What is an HSA (Health Savings Account) under Obamacare?

Doesn’t it feel like health care costs increase every year, no matter what health insurance plan you choose?

Everyone wants to save money on health care, but high medical costs combined with high insurance premiums and deductibles can make it feel like we’re all one medical emergency away from bankruptcy. Luckily, there is a smart way to help prepare for this kind of scenario: HSAs.

HSAs (Health Savings Accounts) were created during the George W. Bush administration as a way for individuals to save money for their health care costs in a tax-advantaged savings account. HSAs survived health reform of the Affordable Care Act, and are now a part of the Obamacare experience for many Americans.

What is a Health Savings Account under Obamacare?

An HSA is a special kind of medical savings account designed for use with qualifying high-deductible health insurance plans. If you have a high-deductible plan that is qualified for use with a Health Savings Account, you can contribute funds to the HSA on a pre-tax or tax-deductible basis, up to the maximum amount allowed by law each year. In some cases, your employer can also make contributions to your HSA on your behalf.

Even if your employer contributes to your HSA account, the account and the money in it are yours to keep and may be used to pay for qualifying medical expenses on a tax-free basis. The IRS defines what is considered a qualifying medical expense, but almost anything that would usually be applied to your deductible for medical, dental, and vision expenses may qualify – as well as a number of things not typically covered by health insurance.

You don’t need to be intimidated by high deductibles if you have contributed to your Health Savings Account! Many people avoid going to the doctor because they don’t have the money to cover their deductible. With an HSA, you can save money while you are healthy to cover the deductible when you need it.

Remember, all contributions to an HSA account belong to you. Some accounts are even able to earn interest. Unlike Flexible Spending Accounts provided by some employers, your Health Savings Account balance can roll over from year to year even if you do not use it. The funds are yours to grow, invest, and use on qualified medical expenses whenever you wish, tax-free. However, taxes and penalties are applied when withdrawing funds for anything other than qualified medical expenses.

What kind of Obamacare plans qualify for use with an HSA?

HSAs have always been designed to work with high-deductible health plans. Health insurance plans with higher deductibles tend to have lower monthly premiums, but not always. For people who choose a high-deductible plan solely for the more affordable monthly premium, contributing to an HSA can soften the blow of an unaffordable deductible. HSA-eligible health insurance plans can be purchased for yourself and your family, and employers may offer HSA-eligible plans to their workers.

Minimum Out-of-pocket requirements for HSAs

For 2016, a high-deductible Obamacare health plan must fit these guidelines to qualify for use with an HSA:

• An eligible Obamacare plan must have a minimum deductible of $1,300 for individuals or $2,600 for families
• And a maximum out-of-pocket limit of no more than $6,550 for individuals or $13,100 for families

How much do HSA-eligible plans cost under Obamacare?

HSA-eligible Obamacare plans may cost a bit less than your average Obamacare plan, but not always. Most of the cost-saving you could potentially realize from an HSA-eligible plan is found in the tax advantages you may enjoy by saving money in your Health Savings Account.

Contribution limits for HSA Accounts

There are limits to how much money you can deposit into an HSA each year. The annual contribution limit for 2016 is $3,350 for individual plans or $6,750 for family plans. These contribution limits apply to the total deposits to the HSA, regardless of the source. For example, if an employer deposits $1,000 to an individual’s Health Savings Account within the calendar year, the employee can only contribute $2,350 in that same year.

If you are age 55 or older, you are allowed to deposit up to an additional $1,000 per year. Some consumers with HSA-eligible health insurance plans use their Health Savings Accounts as a medical retirement account. As we age, we are more likely to need our health care more often. Why not prepare for those future medical expenses with an HSA, and create more flexibility to use your pension or 401K for more enjoyable activities?

Qualifying Medical Expenses for HSAs

High-deductible health plans come with a variety of cost-sharing insurance fees that you are responsible for as a part of your plan’s maximum out-of-pocket expenses:

• Deductibles – You are responsible for paying 100% of your health plan’s deductible before the insurance company starts paying for covered medical services and supplies (though some preventive medical services are covered at no cost to you).
• Copayments – These are fees for visiting a doctor’s office or hospital, which may not count towards your deductible, depending on your plan. There are also prescription drug copayments that may be counted separately from doctor visit copayments.
• Coinsurance – After you pay 100% of your deductible, the insurance company may only pay for a percentage of your additional medical bills. For example, if your coinsurance is 20%, you are responsible for 20% of the remaining medical bill, up to your annual out-of-pocket limit as defined by your plan.

These cost-sharing fees can turn a plan with an affordable monthly premium into a very expensive plan in the long-run. Fortunately, you can use your HSA funds for deductibles, copayments, and coinsurance! However, you cannot use your HSA contributions to pay for your monthly insurance premium.

Other possible uses for a Health Savings account include dental care, vision care (including glasses and contacts), laser eye surgery, prescription drugs, and even some over-the-counter drugs such as antacids, allergy medication, and cough drops.

Again, the IRS ultimately defines what is medical expenses are eligible. Always check with your accountant or refer to IRS Publication 502 if you are unsure, because ineligible purchases or withdrawals from an HSA are taxable as income and subject to a 20% fee.

Final Things to Remember about HSAs

Health Savings Accounts provide a means to pay for qualifying medical expenses on a pre-tax or tax-deductible basis. You can only deposit money into an HSA when you have a qualifying high-deductible health insurance plan, and not all Obamacare plans qualify for use with a Health Savings Account. However, even if you no longer have a qualifying health plan, you can still use the money you’ve saved in the account to pay for qualifying medical expenses.

If you are not sure if you can open an HSA with your current health plan, ask your agent or your insurance company about your options. If you’d like an HSA-eligible plan, look into your options during the next nationwide Obamacare open enrollment period, or when you experience a qualifying life event allowing you to change plans outside of open enrollment.

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Notes:

* See eHealth’s Health Insurance Price Index Report for the 2016 Open Enrollment Period. [NOT YET PUBLISHED]