Are Health Savings Accounts (HSAs) the way forward?

The current administration and majority leaders in Congress have made it clear that their plan to replace the Affordable Care Act relies heavily (if not totally) on Health Savings Accounts (HSAs), but most Americans have little experience with HSAs or aren’t aware of exactly how these plans work.

HSAs are separate bank accounts that an individual/family can make contributions to only if the individual/family purchases an HSA-compatible insurance plan known as a High Deductible Health Plan (HDHP). Politicians talking about HSAs usually fail to mention that HSAs must be combined with HDHPs—as you read on please keep in mind that HSA always means a combination of HSA and HDHP. You cannot legally establish an HSA without being enrolled in a compatible HDHP.

HSAs and HDHPs can be very good for people who have excess income to save and who have minimal medical needs. Contributions to HSAs are tax-deductible, which is great for small business owners who deduct such expenses and whose income would otherwise put them in a higher tax bracket. However, contributions are limited to $3,400 for an individual or $6,750 for a family per year. The money in an HSA rolls over every year, so they can be a great way for healthy people to save money now for future medical needs. By law, the maximum deductible can be $6,550 for an individual and $13,100 for a family—and I find these deductibles are typical throughout Wisconsin.

HSAs work well for a small percentage of Americans—people who are very healthy, have high income, and can easily save money every month for their future health needs. HSAs can also work well for middle income earners who have few medical needs, want to save for future health expenses, and are comfortable with the possible financial exposure of having a high deductible plan if they get sick. For people living paycheck to paycheck, saving for an HSA is impossible and can lead to medical and financial disaster.
Even for people solidly middle-class, HSAs could be a financially damaging if someone gets sick. A family with an HSA compatible HDHP can contribute $6,750 to their HSA per year, but a HDHP can have a total deductible of $13,100. This means that in addition to saving $6,750 per year in their HSA ($562.50 per month) the family is exposed to an additional $6,350 in medical bills before the plan pays a cent toward medical care. A family could get up to $13,100 in medical bills for the year—it’s just that a little over half could be saved pre-tax if they thought ahead and contributed to their HSA. Keep in mind too that these amounts are in addition to their monthly premium for the HDHP.
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HSAs should be an option, but not the only option. We all know insurance premiums are high, and I argue that we should get coverage for the amount we pay. HDHP premiums are usually not significantly different from plans with lower deductibles and copays. In deciding if an HDHP and HSA would work for you, I recommend calculating if you could comfortably save $546 per month for an individual or $1,092 for a family in addition to your monthly premium. If these amounts are unrealistic, I do not recommend an HDHP and HSA for you—instead I recommend choosing a Silver plan where you have copays to see doctors before a deductible. Whatever you choose for yourself and/or your employees, I highly recommend you speak to an experienced broker and tax professional about your options and needs.

For more information on the rules for HSAs, please review IRS Publication 969: https://www.irs.gov/uac/about-publication-969

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