Why Most People with High-Deductible Health Plans Can’t Get a Health Savings Account (HSA)

Deductibles and out-of-pocket costs for health insurance plans have soared since 2010. Deductibles alone have risen 67%—about seven times as fast as wages and inflation. In 2015, the average individual deductible was $1,318, according to a 2015 Kaiser Family Foundation/Health Research & Educational Trust survey. At the same time, a tool that could soften the blow—the Health Savings Account (HSA), which allows people to pay many of their health care costs with tax-deductible dollars—is not available to most Americans with high-deductible plans. In 2016, 3365 of the 4058 plans (83%) on the federal exchange had deductibles greater than $1,300. But only 764 (19% of the total number) were HSA-eligible. 

Most High-Deductible Health Insurance Plans are Not HSA-Eligible

Many people are under the mistaken impression that as long as their health insurance plan’s deductible and out-of-pocket limits meet certain IRS-prescribed targets, they are eligible to contribute to an HSA. These targets are as follows: 

Self-OnlyFamily
HDHP Minimum Deductible Amount $1,300 $2,600
HDHP Maximum Out-of-Pocket Amount $6,550 $13,100

In actuality, few are HSA-eligible, because the IRS specifies—deep in its guidelines—that “except for preventive care, [the] plan may not provide benefits for any year until the deductible for that year is met.” That means that a slightly more generous plan, which pays for any portion of things like prescription drugs or specialist visits or an X-ray (with or without a co-pay or co-insurance) before the deductible is met is not HSA-eligible.

Why Does it Matter if You Can’t Get an HSA?

If you expect to have any health expenses, ever, an HSA allows you to pay them with tax-deductible dollars. (You cannot use HSA money to pay insurance premiums unless you are between jobs). You can pay your deductible, doctor and dentist bills, prescription co-pays, eye exams, contacts and prescription glasses, medical supplies from bandages to hearing aids—the list of eligible expenses is long. It even includes expenses that may not be covered by health insurance at all, like laser eye surgery, guide dogs or fertility treatments.

Since almost everyone eventually faces health expenses, paying for them with pre-tax dollars can really help your bottom line. 

Let’s look at an example. You have income (AGI) of $50,000 and you’re facing medical bills totaling $3,000, perhaps because you want laser eye surgery to correct your vision, or you have a chronic condition that requires regular care and monitoring, or you had a baby or a worrisome symptom that required extensive medical testing. You can pay these expenses out of any money you have in an HSA, as long as the account was established before you incurred the expenses.

Where You LiveYour Total Tax Rate*Earn This to Pay without an HSAEarn THIS to Pay  with an HSA**TAX Savings Due to HSA
California (HSA contribution not deductible from state taxes) 36.95% $4,758 $3,409 $1,349
Illinois 36.40% $4,716 $3,248 $1,468
New York City 41.55% $5,133 $3,248 $1,885
Florida 32.65% $4,454 $3,248 $1,206
Texas 32.65% $4,454 $3,248 $1,206

* Includes Social Security and Medicare taxes, federal income taxes and state taxes if applicable.

** Everyone pays 7.65% in Social Security and Medicare taxes, up to certain income limits, unless the HSA is offered through an employer cafeteria plan. The above table assumes the HSA is individually established by someone who is not self-employed.

If you never need to spend the money, it stays in your account forever (you can even invest it!) and you can eventually use it for retirement income.

Find Out if Your Plan is HSA-Eligible

If you aren’t sure if your health insurance qualifies you for an HSA, call the insurer and ask. If you purchase a plan through a federal or state exchange, the answer should be in the plan information available through the exchange website. 

If you qualify for an HSA, you can walk into any bank that offers these accounts (most do), or consider an online bank. Look into any fees you will be charged as well as interest rates and investment options for money you leave in an HSA.

It’s important to establish your HSA as soon as possible—even if you don’t have the money to fund it right away. That’s because you can only use money in your HSA to pay for expenses that occur after the account was established. Make sure you fund the account while you still have an eligible plan. If you later switch to a non-eligible plan, you can not add contributions for that year, however you can use the funds that are already in the account for qualified expenses. 

If your current health insurance plan isn’t HSA-eligible, despite its high deductible, you’re out of luck for this year. But now that you know how a plan qualifies, and how this kind of account might help you every time you have a medical expense—or even if you never do—you can consider the possibility next time you’re choosing a health insurance plan. 

Sources:
Kaiser Family Foundation/Health Research & Educational Trust (HRET) 2015 Employer Health Benefits Survey: http://kff.org/report-section/ehbs-2015-summary-of-findings/
IRS HSA Guidelines: https://www.irs.gov/publications/p969/ar02.html

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