After every national election cycle, the world of financial planning changes in some way. It may be big changes coming down the pike, or changes in the details. Advisors work to field through the changes to make sure clients are getting the best advice they can offer. This election cycle is no different and looks to have big changes coming your way. The first area targeted for change is the Healthcare Law. With reference to Health Savings Accounts being proposed as a significant component, it may help to refresh our memories on what these are and how they’re used.
Health Savings Accounts (HSAs) were introduced in 2004 and were coupled with High Deductible Health Plans (HDHPs). It’s always important to verify that the insurance plan is HSA-eligible. The HSA is a separate account that an employee, employer or private policy holder contributes money to during the year. The premise of these accounts was to help curb the growing cost of health insurance and to put the insured patient more in control of their healthcare. The pre-tax contributions are much like a traditional 401(k) or IRA. The account can then be tapped to pay for qualified medical expenses. If money is used to pay for non-qualified medical expenses, it will be taxed and will include a 10% penalty.
HSA funds can also roll over year to year unlike a Flexible Spending Account, or FSA, in which all funds must be used by the end of the year. Currently, HSA accounts can only be used in combination with certain high deductible health insurance plans.
Many employers are encouraging their employees to choose benefits with the HSA account; they often provide partial funding of the account and employee pre-tax withholding to the account. Typically, the cost of medical care and insurance premiums are deductible on tax returns only if they exceed 10% of the taxpayer’s adjusted gross income (AGI). This means that someone with $50,000 of AGI would have to have expenses in excess of $5,000 before they could deduct one dollar. The HSA provides for this tax benefit and when used to pay medical expenses and co-pays to providers, the full amount of these expenses is paid with tax-free dollars.
It’s important to note that the HSA with HDHP is not for everyone. But if you’re generally healthy and visit the doctor for your regular visits and perhaps a couple additional times per year, it may be worth evaluating. Many people become concerned that they are paying out of pocket at a higher rate before they are covered by insurance. But what they may not realize is that the deductible is not spent unless it’s needed. In evaluating plan choices, consider what the annual cost of premiums plus the possible payments from the HSA may be to cover your deductible.
Here is one example: Mary has an HSA with HDHP as a sole proprietor. Her plan is HSA compatible with premiums of $300 per month and a $5,000 deductible. One physical is covered per year, and she goes to the doctor for visits 3 more times in that year, totaling $500. Her annual cost of coverage would be $3,600 plus $500 or $4,100. The other option is a PPO plan, with premiums of $400 monthly, and copays of $30 per doctor visit. Her total annual cost would be $4,800 plus $90 or $4,890. In addition, Mary paid for the $500 doctor visits from her HSA account, which is tax deductible and further decreases her out of pocket cost.
It’s easy to see why in the last several years Americans have been leaning towards HSAs. As of June 2016, 18.2 million accounts were opened. According to Devenir, an HSA research firm, this is a 25% increase from 2015. In addition, Jon Robb, Senior Vice President of Research and Technology at Devenir told CNBC in November that the election outcome "seems to lean more favorably toward HSAs.”
So, what leads Mr. Robb and others to see a favorable trend coming? A quick perusal of President-elect Trump’s platform on healthcare gives us a greater understanding of what may be just around the corner. Mr. Trump outlines the following in point 4 of his healthcare reform platform:
“Allow individuals to use Health Savings Accounts (HSAs). Contributions into HSAs should be tax-free and should be allowed to accumulate. These accounts would become part of the estate of the individual and could be passed on to heirs without fear of any death penalty. These plans should be particularly attractive to young people who are healthy and can afford high-deductible insurance plans. These funds can be used by any member of a family without penalty. The flexibility and security provided by HSAs will be of great benefit to all who participate.”
However, the real issue will be in the details. As is typical after every election, Congress and the incoming administration will work to set guidelines that probably will be as confusing as they are meant to be helpful. Your trusted financial advisor should be able to answer any questions you may have as changes are being implemented. For more information, contact your advisor.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.