Health Savings Accounts: Understanding the Basics

Last week we shared information on embedded deductibles and how they work. Another topic we’ve had questions about recently is Health Savings Accounts (HSAs). High deductible health plans that are marketed as “HSA compatible,” along with HSAs, are being marketed to individual market consumers inside and outside the health insurance marketplaces..

Under federal tax rules, a Health Savings Account (HSA) is an account or a trust created exclusively for the purpose of paying qualified medical expenses incurred by an individual, spouse, and all dependents claimed on your taxes, up to the age of 19 (or 24 if a full time student). Qualified medical expenses include doctor visits, treatments for disease, medical devices and equipment, and insulin (even without a prescription). Qualified medical expenses do not include premiums and over-the-counter drugs unless there is a prescription. More information on qualified medical expenses can be found here. Most people use HSAs to help meet their deductible or defray co-payments and co-insurance for medical services and supplies.

Individuals or employers can contribute money to HSAs on a pre-tax basis. The I.R.S. limits the amount of contributions on a yearly basis; in 2015, contributions are capped at $3,350 for an individual with self-coverage and $6,650 for an individual with family coverage. Similar to a retirement or investment account like an IRA or 401(K), money in an HSA can be invested, and any interest and investment gains in the account are not taxed. Withdrawals are also tax-free as long as they are used for qualified medical expenses-otherwise there is a 20% penalty.HSAs are also portable – they stay with the individual and unused amounts in an HSA carry over year-to-year.

Someone wanting to set up an HSA must get a high-deductible health insurance policy (HDHP). In 2015, the I.R.S. defines a HDHP as a health plan with an annual deductible that is not less than $1,300 for self-only coverage and $2,600 for family coverage. In addition, the I.R.S limits annual out-of-pocket expenses to $6,450 for self-only coverage or $12,900 for family coverage; out-of-pocket expenses include deductibles, co-payments, and other amounts, but not premiums.

The benefit of a HDHP is lower premiums every month, but the disadvantage is that in the event you become ill, you’ll have to pay this high deductible out-of-pocket before your health insurance kicks in. High deductible plans can be beneficial if you don’t anticipate incurring health expenditures regularly, but are risky if you or someone covered under your family plan becomes ill, and you don’t have sufficient funds in your HSA to cover your out-of-pocket costs.

So what’s the point? It’s now open enrollment and many people are thinking about getting coverage or renewing into coverage and perhaps interested in an HSA. However, for enrolling through the health insurance marketplaces, there is a wrinkle if they qualify for cost-sharing subsidies (available to enrollees whose income falls between 100 to 250% of federal poverty levels). Many cost-sharing plans have low or even zero deductibles, or exempt certain services from the deductible to meet the cost sharing requirements. If the cost-sharing reductions bring the deductible below the deductible requirement under a HDHP (i.e., a HSA-compatible plan), you’ll no longer be eligible for an HSA because you don’t have a compliant health plan (i.e., HDHP). In this circumstance, you’ll have to choose whether or not to take the cost-sharing reductions or have a HSA, but not both. See this CMS guidance for additional information.

You want more?  Check out our on-line Navigator Guide which includes information about HSAs and much more!

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The opinions expressed here are solely those of the individual blog post authors and do not represent the views of Georgetown University, the Center on Health Insurance Reforms, any organization that the author is affiliated with, or the opinions of any other author who publishes on this blog.