If you’re shopping for a health insurance plan for 2016 on a state or federal exchange, you have until January 31 to make your choice. You may have heard about the intriguing benefits of Health Savings Accounts, and have HSA-eligible plans among your options. HSAs offer some nice perks if you expect to have health, dental, vision, hearing or disability expenses that aren’t covered by insurance. Just like a Flexible Spending Account (FSA, the employer-sponsored version, which has slightly different rules), an HSA allows you to pay for things like laser eye surgery, fertility treatments, even dental care, with tax-deductible dollars. This can save you between 10% and 50% on each expenditure, depending on your tax rate.
Here are some examples of typical procedures, and the amount of savings consumers can see at various tax rates.
|Health Expense||Typical Cost||Tax Rate*||Pay with HSA**||Equivalent Pre-Tax Dollars||Savings Using HSA|
|A Root Canal||$823||17.65%||$891||$1,082||$191|
|Lasik, both eyes||$5,000||32.65%||$5,414||$8,039||$2,625|
|A Round of IVF||$12,400||50.00%||$13,427||$24,800||$11,373|
* Tax rate includes the employee's portion of the Social Security and Medicare tax, state income tax, and federal income tax. Rates vary by income and location.
**This table assumes the HSA is established by the individual, not as a cafeteria plan through an employer. As a result, you would still pay the employee portion of the Social Security and Medicare tax at a rate of 7.65%
You can use HSA money to pay for expenses like your health insurance deductible, co-pays for doctor visits or prescription medications and co-insurance for imaging or procedures.
But you can also use the money to pay for other kinds of health-related expenses which may not be covered by your health insurance at all. Similar to the rules for FSAs, if you have an HSA, you can use the money in the account to pay for almost any expense which would qualify as a deductible medical or dental expense under IRS rules. The following table includes a sampling of the costs you can pay for out of your HSA.
|Acupuncture||Eye surgery, including laser eye surgery for defective vision|
|Alcoholism treatment (including transportation to AA meetings)||Fertility treatments|
|Artificial teeth (and limbs)||Guide dogs, and other service animals|
|Braille books and magazines||Lead-based paint removal|
|Capital expenses for home alterations to address medical conditions (like installing ramps)||Pregnancy tests|
|Contact lenses, and solutions and cleaners for them||Transportation and lodging essential for medical care|
|Dental treatment (but not teeth whitening)||Weight-loss programs (see details)|
|Eyeglasses||Wig (if hair is lost due to disease)|
Only people covered by an HSA-eligible high-deductible health insurance plan can establish and fund an HSA. Not all high-deductible plans qualify. They must meet the following requirements:
|HDHP Minimum Deductible Amount||$1,300||$2,600|
|HDHP Maximum Out-of-Pocket Amount||$6,550||$13,100|
And they must also meet this IRS requirement: “Except for preventive care, [it] may not provide benefits for any year until the deductible for that year is met.” A high-deductible plan which pays for any portion of things like prescription drugs or specialist visits before the deductible is met is not HSA-eligible.
This requirement renders many high-deductible plans ineligible for an HSA. For 2016, about 83% of the plans on the federal exchange have deductibles at or above $1,300. However, only 19% of plans are HSA-eligible.
Plan literature available on the exchanges should confirm if the plan is HSA-eligible. You can also call the insurer and ask. The same rules about HSA-eligibility apply to plans offered by employers.
In addition, to be eligible for an HSA, you must have no other health coverage besides the qualified high-deductible health plan, with certain exceptions such as coverage for dental care, vision care, accidents, disability or long-term care. You cannot be enrolled in Medicare. And you cannot be claimed as a dependent on someone else's tax return.
Once you enroll in an HSA-eligible high-deductible plan, you can set-up your HSA after the first day of the first month of your coverage. It’s important to establish the account immediately, even if you don’t put any money into it right away. This is because you can only use HSA money for health expenses that occur after the account has been created. You can contribute up to $3,350 as an individual or $6,750 for a family for each year you are eligible. (You can contribute less, if you like.) If you switch out of the plan within a year, your eligible contribution amount will be pro-rated.
Most banks, credit unions and other financial institutions offer HSAs. Compare their terms so the most money possible goes toward your health expenses, not to bank fees. Most HSAs issue a debit card so you can pay the health expenses at the point of purchase. Some require reimbursement forms.
Factors that should push you towards establishing and funding an HSA include the following:
- You already have an HSA-eligible health plan or can switch into one
- You expect to have eligible expenses soon (or ever)
- You pay a lot of income taxes (perhaps because you are in a high income tax bracket, have high state income taxes, or a combination)
Factors that might make it reasonable to wait on an HSA include:
- You need to switch to an HSA-eligible plan (consider premiums, benefits and tax implications when choosing a plan)
- You don’t have expected health expenses you could pay out of the account
- You don’t pay a lot of income taxes (perhaps because you are in a low income tax bracket and have no state income tax)
In contrast to how FSAs work, money you put in your HSA remains there forever, until you use it for an eligible health expense. At age 65, you may also use whatever you have left over for retirement income.
If you have an HSA-eligible plan and you have money to spare, it makes a lot of sense to fund an HSA even if you don’t have impending health expenses. You get the tax break immediately and you can even invest the money. You can accumulate your contributions and investment returns year after year and the money will be there whenever you need it.
Just one word of caution: under your HSA-eligible plan, you will have to pay towards the deductible if you get any health care beyond preventive care during the year. If you spend your HSA money immediately on something like laser eye surgery or IVF, and then need other health care (like for the pregnancy you achieved), you’ll end up paying the deductible with after-tax money anyway.
One possible approach? Get an HSA-eligible plan and start saving in it during your healthiest years. Once you start needing more healthcare, for something like pregnancy, or an illness or injury, switch to more comprehensive health coverage, and use the HSA money for the inevitable out-of-pocket costs, as well as any of the extras the IRS allows.