A Primer for Americans on HSAs

As our government ratchets through the process of doing “something” about healthcare, one term you’re going to see tossed around a lot is “Health Savings Account.” These HSAs are not new, but seem potentially poised to make a major comeback. It’s worth understanding – from a non-political perspective – what these are, so that you can have an informed opinion to take to your Congresspeople. You may be in favor of these, or you may not – but you should have some facts.

HSAs have been around for a while, as a companion of HDHPs – High Deductible Healthcare Plans. Essentially, the plan goes something like this:

  • Your healthcare premiums are lower, compared to similar coverage in other plans.
  • Your annual out-of-pocket deductible – the amount you must pay before your insurance kicks in – is markedly higher, perhaps around $2500 per person.
  • You can put pre-tax dollars into an HSA, and spend those dollars tax-free in qualified medical expenses. There is a limit on this, and it’s typically around the same amount as the maximum deductible allowed by law.

The theory is that you pay less overall for a cheaper plan, with the opportunity to save some money in a tax-advantaged account. HSAs are just a bank account, and you can typically invest the money much as you would a 401(k) or an IRA. So the account can grow. It rolls over from year to year, and can become a part of your long-term financial planning.

So that’s the basic gist. If you are sick, you’ll pay more out of pocket, but in theory, you’ve saved for that extra expense, and in the meantime you may lower monthly premiums (sometimes markedly lower). HDHPs often have some exclusions. For example, they may offer a flat co-pay for simple office visits, co-pays for drugs, and so on, allowing you to access certain basic benefits without having to meet your deductible first. Plans differ, and those details are important.

Some of the current rumblings have suggested that “you, your employer, or the government” could contribute to the HSA, and obviously it remains to be seen what kinds of limits are put on those.

But here’s a potential problem with all this: in my own experience (I was on one of these plans for years before Obamacare, and have several friends who were), many people buy these plans for the low monthly premium, and then fail to save in the HSA. So when they get sick and are on the hook for a huge bill, they’re screwed. Additionally, while a law may allow your employer or the government to contribute to your HSA (presumably, the government would do so for low-income people), the law may not require them to do so. If they do not, and you do not, then “screwed.”

This is extremely similar to the 401(k) plans that have all but eliminated traditional pensions. The sales pitch for a 401(k) was that it let the individual contribute to their own retirement, while still permitting employers to shoulder the majority of the retirement burden. But employers are not required to do so. In order to retire, most middle-class earners need to ave about $55,000 per year (in 2017). As an individual, you can contribute no more than $18,000 to your 401(k), and your employer is expected to contribute the rest. Almost no employer does. Most will match a small percentage, perhaps doubling you to $36,000 in a generous situation, but nowhere near the full $55k you actually can expect to need in order to – along with Social Security – retire.

401(k)s let employers get out of the retirement business entirely, save for (in most cases) a token contribution; HSAs could well be used the same way. Employers would get the advantage of cheaper monthly premiums, because a large portion of costs – that annual deductible – would shift to the individual. The individual could save for that in an HSA, and perhaps the employer may contribute to the HSA, but you can see how a law could be written allowing employers to also not do so. Now, as I said, you may be great with that as a plan, but you should just be aware of the possibility. On a cynical note, one might imagine that companies, now free of some of their health costs, could lower the prices on their products and services, but I don’t imagine any of us see that occurring.

The current rumblings also pitch HSAs as a way for consumers to “have some skin in the game,” encouraging “shopping around” and letting “market forces” naturally lower the cost of healthcare. This will not happen, and that is not a political opinion, it is a fact of our healthcare situation. While an HSA does give you financial “skin in the game,” you will still be under an insurance policy. The insurer will negotiate and dictate costs on your behalf, and will also determine what services and products they will cover (uncovered products and services, even should you pay for them from your HSA funds, do not typically count toward your deductible). You will still be encouraged to use your insurer’s network of doctors and other providers. You will rarely see the “real” price for anything, regardless of how much of your own money you end up spending. You will certainly not be “shopping around” in the way that you might shop around for a good price on a Crock Pot. If you feel that one of the problems with our current health system is the high overall cost of services, then know that the simple existence of HSAs will not change that in any form. (I’ll note that Obamacare also did practically nothing to address the skyrocketing costs of health services and products; this has been a pervasive and difficult-to-address problem for decades.)

Personally, I was a huge fan of my HSA-based plan, which was regrettably discontinued due to the Affordable Healthcare Act. Due to an exciting loophole between Nevada and Federal law, my family was allowed to save (tax-free!) double what most people in our situation would have been. We still have the account, even though I can no longer contribute to it (although we can tap into it for allowed expenses at any time). It’s a nice nest-egg that I hope will help cover medical expenses when we’re older and likely need more medical services. It lets me pay for those things free of income tax, which is marvelous, and means my healthcare money goes 20-25% further. So don’t take this article in any way as a trash on HSAs – I love ’em. But, if they’re poised to become a major part of our healthcare system, you should at least have some context, which is what I’ve tried to provide here.


3 thoughts on “A Primer for Americans on HSAs

  1. BladeFireLight

    The problem with HSA’s is they only work if you start out healthy. Have a kid with an expensive chronic disease like Type 1 Diabetes and you burn through what little you have saved in no time.

    1. sumdog

      I agree. I had one with one company and was able to save with it, but I was also young and healthy.

      Also, if you leave the company that offers an HSA and your next company doesn’t, you usually start having to pay a fee ($5/month for me). If you want to invest an HSA like an IRA/401k, you need a minimum of $2000 before you’re allow to. If you start working for an employer who offers HSAs, you can roll-over from another bank and avoid those fees.

      The other interesting thing is you get a credit card with your HSA. It will work anywhere. You can use it to buy groceries, but you shouldn’t. It’s a self regulating system. You are required by the IRS to keep each any every receipt and bill for medical treatment. If you don’t, all of those charges need to be from a hospital or doctors office if you want to survive an audit.

      Most people aren’t taught this, and they should be when signing up for an HSA. You need photos of every since receipt to be safe. Getting replacement statements from doctors may not be that difficult (just time consuming) but what about prescription drugs? You can’t prove without a receipt that you only bought drugs and not a ton-o-beer. (I knew too many people who’d just spend money out of their HSA accounts; many of them poor).

      Also, what about adjudicatement? I had a friend who was hit by a car on her bicycle. Since it was the drivers fault, the car owner’s insurance paid the medical bills (or I should say they reimbursed them).

      She was able to pay all the bills out of her HSA, essentially cleaning it out. Then she got a check from the driver’s car insurance which she put in her bank account. So she was able to close down an old HSA filled with pre-tax earnings in a perfectly legal way (paying for an ER visit) yet she was reimbursed and put that into her regular accounts. It seems like a legal/tax loophole.

      However, if you work in an auto-shop and you get injured, and you later get a payout from the shop’s workman’s compensation insurance, your health insurance may start an adjudication process to claim some or all of that money. In the bicycle accident case, would she be required by the IRS to pay that money back into her HSA?

  2. burtd667

    Don do you think the way Insurance companies are forced to operate contributes to overall expense and lack of covered services?

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