA, you must be an individual who has a high-deductible health plan (HDHP). An HDHP is one in which a single individual has a yearly deductible of no less than $1,250 (2014). Further requirements are as follows:

HSA holders can choose to save up to $3,300 for an individual and $6,550 for a family (HSA holders 55 and older get to save an extra $1,000 which means $4,300 for an individual and $7,550 for a family) – and these contributions are 100% tax deductible from gross income.
Minimum annual deductibles are $1,250 for self-only coverage or $2,500 for family coverage.
Annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) cannot exceed $6,350 for self-only coverage and $12,700 for family coverage.
You must not be covered under any other insurance plan that is not an HDHP.
You must not be entitled to Medicare benefits.
You cannot be claimed as a dependent on another person’s return.

If you meet all of the above requirements, you are an “eligible individual” for a Health Savings Account.

The benefits of an HSA

Employee benefits
An HSA has many benefits for employees. The first benefit is that 100 percent of the annual deductible for the individual or family can be contributed to an HSA. However, this amount cannot exceed $3,300 for an individual, and $6,550 for family coverage. People ages 55 to 64 can make additional contributions to “catch up” in 2014 of $1,000.

The contribution to the HSA is tax-free to the employee. The employee can take a deduction for any amount he contributes to the HSA. This deduction is an “Above-the-Line” deduction, and therefore directly reduces an employee’s taxable income.

An HSA is held in an account for the benefit of the individual, his spouse or children. This account is invested, and any gain on the investment is also tax-free. In addition, if an employee changes jobs, the account goes with him, as the employee is allowed to transfer the entire fund balance to his new job.

Employer benefits
There are also benefits to the employer. An employer is not taxed on the amounts he contributes to the account, and these amounts are also not subject to withholding for income tax, FICA, or FUTA. Therefore, an employer obtains a direct write off for the amounts paid not only for the health insurance premiums, but for the HSA as well.

In addition, most employers will see a reduction in the monthly premiums they pay for their employees due to the increase in deductibles (if the employer does not already have an HDHP).

The reduction in the premiums, and the tax deduction, will help to offset the cost of the employer funding a portion of the HSA, if they so wish to assist their employees with funding the HSA.

The disadvantages of an HSA

Disadvantages for employees
The disadvantages of an HSA are few and far between. First of all, once you reach the age of 65, you can no longer contribute to an HSA. If you do contribute, all amounts will be taxable to you in addition to a penalty of 6 percent. This also occurs if you are considered an “eligible individual” and exceed the allowable amounts that can be contributed if you are less than 65 years of age.

If you do not use the funds for “qualified medical expenses,” the funds that are used are included in your gross income, and a penalty of 10 percent is imposed. The 10 percent penalty is eliminated in the case of a distribution after the account beneficiary’s death, disability, or once you have attained the age of 65.

An HSA can be transferred to a spouse tax free, but when an HSA is transferred to a person other than your spouse, it ceases to exist as an HSA. It is then included in the person’s taxable income. This amount, however, is reduced by any amount paid by the HSA for the decedent’s qualified medical expenses paid up to one year after their death.

Change in health care coverage

Disadvantages for an employer
One disadvantage for an employer is that a “comparability” rule applies. An employer must make comparable contributions to each individual’s HSA. They must be either the same amount or same percentage of the deductible of an HDHP for each employee. No discrimination is allowed as to employees.

A second disadvantage is that the employee is deemed the owner of the HSA, and therefore if they were to quit or be terminated from employment, all employer-funded amounts remain the property of the employee. The employee is free to transfer their HSA to another employer, including all payments made by their former employer and all interest accumulated on those payments.

The employer can contribute throughout the year, as he pays the medical premiums for his employees. Thus, an employer can save on the cost of the premiums, spread the payment amount over the year and save payroll taxes on the money contributed. This is in addition to making the employee happy.

Who can administer an HSA?

An HSA must be administered by a qualified HSA trustee or custodian. This includes an insurance company, bank, or a person approved by the IRS (approval may be difficult to obtain). The Trustee can be different than the company that provides the HDHP, but you should first check with your insurance carrier to determine if they carry HSAs, and the cost of such plans.

A refreshing option

Health Savings Accounts (HSA) are as good as they sound. Decreasing the cost of health insurance is a refreshing option in today’s rising inflationary economy. Small and large employers alike can now benefit from a quality health program. It is not often that we have the ability to reduce our health insurance costs. Therefore, it is imperative to reassess your employer-sponsored health insurance plan, and determine if an HSA is appropriate for your company.

1 Easy Way to Save Money on Health Care Expenses.

July 21, 2015 by Frank West

The average American spent $400 more on health care and health insurance in 2012 when compared to 2010, a gain of 12.5%. This compares to just a 7% gain in total average spending, meaning that more and more health care costs are taking a bigger bite out of consumers’ income.

One thing individuals can do to help save money on health care costs is utilize a Health Savings Account, or HSA. These savings accounts allow individuals with high-deductible health insurance to save money for medical expenses without paying taxes.

What an HSA is
People with health insurance deductibles greater than $1,250 for an individual and $2,500 for families can qualify for an HSA. An individual is then allowed to contribute $3,300 to an HSA tax-free in 2014, and the limit stands at $6,550 for an individual with a family.

In turn, that money is withdrawn before taxes every month into a special savings account and can be used on qualified medical expenses, which the IRS defines as those used for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.”

Those of course include hospital visits, prescription medicines, and other services, but also thing like eyeglasses, insulin, and hearing aids. The complete list is available from the IRS.

Yet not only is the money contributed tax-free, but it also grows tax free and is withdrawn tax free, known as “triple tax savings.” This means if you don’t use the $2,000 amount saved and it grows to $2,500 after years of interest payments, that $500 doesn’t face the capital gains tax like other investments, and you’ll never pay a single cent in taxes when it is withdrawn.

All told, an HSA can be an incredibly effective tool to help save on health care expenses that all people face in their lifetimes.

How an HSA works
Those with high-deductible plans can get an HSA through their current insurer if they offer it, or through a bank like Bank of America (NYSE: BAC ) or Wells Fargo (NYSE: WFC ) . The person will then decide how much they want to save each month, and then that money is withdrawn and put into the account.

Like any other bank account, there is an associated debit card that is issued to pay for those eligible health care expenses. Also, the money can be invested into mutual funds provided the balance of the HSA exceeds $1,000, and also investments that pay less interest, but have much lower risk. It should be noted that individuals should ensure they have enough to cover potential unplanned expenses before they invest heavily in funds that may be volatile and stand the chance to lose money.

Individuals should also always review all account disclosures for fee information, interest rates, FDIC coverage, and other information to ensure their HSA is with a trustworthy provider and indeed is what’s best for them.

Why you should get an HSA
The principal benefit of the HSA is the tax savings it provides. Consider the example Bank of America provides on its website of a family of four that saves $4,000 over 20 years, spends $2,000 each year, and the account grows at just 2.5%. That family would have saved $23,091 in taxes, and have more than $51,000 in the account at the end of year 20.

Outside of the tax benefits of an HSA, a great benefit too is that unlike Flexible Spending Accounts (FSA) that are owned by your employer, the money in an HSA is yours, it never expires, and can be saved for years and years.

There is no denying the cost of health care is on a troubling path, but using an HSA can help consumers ease the burden through significant tax savings and other crucial benefits.

Filed Under: Health Savings Account, HSA Tagged With: HSA

Consumer-Driven Health Plans (CDHP)

April 29, 2014 by Frank West

Consumer-Driven Health Plans (CDHP) are a category of health insurance plans that combine a high deductible amount with a savings account to pay for a portion of medical expenses with pretax dollars. The pretax dollars set aside for medical expenses are kept in a Health Savings Account (HSA) or a Health Reimbursement Account (HRA). HSA savings accounts are only available to enrollees enrolled in a high deductible health plan.

If you are considering a health plan that offers the option of either a HSA or a HRA, see our article “HSA vs HRA” to determine which of these savings account options is right for your circumstances.

CDHPs can only use high deductible health plans to provide health insurance benefits. To qualify as a high deductible health plan for an individual, the deductible amount must be at least $1,250 in 2013. The minimum deductible for a family is $2,500 in 2013 in order to qualify as a high deductible health plan. High deductible health plans are associated with lower premiums as compared to health plans with smaller deductibles.

Three-Tiered Payment Systems

Consumer-driven health plans are sometimes referred to as three-tiered payment plans. This is because one of three entities can pay medical costs:

The savings account associated with the CDHP (e.g. HSA or HRA)
The consumer in the form of payments made out-of-pocket
The insurance plan

In order for the savings account to pay for medical bills, it must have sufficient funds in it.

Once the deductible amount is satisfied, the CDHP operates similarly to a traditional health plan where the insurance pays the majority of a covered medical service and the enrollee pays a copayment or coinsurance fee.

Consumer-Driven Healthcare

CDHPs are part of a larger set of practices known as “consumer-driven heathcare.” Consumer-driven healthcare seeks to introduce competitive market forces to healthcare by exposing a larger portion of costs to consumers and, by doing so, encourage price shopping. While the consumer pays more out-of-pocket, they typically enjoy lower insurance premiums while still gaining protection from catastrophic healthcare costs associated with a major medical event or condition. However, in order for consumer-driven healthcare to be effective it requires consumer access to medical costs. At present this costs are not always available to consumers.

The opposite of consumer-driven healthcare is found in many pre-reform health plans where consumers have no incentive to comparison shop costs when healthcare prices are hidden from them by flat fee copayments that are the same regardless of which healthcare provider is used. Critics of consumer-driven healthcare argue that high out-of-pocket costs result in lower short-term medical utilization that results in more expensive lifetime healthcare costs. Present research has not been able to support that claim.

Filed Under: Affordable Care Act, Health Insurance, Health Savings Account Tagged With: Affordable Care Act, HSA

Health Insurance for the Self Employed .

June 27, 2013 by Frank West

Health Insurance for the Self Employed

Medicine Bottles Being self-employed is a liberating feeling for those who make it a part of their lifestyle. These people have the autonomy to set their own schedule, and enhance their careers as much as possible without having to deal with mundane office politics. A self-employed person can manage their own career, without having to wait to be promoted. There is one thing however, that is tough to manage, which is health insurance.

When first starting out in a new career, it can be especially difficult to carry health insurance. Although many people would love to become self-employed, and plan carefully for such an event, most do not realize the actual monthly expense of health insurance. Before you make this decision, it is crucial to figure out exactly how much you will be paying for health insurance. Collect as much information as possible, for example the rates you need to pay to cover yourself and possible dependents, and how that fits into your budget.

Being self-employed does not allow you to take advantage of bulk rates that are normally set aside for employers paying to cover their employee’s health insurance costs. This is one of the reasons why the insurance rates are so high. Through careful research, you may find you have access to low bulk insurance rates through a non-corporate affiliation. Possible solutions include programs related to educational institutions you may be associated with, or perhaps your religious background will allow you to get a discount from certain organizations.

Consider joining a group that can help get you an affordable insurance rate. The Freelancer’s Union was formed partly to help the self-employed get health insurance at discounted rates by bringing freelancers together. Take into account nationwide organizations like the Freelancer’s Union as well as local community organizations that will give you options for insurance rates. It’s just a matter of being resourceful and creative to find health insurance as a self-employed person.

Filed Under: Health Insurance, Health Insurance Self Employed, Self Employed Health Insurance Tagged With: Health Insurance Exchange, Health Insurance Self Employed, HSA

HSAs Gain Strength As Crucial Retirement Planning Tool.

May 27, 2013 by Frank West

Most retirees will spend an average $250,000 in out-of-pocket health costs during their retirement years, seriously cutting into their nest egg. The flexibility of HSAs and the tax advantages they offer may afford many workers the ability to contribute to their future health needs over their working careers and amass enough wealth to help chip away at their out-of-pocket expenditures. This may be particularly important when workers begin paying Medicare premiums, which are likely to rise when retirees are required to take minimum distributions from tax-advantaged retirement accounts, according to Investment News. Required minimum distributions from tax-qualified retirement plans, pensions and Social Security can trigger an increase in income that results in permanent Medicare premium hikes. As HSAs are tax-free income sources when distributions are used to cover qualified medical expenses, the use of them may help workers cover their costs and premium payments according to a recent report at www.algeus.com.

Filed Under: Health Insurance, Health Savings Account, HSA Tagged With: Health Savings Account, HSA, HSA Retirement Planning