Health Savings Accounts Can Lower Your Taxes: Obamacare Could Help

NEW YORK (MainStreet) — While only 8% of Americans have a Health Savings Account (HSA), however 50% say they are somewhat or very likely to use an HSA to lower their taxes, according to a new insuranceQuotes.com report.

Americans with high-deductible health insurance plans can allocate money into HSAs to cover certain medical expenses. Their contributions are not subject to federal income taxes and can be invested like an IRA.

The advantage of HSAs is that the unused funds roll over each year and any remaining money can be used for retirement after the age of 65, said Laura Adams, insuranceQuotes.com's senior analyst.

Many consumers are confused about HSA eligibility and benefits. Only 14% of Americans know that an HSA needs to be paired with a high-deductible health insurance plan. People who buy coverage on the public health insurance exchanges are especially good candidates, since most of the purchased plans (including silver and bronze plans under Obamacare) are high deductible plans.

A high deductible is defined as at least $1,250 for an individual and at least $2,500 for a family. InsuranceQuotes.com found that only 16% of Americans who know that a high-deductible plan is required for an HSA correctly pegged this amount.

Consumers remain confused about which medical expenses HSAs can be used for with 52% incorrectly believing that they can use HSAs to pay for over-the-counter medications and 51% falsely believe they can use HSAs to pay for health insurance premiums.

Popular expenses that HSAs can be used for include prescription medications, doctor visits, dentist visits and eyeglasses. HSAs can also pay for continuing coverage such as COBRA and long-term care insurance.

"With the advent of Obamacare, more Americans are eligible for a Health Savings Account than ever before," she said. "You fund it ahead of time which means you will get a discount for any medical procedures you need in the future. It can add up to some substantial savings."

Consumers can buy their HSA though their employer, but also through the open marketplace. There are a myriad of HSAs out there, but look for the ones that charge no or minimal fees for monthly account maintenance and transactions.

"You can choose anything that is on the market," Adams said. "They are totally portable, are owned by you and have no affiliation with your employer. You can continue to spend money even if you don't put in additional contributions and can be used for your spouse or dependent."

Search for one with the highest interest rate. Some accounts are more basic and are more akin to a regular savings account, but many others allow you to select from various stocks and mutual funds.

"It always makes sense to open it and fund it," she said. "It is there if and when you need it. You can spend the money in retirement for non-medical expenses. A lot of people use them more for investing and try to max them out."

HSAs are a good option for people who rarely see the doctor, are not regular prescription drug users and who can fund their HSAs to the max, said Carrie McLean, director of customer care at eHealthInsurance.com. HSA-eligible plans may be less optimal for people who have chronic medical conditions which require them to see the doctor regularly or for those who take maintenance drugs. In order to really take advantage of your HSA-eligible plan these days, you need to fully fund your HSA annually, she said.

When you are enrolling in a HSA, check to see if you are eligible for a subsidy. If you qualify for health insurance subsidies in 2014, you can get even more dollar-value out of your coverage.

People earning between 133% to 400% of the federal poverty level in 2014 (up to about $45,000 for an individual or $93,000 for a family of four) may be eligible for subsidies when buying coverage on their own in 2014. If you purchase your coverage through a state exchange, see if there are any HSA-eligible plans available.

"The combined savings between your subsidy and a fully-funded HSA could be substantial," she said.

The maximum dollar amount that can be contributed to a HSA in 2014 is $3,300 for individual coverage or $6,550 for family coverage, which includes employer contributions.

 

There are over 10.7 million Americans using HSAs currently and show increase to 11.2 million by the end of 2014, according to the recent Devenir survey. Too many Americans don't take advantage of them because they do not understand them, said Chad Wilkins, head of HSA Bank, based in Sheboygan, Wis.

"In some regards, HSAs are better than a 401(k) as money goes in pre-tax and money goes out pre-tax when used for medical expenses," he said.

Employees who receive contributions from their employers should definitely consider opening an HSA, said Tom Torre, CEO of Alegeus, a Waltham, Mass.-based healthcare and benefit payments company. HSAs grew to over $20 billion in assets during January, according to Devenir.

"HSA funds can be used for any eligible expense incurred from the date the HSA is established into the future with no expiration date, making it an excellent savings vehicle and not just a spending account," he said.

Unlike Flexible Spending Accounts, HSAs never expire. However, one disadvantage of having an HSA is that you can not participate or contribute to both an HSA and a general-purpose FSA in the same year, said Steve Jackson, SVP of PrimePay, a third-party benefits administrator based in West Chester, Penn.

"Employers are making more contributions to their employees' HSAs," he said. "They are helping them fund their HSAs," he said.

Some insurance companies are offering individuals with HSAs the option to book appointments online and to make payments directly from the account. In Dallas, Denver and Phoenix, UnitedHealthcare plan participants enrolled in high-deductible health plans linked to HSAs can use myEasyBook, which allows to them book appointments online and pay for them directly and track their health care expenses.

--Written by Ellen Chang for MainStreet

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