Insurance Basics: Health Savings Accounts

This is a one-hour CE course that provides the general overview of Health Savings Accounts.

Course Name: Insurance Basics: Health Savings Accounts
Course Number: 112995
Provider Name: ComedyCE.com LLC
Provider Number: 37719

Course Overview

Health Savings Accounts have grown exponentially in the past few years, but there are still a lot of employers, individuals, and health insurance agents who are a little confused about the benefits of an HSA. In this course, we’ll tackle the basics. Here we go…

HSA = Health Savings Account

HSA stands for Health Savings Account. An HSA is a tax-advantaged account that allows eligible individuals to set aside tax-free dollars to pay for qualified medical expenses.

HSA-Eligible Individual

An HSA-eligible individual is an adult who has a “High Deductible Health Plan,” does not have other coverage that would pay prior to the minimum HDHP deductible, and who cannot be claimed as a dependent on someone else’s tax return.

To set up an HSA, you must have a High Deductible Health Plan

A High Deductible Health Plan has a minimum deductible and a maximum out-of-pocket that tends to change every year. Here are the limits for 2018 and 2019:

Not really a high deductible

Note that the deductible on an HDHP isn’t all that high. Many employers and individuals have a higher deductible than that even if their plan isn’t HSA-compatible.

HDHP vs. ACA Plan

The out-of-pocket limit isn’t that high either. Compare the HDHP out-of-pocket limits for 2019 with the out-of-pocket limits on a non-HSA-qualified ACA-compatible plan:

No Copays before Deductible

The biggest difference between an HSA-qualified High Deductible Health Plan and a traditional health plan is that an HDHP does not have up-front copayments. Preventive care can be covered prior to the deductible on a High-Deductible Health Plan (and must be covered with no cost sharing on all non-grandfathered plans), but up-front copayments for doctor visits, prescriptions, and other plan expenses are not allowed prior to the deductible.

Two Types of Deductibles

There are two types of deductibles on an HSA-qualified High Deductible Health Plan: aggregate and embedded. To better understand the two, it’s helpful to substitute the word “individual” for “embedded” and “family” for “aggregate.”

An aggregate deductible does not include stop-loss protection for individual family members on a plan that covers more than one person. Instead, the entire family’s claims apply toward a family deductible amount.

An embedded deductible plan does include an embedded stop-loss amount for individual family members, and there’s still a total family limit on the deductible. However, for someone with individual coverage, if the HDHP is filed as an embedded deductible plan, the minimum embedded individual deductible cannot be less than the minimum family deductible for an HSA-qualified plan.

For example, a family of four might have an HSA-qualified plan with a $3,000 embedded individual deductible and a $6,000 deductible limit. What this means is that if any one family member hits $3,000 in deductible expenses, he or she would be done with the deductible and would begin paying any applicable coinsurance percentage. Once the four family members cumulatively have paid $6,000 in deductible expenses, whether that’s because two people have $3,000 in expenses all four have $1,500 in expenses toward their deductible, as a family they are done with their deductible. If they had an aggregate deductible plan and one family member ended up in the hospital, he or she could easily go through the entire $6,000 family deductible. For that reason, an aggregate deductible is more risky for a family.

The below video explains the difference between an aggregate and an embedded deductible. Note that the video is a couple years old, so the minimum deductible amounts have since changed, but it should still be  helpful.

An HDHP can be an HMO or PPO

Some people have developed the bad habit of saying “do you want a PPO or an HSA plan?” These two are not mutually exclusive. PPOs and HMOs refer to the provider network that a health plan uses. Either of these plans can be HSA-compatible. It’s better to say “PPO or HMO” and “Copay plan or HSA plan.”

HSA-Eligible Individual

Again, an HSA-eligible individual is someone who is eligible to set up and contribute to an Health Savings Account.

There are four requirements: You must be 1) an adult 2) who cannot be claimed as a dependent on someone else’s taxes. You 3) must have an HSA-qualified plan and 4) must not have other coverage that pays prior to the minimum HDHP deductible.

VERY IMPORTANT: You do not have to be primary on the insurance to set up an HSA.

This is very difficult for a lot of people to understand, but remember, we said that you need to be an adult with a High Deductible Heath Plan and no other coverage that pays for plan expenses prior to the deductible. We never said that you have to be the primary member on the HSA-compatible plan, just that you can’t be claimed as a dependent on someone else’s taxes, and for these purposes a spouse is not considered a dependent.

For example, Mary works for an employer that offers an HSA-compatible plan. She has employee + spouse coverage with her and her husband Bob on the plan. Assuming neither has other disqualifying coverage, both Mary and Bob are eligible to set up an HSA.

Contribution limits depend on single or family coverage

The maximum amount that people can contribute to a Health Savings Account depends on whether they have single or family coverage.

  • Single coverage, obviously, is a health plan with just one person covered. If more than one person is covered, it’s considered a family plan.
  • For example, family coverage would include husband and wife, mom and child(ren), dad and child(ren), or mom, dad, and child(ren).

Contribution limits change every year

The HSA contribution limits change nearly every year. Here are the maximum contribution amounts for 2018 and 2019.

HSA contributions are very flexible.

Unlike a Flexible Spending Account (FSA), HSA account holders do not have to decide at the beginning of the plan year how much they will contribute to their account. The contributions can be made in any amount the account holder would like until the tax filing deadline (April 15) of the following year.

In many ways, an HSA is even more flexible than a Flexible Spending Account.

No joint Health Savings Accounts

Like with an IRA, an HSA can only be in one person’s name – there are no joint Health Savings Accounts.

  • If a couple has family HSA-qualified coverage, they can open one or two accounts.
  • If just one of the two adults opens an HSA, he/she can contribute the full family contribution.
  • If they both open an HSA, they can split the family contribution amount between them however they would like.

The $1,000 annual catch-up contribution after age 55, however, must be made to an account in the person’s name. In other words, if both the husband and wife are age 55 and older, they’ll both need to open a Health Savings Account in order for both of them to make the catch-up contribution.

HSA contributions for partial year coverage

HSA contributions also need to be pro-rated based on the number of months during the year that a person is an HSA-eligible individual. For example, an individual who is covered by an HSA-qualified plan for the first six months of the year can deposit 50% of the maximum contribution based on his/her coverage type.

Coverage changes during the year

It’s a little more complicated if the person changes coverage types during the year. To figure out the pro-rated amount, determine the monthly contribution amount based on the coverage type for each month.

For example, suppose someone has family HSA coverage for the first 4 months of the year and single HSA coverage for the last 8 months of the year in 2019. Then add the monthly amounts.

If you turn 55 in the middle of the year

If you’re HSA-eligible all year long and you turn 55 during the year, you can make your full $1,000 catch-up contribution. No need to pro-rate the contribution amount.

If your coverage ends before December 1

If you begin the year with an HSA-qualified plan but lose eligibility during the year, either because you lose qualified coverage or b/c  you go onto Medicare, you MUST pro-rate your contribution based on the months covered. Otherwise, you’ll pay taxes + a 6% penalty on the excess contribution.

If you have HSA coverage on December 1

If you become HSA-eligible during the year and are still eligible on December 1, you can contribute the full individual or family maximum (based on the type of coverage you have 12/1). However, there is a testing period – you must stay eligible the entire next calendar year or pay a 10% penalty on the excess contribution.

IRS Publication 969

There are plenty of other eligibility and contribution rules, but this is an HSAs 101 class. A great resource to learn about the different rules is IRS Publication 969. https://www.irs.gov/publications/p969

Now for the big question

We’ve learned what an HSA is, what type of health plan is compatible with a Health Savings Account, who can set up an HSA, and how much they can contribute.

The last important thing we need to discuss is what type of expenses you can use your Health Savings Account for.

  • The short answer is anything you want – it’s your money.
  • However, if you spend your funds on an ineligible expenses, you’ll pay taxes and a 20% penalty on that money.
  • Unless you’re age 65 or older, that is. After age 65, if you spend HSA funds on an ineligible expense, you pay taxes but no penalty, just like with an IRA. For that reason, there’s really no reason to worry that you’ll end up with too much money in your HSA.

Eligible Expenses

At any age, if you use your HSA funds for ELIGIBLE expenses, you pay no taxes and no penalty. That’s what makes the account so great. You get a tax break when you put the money in, it grows tax free, and if you spend the money on eligible expenses you never pay taxes.

Eligible expenses include doctor visits, prescriptions, hospital stays, etc. – basically, your out-of-pocket spending on your health plan. However, you can use your HSA money for things like dental and vision as well.

You can also use HSA funds for Medicare Part B and D premiums, certain long-term care insurance premiums, COBRA premiums, and individual health insurance premiums while you’re receiving federal or state unemployment.

You can even use your Health Savings Account to pay for the eligible expenses or your family members (spouse and tax-dependent children) – even if they’re not on your health plan.

Over-the-counter drugs are NOT an eligible expense

Unfortunately, you cannot use HSA funds for over-the-counter medications without a prescription. This is a result of a 2011 change created by the Affordable Care Act. If your doctor does prescribe an over-the-counter drug like a daily aspirin, you can pay with tax-free dollars and will need to hang on to the prescription as proof tht it is an eligible expense.

For more information, check  out publication 502

IRS  publication 502 has a pretty good list of eligible expenses. https://www.irs.gov/publications/p502

Don’t delay! Set up your HSA right away!

It is important that you set up your Health Savings Account as soon as possible after your qualified High Deductible health coverage begins. You can even “stage” your account to start on your effective date.

Once your HSA is established, you can pay for any future medical expenses with tax-free dollars, even if the expense is higher than your account balance at the time. You can pay the expense with a credit card, for example, and then slowly pay yourself back over time as you make deposits to your account.

However, expenses incurred after your HDHP is in force but before your account is established are NOT eligible. You’ll have to pay those claims with after-tax dollars.

Reporting HSA contribution and expenses on your taxes

Having an HSA does not create a huge paperwork burden, but contributions and expenses do need to be reported when you file  your annual federal tax return (and state return, if applicable). Specifically, anyone with an HSA must complete IRS form 8889, which asks how much they contributed to their account directly and through payroll in order to determine if they can write off some or all of this contribution on their taxes and how much was withdrawn from their accounts for eligible and ineligible expenses.

Keeping track of expenses is the account holder’s responsibility

With a Health Savings Account, the account holder can pay for eligible expenses with tax-free dollars, but it is his or her responsibility to keep track of those expenses. It is not he employer’s responsibility and it is not the job of the HSA administrator / bank. For that reason, it is a good idea for people with an HSA to keep their receipts in a file folder or a shoebox.

Healthcare Consumerism

Health Savings Accounts are part of the trend toward consumerism in health care. The idea is that people spend their own money differently than they spend someone else’s money, so by ditching the up-front copayments and requiring people to spend their own money, they’ll spend less on health care.

With an HSA plan, people buy less insurance, and they can deposit the premium savings into an account that they can use in place of the up-front copayments. In other words, they pay a lower fixed cost (premium) while increasing their potential variable costs (out-of-pocket exposure).

How can people determine if an HSA is right for them?

When deciding to go with an HSA-qualified plan or a traditional plan with up-front copayments, people need to consider a number of factors, including the premium differences between the plans, their tax bracket, and their expected expenses. As the below video explains, most people end up doing better with a Health Savings Account, whether they are a low, medium, or high utilizer of health care services.

There’s a lot more to learn, and the better educated consumers are the more successful they will be. People don’t become good consumers of healthcare overnight. It’s a process…

 

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