There are many kinds of health insurance plans and the marketplaces created by the Affordable Care Act (ACA) have made that especially clear. The ACA, also known as ObamaCare, created state marketplaces both the insured and uninsured could purchase insurance. With an array of options in front of them, many Americans are struggling to understand what the best coverage options really are. One of the less well known options available in the Marketplace, are plans that use a Health Savings Account, or HSA.
An HSA allows you to set aside tax-exempt money for use on your medical expenses. It is paired with a high-deductible health plan (one with a deductible of at least $1,250 for self-only coverage or $2,500 for family coverage) to make the deductible more attainable for the average family. In 2014, if you have an individual-only plan, you can set aside up to $3,300 per year in your HSA. If you have a family plan, you can set aside up to $6,550. HSA funds can only be used for qualified medical expenses – other uses will incur taxes and penalties.
Once an HSA reaches a minimum balance, it can often be invested in various stocks or other investment vehicles. The income gained from growth in those investments is tax free, as long as the distribution is used for qualified medical expenses. As with any investment strategy, investing your HSA will expose you to loss, as well as gain.
A Medical Savings Account, or MSA, is similar to an HSA but is only for self-employed individuals or those employed with certain small employers. A Flexible Spending Arrangement, or FSA, is another common way to save for medical needs. An FSA is established by an employer and does not need to be used in conjunction with a high-deductible health plan. Contribution limits for MSAs and FSAs are lower than for an HSA.
In an HSA, if your money isn’t used at the end of the year it rolls over to the next year. In an employer-based FSA, if you don’t use it, you lose it. This makes an HSA very helpful when you medical needs vary. If your medical needs are low one year, you won’t use much of your HSA, but you will have the remainder available the next year if a major health need arises.
Non-medical distributions from an HSA have a tax penalty of 20%. This means that if you have a balance in your HSA that you decide to withdraw and use on something other than qualified medical care, you will pay a sizable penalty to do so.
HSAs and High Deductible Health Insurance
One reason that Americans choose high-deductible plans is that the monthly premium is often lower than other insurance. If you don’t expect to need much medical care, it can be a good choice. This is especially true because an HSA allows you to save money for whenever you need care, rather than having to pay a higher premium each month of each year in a more traditional plan.
A high-deductible health insurance plan is defined as one with specific deductibles for individuals and families. In 2014, a high-deductible plan is one that has a minimum of $2,500 for family coverage, with a maximum out-of-pocket limit of $12,700 or more. For self-only coverage, it is a plan with a minimum deductible of $1,250 and a maximum out-of-pocket expense of $6,350 per year.
Because high-deductible plans have much of the cost of medical care carried by the participant, there was concern initially that they would not meet the minimum threshold to be considered adequate coverage by the ACA. Plans must cover at least 60% of average medical costs to meet minimum ACA coverage standards. This might be an issue for employers who offer high-deductible health plans and also contribute funds to employees’ HSAs. The Administration ruled that employer funds contributed to an HSA could be used to calculate the plan’s value, allowing many to meet minimum value criteria.
Choosing a high-deductible insurance plan is great in terms of monthly payments, but the deductibles can be daunting if medical needs arise. An HSA allows you to set money aside to meet those obligations. If the money isn’t needed this year, it can be used next year. The contributions to an HSA are tax-exempt, and account growth and qualified distributions are also not taxed. This makes an HSA a great way to pay for your health needs with a high-deductible insurance plan.