What is a HSA/HDHP?

HSA/HDHP is a stands for “health sav­ings accoun­t/high-deductible health plan”.  In order to open a HSA, one has to be enrolled in a HDHP so the two real­ly go hand-in-hand.   Health Sav­ings Accounts (HSA) were cre­at­ed in 2003 as a part of the Medicare Pre­scrip­tion Drug and Mod­ern­iza­tion Act.  HDHP’s are health insur­ance plan’s with low­er pre­mi­ums and high­er deductibles than tra­di­tion­al health plans. 

More com­pa­nies are mov­ing to HSA/HDHPs.  On aver­age, the annu­al growth rate of par­tic­i­pa­tion in HSA/HDHP has been 15 per­cent.  This fig­ure is only expect­ed to increase as a result of the recent health-care over­haul.  Start­ing this year, 2014, most employ­ers have to offer health insur­ance plans that are con­sid­ered afford­able and ade­quate.  What employ­ers’ have found, is that by offer­ing HDH­Ps’, they can reduce their year­ly health pre­mi­um pay­ments by up to 35%.  Not only that, but HDH­Ps’ can save a com­pa­ny mon­ey in renew­al fees as well.  A recent Price­Wa­ter­house­C­oop­ers sur­vey released in June 2013 found that 17% of employ­ers now offer HDHP’s as their only option, up from 13% in 2012.  Bot­tom line, expect to see more com­pa­nies move to offer­ing only HDHP’s in the future.      

 

HSA/HDHP Explained

HSA’s are very sim­i­lar to Indi­vid­ual Retire­ment Accounts (IRA’s) in that they are accounts that are set-up to allow one to save mon­ey on a tax-deferred basis until the mon­ey is need­ed, usu­al­ly in retire­ment.  The big dif­fer­ence is that HSA’s can only be used to pay for med­ical expens­es.  In a sense, they are Med­ical IRA’s.    

HSA’s are also sim­i­lar to a Flex­i­ble Spend­ing Accounts (FSA).  Both let you save pre-tax dol­lars to pay for future med­ical costs.  The key dif­fer­ences:  The con­tri­bu­tions you make to a HSA nev­er “expire”.  You can roll your mon­ey over every year and let the bal­ance build up if you don’t use it.  Addi­tion­al­ly, the HSA is yours to keep even if you leave your job for anoth­er employ­er.  As men­tioned, you have to be enrolled in a HDHP. 

On the oth­er hand, with a FSA, you can enroll in any health plan your employ­er offers.  The caveat, you have to use it or lose it.  Mean­ing any mon­ey you con­tribute to your FSA account has to be used in the year you con­tributed it or, if it goes unused, you lose that mon­ey.  Also, if you leave your employ­er, your FSA is closed.

Bot­tom line, HSAs’ offer more flex­i­bil­i­ty than FSAs’ and could offer sim­i­lar ben­e­fits as IRA’s.         

 

The 3 BIG Benefits

The big three ben­e­fits of con­tribut­ing to an employ­er spon­sored HSA is that it is triple tax advan­taged, mean­ing,

  • Con­tri­bu­tions are deduct­ed from an employee’s pay tax free
  • Earn­ings grow tax free, and
  • Qual­i­fied dis­tri­b­u­tions are tax exempt from fed­er­al income tax, Social Secu­ri­ty and Medicare tax, and state income tax­es (in most states)

 

The Fine Print

As is almost always the case, one needs to read and under­stand the small print when inves­ti­gat­ing an employer’s health ben­e­fit plan.  Not all employ­er plans are equal and know­ing what is and is not includ­ed in that plan is essen­tial to mak­ing an intel­li­gent sav­ings deci­sion.  So, when does it make sense to con­tribute to a HSA vs FSA?      

HSA HDHP PlansUnder­stand your employer’s invest­ment options.  Many com­pa­nies out­source the man­age­ment of their HSA’s to third par­ty com­pa­nies.  The invest­ment options offered by these orga­ni­za­tions can be as sim­ple as offer­ing a sav­ings account with a min­i­mal inter­est rate to as com­pli­cat­ed as offer­ing full bro­ker­age ser­vices allow­ing one to invest in stocks, bonds and even options trad­ing. 

If your orga­ni­za­tion offers invest­ment options that essen­tial­ly amount to inter­est bear­ing sav­ings accounts, then you need to take the time to under­stand your per­son­al views of why you are con­tribut­ing to a HSA.  The obvi­ous ben­e­fit is being able to roll your mon­ey over every year.  You don’t have to wor­ry about los­ing it if you don’t use it.  But if you want to use it as a Med­ical IRA, then you will be los­ing mon­ey over time. 

Why?  Because the inter­est you would be receiv­ing on your invest­ment, espe­cial­ly giv­en today’s very low inter­est rates, would not be able to keep up with infla­tion, much less keep­ing up with med­ical infla­tion.  Com­pet­i­tive inter­est rates on bank HSAs’ is between 0.1% for accounts with low cash bal­ances to 0.55% for accounts with cash bal­ances over $25K.  Unfor­tu­nate­ly, the cur­rent US Infla­tion rate is 1.5% and health­care infla­tion typ­i­cal­ly runs more dou­ble the US infla­tion rate.  As of August 2013, it health­care infla­tion was pegged at 4.5%.  Putting hard earned mon­ey into a HSA with lim­it­ed invest­ment options is a mon­ey los­ing propo­si­tion.  In this case, it’s bet­ter to spend the mon­ey in the year you make your con­tri­bu­tion.     

 

For the Smart Saver

Con­tribut­ing to a health sav­ings account, if used wise­ly, can be an excel­lent way to save addi­tion­al mon­ey for retire­ment or med­ical emer­gen­cies tax free.  In 2014, an indi­vid­ual can con­tribute up to $3,300 a year, while a fam­i­ly can con­tribute up to $6,550.  Just remem­ber, you also need to be enrolled in a high deductible insur­ance plan.  These insur­ance plans have to have a min­i­mum deductible of $1,250 for an indi­vid­ual or $2,500 for a fam­i­ly, to be con­sid­ered a HDHP.