[Guide] The Best Introduction to Health Savings Accounts
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This document serves as an introductory guide to Health Savings Accounts (HSAs), detailing their origins, how they work, and their advantages and disadvantages. It highlights the shift towards consumer-driven health plans (CDHPs) and emphasizes the potential benefits of HSAs in terms of tax savings and reduced healthcare costs when paired with high-deductible health plans (HDHPs). Additionally, it outlines the requirements for establishing an HSA and the complexities involved in managing one.
[Guide] The Best Introduction to Health Savings Accounts
- 2. Intro Whether you are being, well… motivated to consider a Health Savings Account (HSA) due to a workplace change in policy, or you perceive that you are spending more than you should be for health care – some compelling reason brought you to this guide. Good! This is your first step toward understanding what an HSA is and how it works. This is an introductory guide that aims to inform comsumers and employers about Health Savings Accounts. Make sure you get additional questions answered by reading IRS Pub. 969 or through your insurer. Contents HSA Origins A Brief Look into CDHPs Considerations of an HSA Establishing an HSA Using the Account HSA Expenses & Coverage Additional Resources 3 4 6 9 10 11 17 INTRO HOW HSAS WORK ADDITIONAL RESOURCES
- 3. 1 2 3 4 5 6 7 8 0.1 0.20 .2 0.4 0.9 1.1 1.7 2.3 3.2 4.4 6.1 8.3 HSA Investment Assets (in billions) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *estimatedSource: Figures based on Devenir Research and 2014 Year-End Devenir HSA Market Survey 3 | HSA: Employee Benefit Express Part 1 Intro share it According to the National Center for Policy Analysis (NCPA), the idea for such an account came about in the early 1990’s. The NCPA had organized a task force whose conclusions advocated for self-insurers to use a Medical Savings Account (MSA), then “medisave”, to cover their smaller medical bills. It took a book (Patient Power, 1992) and much trial & error in the private sector before Congress came out with a pilot program for the MSA in 1996. Since MSAs were only available to the self-employed and employees of a small business – there grew a need for plans available to the broader consumer market. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 is what expanded availability to any individual/family with HSA-qualified insurance. HSAs are now a rapidly growing option in the healthcare community. HSA Origins
- 4. 4 | HSA: Employee Benefit Express Part 1 Intro share it To fully understand an HSA, you must first learn about the general breakdown of Consumer-Driven Health Plans (CDHPs) - as that is the general category of what you’re looking at. The main idea of CDHPs is to give control of health care to the consumer so that they are encouraged to make informed healthcare buying decisions and can be rewarded with cost savings for living a healhtier lifestyle. CDHPs are characterized by having a High-Deductible Health Plan (HDHP) associated with some sort of medical savings account. In exchange for paying for routine medical expenses up front, the consumer gains the benefit of a lower insurance premium. You pay these medical expenses (excluding the premium) out of your medical savings account. A brief look into CDHPs
- 5. Deductible Period Financial Layout of Payment Periods Coinsurance Period After OOP max is reached Insurance Premium Non-qualified Expenses Coverage Preventive Care HSA-qualified expenses You Pay They Pay *Not based on actual percentages 5 | HSA: Employee Benefit Express Part 1 Intro share it In terms of initial money allocation in an HDHP: there are certain things that are considered preventive care... which are covered by the plan straight away. In addition to a premium, other expenses must be paid in full until the deductible is met - at which point the plan will cover a percentage of the remaining costs. Once the out-of- pocket maximum is reached, then the plan will pay the rest of your medical expenses for the term. These conditions will be discussed later in the guide as well. There are a few varieties of HDHPs that you can consider. The main options include: Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and Medical Savings Accounts (MSAs). All will allow tax advantages; however, each has unique stipulations. A brief look into CDHPs
- 6. A brief look into CDHPs 6 | HSA: Employee Benefit Express Part 1 Intro share it FSA - Flexible Spending Account Employer-established accounts that reimburse employees for qualifying expenses. They are usually funded through salary reduction agreements under which employees receive lower monetary wages in exchange for equivalent contributions to their FSAs. HRA - Health Reimbursement Arrangement (Account) Employer-established arrangements that reimburse employees for qualifying expenses. Contributions cannot be made through the employees’ salary reduction agreements; only employers may contribute. MSA - Medical Savings Account Accounts that the account holders use to pay for qualifying expenses. They were established by individuals who held high-deductible health plans (HDHPs) in order to establish or contribute to the MSA. Individuals generally cannot open MSAs after December 31, 2007, but those who had accounts by this date may maintain them. MSA eligibility was limited to people who were self-employed or employed by an employer with fewer than 50 employees. Contributions may be made by the employer or account holder, but not both in the same year. Summary of Other Accounts
- 7. Triple Tax Advantages Savings that grow are tax deferred Deposits are deductible off federal gross income Qualified medical distributions are never taxed $ $ Investment Advantages Funds may be invested in a CD, money market, or mutual fund Employer contributions are yours to keep Funds rollover to the next term $$ $$ $ 7 | HSA: Employee Benefit Express Part 1 Intro share it Compared to traditional plans, CDHPs are more complex and require much more planning for the future to make them successful. If you’re willing to make time to shop around for services, and when researched thoroughly and applied properly, an HSA under an HDHP can yield some hefty savings through these advantages: Considerations of an HSA Positive Considerations
- 8. 8 | HSA: Employee Benefit Express Part 1 Intro share it Lowers health care premiums under the HDHP for coverage for employees Lowers the employer’s administrative costs Provides employees an opportunity to contribute for future health care expenses under the HSA for him or herself and his or her dependents Provides any employee who contributes to an HSA with a tax deduction and/or an income tax and payroll tax free contribution No monies in employees’ HSAs can ever be forfeited back to the employer, even if contributions are deemed in excess Provides an employer with an opportunity to contribute to eligible employees at any time and at any amount up to statutory limits Gives employees immediate access to their HSAs for any reason Provides tax free distributions at any time for health care expenses incurred after the HSA has be established (if the expense was neither reimbursed from any other source nor deducted by the employee) Provides reimbursement of health care expenses for his or her spouse after the employee’s death, provided the spouse is named as the beneficiary under the HSA Provides either a trust or custodial account that accumulates earnings on a tax free basis Gets the employer out of the business of substantiating health care claims Avoids the requirements of ERISA (and COBRA and HIPAA) if the employer does not make participation in the HSA mandatory Gives the employees who participate in an HSA complete portability in transferring their accounts at any time List curated by Larry Grudzien, Attorney at Law Considerations of an HSA A more robust list of potential advantages:
- 9. $ Set-up Fee $ Transaction Fees $ Maintenance Fees $ Account Closing Fee 9 | HSA: Employee Benefit Express Part 1 Intro share it Considerations of an HSA Negative Considerations Fees Like most bank accounts, HSAs also have associated fees – including: These fees may vary, so consider these costs when you’re shopping for an account. Administration The ball is now in your court. You no longer have a Primary Care Physician to act as the middle man. You’ll have to do the shopping and make the decisions based on the information you find. This also makes you responsible for all the IRS reporting and having back-ups and justifications for your records. Information It can be difficult to gain access to accurate medical pricing and quality of service. When time isn’t on your side, in the case of an emergency, you may not be considering the best financial option to get care. Slow-start If your financial situation doesn’t allow for you to accumulate funds and have them rollover, then you may not witness the long-term HSA benefits right away.
- 10. 10 | HSA: Employee Benefit Express Part 3 Additional Resources You have coverage other than the HDHP/HSA (exceptions listed in Outside Coverage on p16) You are enrolled in Medicare You can be claimed as a dependant on somebody else’s tax return You are not required to gain permission from anyone before applying for an HSA Your account will be safe - the institution, known as the account trustee, is required to: ! ! ! share it10 | HSA: Employee Benefit Express Part 2 How HSAs Work share it Establishing an HSA There is a particular order in which you should set up your account. It is required to be enrolled in an HDHP before applying for a Health Savings Account; however , some institutions will let you start applying before your HDHP takes effect - allowing you to have funds available when your plan starts. Once you have a High-Deductible Health Plan, you may start searching your area for a bank or credit union that offers health savings accounts. Keep in mind that you will not qualify if: How to actually set up the account will vary, but most banks offer both electronic and paper forms to get started. Please note:
- 11. 11 | HSA: Employee Benefit Express Part 3 Additional Resources After a service, the doctor will submit a claim to the insurer Once the insurer has the claim, they will apply any eligible discounts The amount paid will count towards the annual deductible share it11 | HSA: Employee Benefit Express Part 2 How HSAs Work share it If the HSA has insufficient funds, then the amount will need to be paid out-of-pocket; however, the out-of-pocket expense can be reimbursed once the HSA has sufficient funds. This does not apply if the deductible has already been met. Important note - Save receipts as proof for the IRS or the insurer. In terms of using your funds, a qualified medical purchase, such as a prescription medicine, you would just have to make sure that is covered in your specific plan before the purchase. As for when you require a service, there is a general procedure similar to having a traditional plan: Using the Account
- 12. 12 | HSA: Employee Benefit Express Part 3 Additional Resources 2016 Coverage Levels $3,350 Individual $6,750 2015 $3,350 $6,650 2014 $3,300 $6,550 Family $1,000$1,000$1,000 Catch-up Annual HSA Contribution Amounts share it12 | HSA: Employee Benefit Express Part 2 How HSAs Work share it HSA Expenses & Coverage The funds you and your employer place into the account are known as contributions. This is the sum of money that will supplement all your deductibles, coinsurance payments, and other qualified expenses. While the deductibles are higher, remember that insurance premiums are also lower (and there’s money saved with the tax advantages) - meaning that you could use these savings to buffer the costs of the higher deductibles. There is a limit on the combined amount any source can fund into the account: Catch-up Contributions To even the benefits of having an HSA at a younger age through retirement, the IRS also allows individuals 55+ the ability to make catch-up contributions to the account. Contributions
- 13. 13 | HSA: Employee Benefit Express Part 3 Additional Resources 2016 Coverage Levels $6,550 Individual $13,100 2015 $6,450 $12,900 2014 $6,350 $12,700 Family Annual Maximum Out-Of-Pocket Limits for HDHP share it13 | HSA: Employee Benefit Express Part 2 How HSAs Work share it HSA Expenses & Coverage A primary benefit of having a High-Deductible Health Plan (HDHP) is that there is an overall limit on how much you will pay out-of-pocket (OOP). This means, once you have satisfied your out-of-pocket maximum, the insurance will cover the remainder of your health expenses for the policy period. In terms of what will count towards this OOP maximum - the annual deductible, copays, and coinsurance will all go toward this maximum. View the most recent annual limits below: Note: It can be a balancing act in choosing higher Out-of-Pocket maximums for a lower monthly premium – having such a set-up could help with accumulating HSA funds. Out-of-Pocket Expenses
- 14. 14 | HSA: Employee Benefit Express Part 3 Additional Resources 2016 Coverage Levels $1,300 Individual $2,600 2015 $1,300 $2,600 2014 $1,250 $2,500 Family Annual Minimum Deductible Amount Limits for HDHP share it14 | HSA: Employee Benefit Express Part 2 How HSAs Work share it As notable from the type of plan (High-Deductible), the deductible is the first amount to work through before you start to receive more assistance with healthcare costs. Thismeansyouwillbearthebruntoftheinitialcostsonyourown.Oncethespecified deductible is satisfied - insurance will contribute a percentage of the total costs and charge you a coinsurance percentage. Then, as noted before, once the OOP maximum is met, insurance will cover the rest. Since it is a fixed amount, then the deductible has a set minimum. View the most recent HSA-qualified deductible minimums below: Deductibles HSA Expenses & Coverage
- 15. 15 | HSA: Employee Benefit Express Part 3 Additional Resources Ambulance Annual Physical Exam Body Scan Chiropractor Dental Treatment Eye Exam Hearing Aids Labratory Fees Nursing Home Oxygen Psychologist Surgery Transplants Wheel Chair X-ray Prescriptions share it15 | HSA: Employee Benefit Express Part 2 How HSAs Work share it You’re probably wondering how well an HDHP will cover your expenses. Since HSAs are subject to the same insurance laws and regulations as other policies, like HMOs and PPOs, then their coverage is comparable to the more traditional plans. Some covered Medical Expenses may include: See IRS publication 502 for a full list of included/non-included medical expenses: http://www.irs.gov/publications/p502 Preventive Services It’s uncertain what your policy will entail when it comes to preventive services. Plans can potentially be limited or unlimited and/or cover 100% or charge co-pays. It’s more or less a case by case basis and you need to research a plan that fits your needs. Coverage HSA Expenses & Coverage
- 16. 16 | HSA: Employee Benefit Express Part 3 Additional Resources share it16 | HSA: Employee Benefit Express Part 2 How HSAs Work share it Unless your spouse or dependent also has an HDHP, then basically any other type of coverage will disqualify you (listed below): • Dependent on someone else’s tax return • Enrolled in Medicare/Medicaid • Enrolled in HMO/PPO (including coverage under a spouse) • VA Benefits • Coverage through Health Reimbursement Arrangement (HRA) or Flexible Spending Account (FSA) However, there are a few variants of HRAs and FSAs that are compatible with an HSA: • Auto • Dental only • Vision only • Insurance for a specific disease or illness, as long as it pays a specific dollar amount when the policy is triggered • Hospital Indemnity • Long Term Care • Disability • Wellness programs offered by your employer, if they do not pay for significant medical benefits • Worksite employee assistance programs (EAP), if they do not pay for significant medical benefits Outside Coverage HSA Expenses & Coverage
- 17. 17 | HSA: Employee Benefit Express Part 3 Additional Resources share it The purpose behind this guide was to be informative - not endorse having an HSA. To learn more about HSAs, please consider the following resources: IRS Publication 969 - overall guide to HSAs http://www.irs.gov/publications/p969/ar02.html HSA Center - general HSA information and FAQs http://www.hsacenter.com/index.html Healthgrades Inc. - provider of hospital / doctor / service rates http://www.healthgrades.com/ Congressional Research Service - comparison of tax-advantaged accounts https://www.fas.org/sgp/crs/misc/RS21573.pdf Patient Advocate Foundation HSA Resource - additional HSA information http://www.patientadvocate.org/requests/publications/Guide-To-Health-Savings-Account.pdf IRS Publication 502 - list of covered & noncovered expenses http://www.irs.gov/publications/p502/ar02.html
- 18. 18 | HSA: Employee Benefit Express share it Benefit Express is the leading middle market, cloud-based platform for employee benefits and health exchange services with a focus on flexibility. By offering technology that integrates all benefits, in a one stop shop, Benefit Express provides simplicity to complex plans and offers a very custom-made experience to engage and educate employees while offering employers an ease of benefit management that is unmatched in market. Benefit Express provides a full range of services including, benefit enrollment, management and administration as well as direct bill services, reimbursement account administration, carrier bill reconciliation, total compensation statements, and a full service call center. Like this guide? Like us! Copyright 2015 - Not to be reproduced without express written consent of Benefit Express Services, LLC About Benefit Express