The Best Introduction to Health Savings Accounts [Guide]

The BEST Introductionto HealthSavingsAccounts

a guide by

IntroWhether 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 consumers 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

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17

INTRO

HOW HSAS WORK

ADDITIONAL RESOURCES

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0.1 0.20 .2 0.4

0.91.1

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

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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


Part 1 Intro

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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

Deductible Period

Financial Layout of Payment Periods

Coinsurance Period

After OOP max is reached

Insurance PremiumNon-qualified Expenses

CoveragePreventive Care

HSA-qualified expenses

You Pay They Pay*Not based on actual percentages


Part 1 Intro

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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.




Part 1 Intro

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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

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

$$$$ $


Part 1 Intro

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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 HSAPositive Considerations


Part 1 Intro

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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:

$ Set-up Fee

$ Transaction Fees

$ Maintenance Fees

$ Account Closing Fee


Part 1 Intro

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Considerations of an HSA

Negative ConsiderationsFees

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.


Part 3 Additional Resources

You have coverage other than the HDHP/HSA (exceptionslisted in Outside Coverage on p16)

You are enrolled in Medicare

You can be claimed as a dependant on somebody else’stax return

You are not required to gain permission from anyonebefore applying for an HSA

Your account will be safe - the institution, known as theaccount trustee, is required to:

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Part 2 How HSAs Work

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Establishing an HSAThere 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:



After a service, the doctor will submit a claim to the insurer

Once the insurer has the claim, they will apply any eligiblediscounts

The amount paid will count towards the annual deductible



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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



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



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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




$6,550 Individual

$13,100

2015

$6,450

$12,900

2014

$6,350

$12,700 Family

Annual Maximum Out-Of-Pocket Limits for HDHP



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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




$1,300 Individual

$2,600

2015

$1,300

$2,600

2014

$1,250

$2,500 Family

Annual Minimum Deductible Amount Limits for HDHP



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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.

This means you will bear the brunt of the initial costs on your own. Once the specified

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




AmbulanceAnnual Physical ExamBody ScanChiropractorDental TreatmentEye ExamHearing AidsLabratory Fees

Nursing HomeOxygen

PsychologistSurgeryTransplantsWheel ChairX-ray

Prescriptions



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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






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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 FlexibleSpending 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 forsignificant medical benefits

• Worksite employee assistance programs (EAP), if they do not pay forsignificant medical benefits

Outside Coverage




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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 HSAshttp://www.irs.gov/publications/p969/ar02.html

HSA Center - general HSA information and FAQshttp://www.hsacenter.com/index.html

Healthgrades Inc. - provider of hospital / doctor / service rateshttp://www.healthgrades.com/

Congressional Research Service - comparison of tax-advantaged accountshttps://www.fas.org/sgp/crs/misc/RS21573.pdf

Patient Advocate Foundation HSA Resource - additional HSA informationhttp://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

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