Published January 15, 2014
The Obamacare exchanges are giving many Americans new, lower-cost health insurance options. But what if you've been relying on another method for reducing health coverage costs: the one-two combination of a health savings account and a high-deductible health plan? Should you move instead to an exchange plan?
A health savings account, or HSA, is a tax-advantaged savings account that allows you to set aside money to cover medical expenses you may incur. It's typically coupled with a health plan with lower premiums but a steep deductible, so that only catastrophic medical bills are covered.
"You have to have a high-deductible health plan in order to be making contributions to a health savings account," explains Craig Rosenberg, a benefits specialist with consulting firm Aon Hewitt.
You have the option to set up your high-deductible health plan and health savings account separately, with two different providers, he adds. For example, while you may enroll in one of the high-deductible health plans available on the exchanges, you could consult a bank or other financial institution to establish your HSA.
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How HSAs, accompanying health plans work
As defined by the federal tax code for 2014, high-deductible health plans have annual deductibles starting at $1,250 for individuals and $2,500 for families. Out-of-pocket costs, including deductibles and copayments, are capped at $6,350 for individuals and $12,700 for families.
Meanwhile, the maximum amount of income that can be contributed to a health savings account tax-free in 2014 is $3,300 for individuals and $6,550 for families. The annual limits are tied to inflation.
The Affordable Care Act has placed new restrictions on HSAs. These include prohibiting the use of HSA funds to buy over-the-counter drugs without a prescription and subjecting nonmedical withdrawals to an increased tax penalty of 20%, up from 10%.
"If you're participating in a high-deductible health plan, saving in an HSA is generally very attractive to you," says Jeff Munn, vice president of benefit policy development at Fidelity Investments.
"It's really a triple play in terms of benefits for employees," says Rosenberg, explaining that HSA contributions can lower your taxable income, earn interest and be used tax-free to pay for health care expenses.
"Over time, you can start building up a health care nest egg, if you will," he says.
Unspent HSA funds can be carried over from one year to the next, so the accounts might be used as retirement savings vehicles.
Your HSA if you move to Obamacare plan
Consumers shopping for health insurance in the Obamacare exchanges may find plans with deductibles and out-of-pocket limits that make them HSA-compatible. Typically, these are "bronze" and "silver" plans that cover only 60% and 70%, respectively, of the typical patient's medical costs.
So, should you drop your individual high-deductible health plan and go with an exchange-based plan instead? Once you've determined your eligibility for federal subsidies, it may be easier to answer that question. The Obamacare marketplace offers tax credits that cut insurance premiums for those with household incomes of up to 400% of the federal poverty level (about $46,000 a year for an individual, $94,200 for a family of four).
Consumers who already have a health savings account and are looking at their options on the exchanges may wonder what will happen to their current HSA. If they choose one of the marketplace's more conventional health plans with a smaller deductible, no additional contributions can be made to the existing HSA, but the funds in the account may still be used for qualifying health expenses. If they switch to a new bronze or silver high-deductible health plan, there are a few options to consider, Munn says.
"That plan could have an arrangement with its own HSA and you might want to combine HSAs, or you might want contributions going into one, but you keep the other," he says. "There are some variables there to think about."
Russ Childers, past president of the National Association of Health Underwriters, says HSAs are useful tools for consumers because they are able to avoid going through insurers to pay for medical expenses and can enjoy tax benefits as a result.
"Particularly (for) people that have ongoing medical expenses, people that have a continuing problem like diabetes or high blood pressure ... it saves money," he says.