While the country speculates what changes are coming to the Affordable Care Act (ACA) and how the new administration plans to deal with our collective health care issues, the Need2Save team has been dreaming up big ways to make Health Savings Accounts (HSA) a better deal for Americans. You know, in case the new administration calls us up and asks us for our opinion we want to be ready. (Like that would happen!). Read on to see what improvements we would make to Health Savings Accounts.
So far, it seems like the Trump administration is keen on Health Savings Accounts which make their longevity for at least the next 4 or 5 years seem pretty solid. Earlier this year, we shared our experience with HSAs and High Deductible Health plans in our post (Debunking the Fear of Health Savings Accounts and High Deductible Health Plans). Please take a look at that post to determine if an HSA is something that could work for you and your family.
WHY DON’T MORE PEOPLE JUMP ON THE HSA BANDWAGON?
It astonishes me every day why more people don’t take a second or third look at HSAs. If you think about an HSA like you would your 401(k), then it’s pretty clear that it’s something you want to get in on. Your money goes in tax free, reducing your current tax burden. The money can be used tax free for qualified expenses. And once you have a large enough balance, you can invest the funds for further growth and interest potential. Oh, and these earnings are not taxed either. They call these the “triple tax advantages” of Health Savings Accounts.
There are many other advantages too. Here is a short list:
- They are portable – you can take an HSA with you if you leave your current employer.
- The funds are not forfeited if you don’t use them by a certain date (ala Flexible Spending Accounts, the older cousin of the HSA).
- They force you to be smarter consumers by looking for low-cost providers (after all it’s your money not the insurance company’s money you are spending so you are more likely to be careful with it).
- Since you have ‘more skin in the game’, using an HSA for health insurance may nudge you into healthier lifestyle choices.
- If you die, your spouse can inherit the account just like a 401(k).
- Preventive care is still covered at 100% under the high-deductible health insurance component. So you can still get your annual check-up and your vaccines. (These rules could obviously change if ACA is replaced).
- After you turn age 65, you can use the funds to supplement your other retirement income sources and only pay regular income taxes on the withdrawals (if used for non-health care expenses).
So those are the current key advantages that come to mind. Pretty awesome features, we think but still some folks don’t take the time to educate themselves.
HOW COULD THEY BE EVEN BETTER?
If we had our way, Health Savings Accounts would be available to everyone regardless of the medical plan you are enrolled in. Right now, there are so many limits on who is left out of the HSA party. You can’t contribute to an HSA if any of the following apply to you:
- You have any other first-dollar health coverage. This includes coverage you may have through your spouse, or your parent, or TRICARE, or Medicare, or Medicaid.
- It also applies to Flexible Spending Accounts (FSA), too! If your spouse has an FSA at his/her job and that FSA can be used for your health care expenses, then you cannot contribute to an HSA even if you are enrolled in a high-deductible health plan at your job. The interpretation of an FSA as a first-dollar health plan is just silly. Yes, it can be used to cover a prescription or trip to the urgent care center for you, but if you have even just $5 in your or your spouse’s FSA account, this prevents you from contributing up to the annual limit for yourself in an HSA until that account is exhausted. There is nothing in the current law to disregard deminimus amounts in an FSA, even $5 balances. Crazy!
- You can’t be claimed as a dependent on someone else’s tax return (other than your spouse). This prevents most young adults from starting HSA accounts for themselves until they are no longer claimed as a dependent by their parents. For a college student who has a paid internship, co-op, or job between semesters – this prevents them from saving for their own future health expenses. Many college students are living with chronic conditions or disabilities and they face significant future health care costs.
We think the system should encourage more saving for future expenses. To do this, these restrictions should be lifted so more people have access to this saving vehicle. We could do away with FSAs altogether if everyone could contribute to an HSA instead. FSAs are inferior because they have lower annual limits, are inflexible, are not portable, and must be used within the plan year (some plans allows for a $500 rollover).
HIGHER CONTRIBUTION LIMITS!
Understandably, law makers don’t want there to be an unlimited opportunity for you stash tax-free money (we could wish though huh?), but the current limits are too low.
A single person can only contribute up to $3,400 in 2017 and any tier of two or more family members is limited to $6,750. Even if you are a family of ten people, you can still only contribute $6,750 a year. Also, if your employer contributes to your HSA (great for you), you have to subtract those contributions to make sure you don’t go over the limit.
We would raise the contribution limits for both individuals and families. Let’s start with matching the annual out-of-pocket maximum ceiling for HSA eligibility. For individuals this would be $6,550 and $13,100 for families. That’s a good enough place to start.
LOWER THE CATCH-UP CONTRIBUTION AGE!
The idea behind the catch-up provision is that as you near your likely retirement age, you may benefit from saving a little extra to cover your rising health care needs. For early retirees, many miss out on this opportunity because the age limit is 55. And even then, you can only save an extra $1,000.
Further, you can’t make catch-up contributions for your spouse even if he/she is over the age of 55. Your spouse would have to have a qualifying high-deductible health plan of their own and contribute to their own HSA in order to take advantage of the catch-up provisions. When you add up the extra premiums you both have to pay, the math may work against you if you have to split the family up for this reason alone.
We would double the catch-up contribution limit to $2,000 a year and we would lower the catch-up age to age 50 to mirror the rules for retirement plan contributions, like 401(k)s. Furthermore, we would let individuals make catch-up contributions for their spouses if the spouse is over age 50, too!
There you go. Our top 3 wishes for HSA reform. Feel free to pass them along to your friends in Washington.
Please tell us what changes you would like to see! Do you currently participate in an HSA?