When the Affordable Care Act was signed into law four years ago, it seemed poised to deal a death blow to health savings accounts tax-advantaged vehicles available only to consumers with high-deductible health plans.
After all, in Massachusetts, where similar legislation has been in effect for several years, HSAs have lagged in popularity. Many people feared that the [act] would dampen HSA growth or even eliminate HSA options, says Todd Berkley, president of HSA Consulting Services in Minnetonka, Minn.
But that has not been the case nationwide. In fact, HSAs are thriving in the new environment, according to Berkley, who now sees a chance for financial planners to play a huge role in a key area of concern to clients.
HSA-compliant health insurance plans account for nearly 20% of the offerings on the new health exchanges. This is about three times the current 7% HSA market share of commercial insurance, Berkley says. Outside of the ACA, large companies are accelerating growth of adoption of HSA plans and participants in the fast-growing private exchanges are choosing HSA plans more than 50% of the time, according to industry reports.
As a result, clients can continue to gain the benefits of HSAs and advisors see a greater opportunity to help evaluate the advantages of an HSA strategy.
George Chobany, a financial planner who specializes in life, health, long-term care and disability coverage at Scurich Insurance Services in Watsonville, Calif., says Obamacare has spurred increased interest in HSAs. Most people who pay their own premiums for health insurance on these exchanges are buying the bronze plans, which generally are the least expensive, he says. With bronze plans, the minimum deductible is usually $5,000, with no first-dollar coverage except for preventive care.
And, he notes, If people are on the hook for $5,000, they might as well get an HSA plan, for the tax benefits.
Those tax benefits are substantial. Allowable HSA contributions for 2014 range from $3,300 (for buyers younger than 55 with individual health insurance) to $7,550 (for those 55 or older with family coverage), and these payments are tax-deductible. Earnings inside an HSA are untaxed; distributions also escape tax if used to pay for qualified health care costs.
no income limits
There are no income limits or phaseouts for the tax deductions, points out Ed Slott, a CPA in Rockville Centre, N.Y. and a contributing writer for Financial Planning. This makes HSAs especially attractive to high-bracket clients, he says. The deductions are above the line on clients tax returns, which can help clients who are facing a loss of tax benefits keyed to adjusted gross income or modified AGI. HSA deductions can also reduce exposure to the 3.8% surtax on net investment income.
Moderate-income clients may favor HSAs, as well, Chobany contends. The subsidies available on the health insurance exchanges are based on modified adjusted gross income, he explains so an HSA tax deduction might reduce their MAGI and provide a subsidy.
Planner Nick Defenthaler mentions yet another HSA benefit. You can no longer contribute to an HSA after youre enrolled in Medicare, but the funds already in the account can be used for any purpose after you reach age 65 regardless of whether they are medically related, explains Defenthaler, of Southfield, Mich., firm Center for Financial Planning. Nonqualified distributions by HSA owners 65 or older will be taxable, but they avoid the 20% penalty faced by younger taxpayers.
MEDICAL IRAs
These tax advantages open up two strategies. Some use their HSA to cover their current health care expenses, paying with pretax rather than after-tax dollars, Chobany says. This process has become very simple now that most HSA custodians and trustees allow people to pay for qualified expenses with a debit card.
Other clients, who can cover out-of-pocket health care bills without tapping their HSA, turn the account into a kind of medical IRA. There is no use-it-or-lose-it timetable, so HSA money stays in the account, growing untaxed for later use.
Laurie Renchik, another planner at the Center for Financial Planning, tells of a client following such a path. She is a single woman in her mid-40s, Renchik says. Her career is on track with significant annual income increases. This client is healthy, with no current medical conditions that require frequent doctor visits or prescriptions. So a high-deductible health plan is attractive to her.
This client is flush with emergency cash reserves, Renchik continues, carries zero debt, fully funds her 401(k), participates in a deferred-compensation plan at work and saves monthly. Renchik advised the client to choose a high-deductible health plan and open an HSA. The client expects to work for at least 10 more years, paying for health care herself while letting her HSA balance grow. Once she retires, she can pay for uncovered medical, dental, vision and other care with untaxed dollars.
INVESTMENT OPTIONS
How will this client invest her HSA funds? Were just setting it up, Renchik says, so were putting her contribution into a non-fluctuating but low-yielding account that she can access, if needed. As the account grows, well consider other investment options.
Starting an HSA with liquid funds appears to be the norm. A recent Fidelity report showed only 16% of account holders had invested HSAs beyond cash and cash equivalents. Yet once sufficient cash is in the HSA, clients who intend to build a medical IRA can choose other options. Planners have a role here, helping clients overcome inertia and the perception of limited investment options.
If someones HSA results from having a high-deductible health plan at work, that person may view it as a part of his or her employee benefits, says Sunit Patel, a senior vice president at Fidelity. There can be a tendency to use the HSA that comes with the company plan, even if that HSA lacks attractive investment options.
In fact, Patel says, HSAs are portable, even without a job change. So an employee can move to an HSA provider with a menu of investment choices or even split HSAs between accounts.
One issue for clients: For HSAs to remain available over the long term, consumers must continue to have access to the required high-deductible health insurance policies. Benefits experts offer a mixed forecast: Berkley says insurance issues such as medical loss ratios and actuarial values could raise problems in the future and keep HSA-compliant policies from the market. Patel, however, says that while large employers group coverage probably wont be adversely affected, insurers profit constraints in the small-group and individual markets could crimp HSA growth in the future.
For now, at least, clients can get the required health insurance and the tax advantages of HSAs if they can find the right coverage. Nearly half of the HSA-qualified insurance options we found in the federally run ACA exchange did not have any obvious indication that would help a consumer realize that they could add an HSA, Berkley says. Advisors not only can explain the benefits of these accounts, they can also help clients determine which high-deductible health plans will deliver the tax-saving trifecta.
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
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