Problems with Health Savings Accounts (HSA)

 HSAs have been touted as the latest and greatest vehicle for consumer directed health care savings, but upon closer examination, HSAs may not live up to their billing because people are laboring under false assumptions. First, health coverage with HSAs isn’t necessarily "cheaper". Cost savings may be achieved through the use of a high deductible health plan but the savings are not always used to fund HSA contributions. Second, HSAs are not retirement savings devises. It is difficult to for most employees to accumulate money in an HSA because the account is depleted annually to cover current health care expenses. Third, HSAs are not designed to be medical cost containment mechanisms; although, they can result in postponing or foregoing medical treatment when they are marketed as retirement savings vehicles rather than tax advantaged medical expense payment mechanisms.

The U.S. Treasury Department’s publication on HSAs contains a laundry list of advantages including affordability, savings, portability and "triple tax savings." While all are true in theory, some are difficult to obtain in reality. HSAs can be more affordable because the high deductible health plan to which it is attached has a lower premium. HSAs create a portable account in which an employee can save money and accumulate earnings in a tax advantaged manner. However, an employee’s ability to achieve any savings in an HSA depends upon how much of the medical expenses are covered by the plan versus paid out of pocket by the employee.

HSAs must be part of a high deductible health plan (HDHP) that is offered on a nondiscriminatory basis to employees of a business.  A typical premium for a high deductible health plan is around $1,000 to $3,000 less than the premium for a traditional plan, largely offsetting deductibles that can be around $1,500 to $4,000 more than under a traditional plan The HSA must be held in a trust for which there is usually a fee. Any employee savings depends upon how much of the premium savings the employer passes on by lowering the employee’s required contribution for the medical plan and how much higher the deductible are in the HDHP.

HSA requirements are generally described in various IRS publications. To qualify for HSAs, the HDHP must have a minimum annual deductible of at least $1100 per individual and at least $2200 per family and a maximum out of pocket deductible cannot exceed $5500 and $11,000 respectively.  An employer, employee, or a third party can fund the minimum deductible with an  HSA .  Employees get a tax deduction for HSA contributions.  The maximum annual HSA contribution amount is the lesser of the annual deductible or $2850 for single or $5650 family coverage.  Employees over 55 can make an additional $800 contribution.  Any unused amount in the HSA can be accumulated on a tax free basis from year to year.  The HSA may be used for health care expenses on a tax free basis during the life of the employee. Amounts taken out of the HSA for non-qualifying expenses are taxable and subject to a 10% excise tax until the individual reaches age 65. After age 65, distributions from an HSA for non-qualifying medical expenses are taxable as ordinary income but not subject to a 10% penalty. Answers to frequently asked questions are available from the Treasury Department.

Generally, the HSA may only be used for health care expenses that are not reimbursed by a health plan.  Insurance premiums do not qualify as medical expenses for HSAs. However, HSAs may be used to pay premiums for long-term care coverage, or, if you are age 65 or older, other insurance premiums such as Medicare premiums, deductibles, co-pays, and coinsurance under any part of Medicare. (but not for premiums for a Medicare supplemental policy, such as Medigap).  At death, an employee’s spouse can take over the HSA in his or her name.  Any other beneficiary of the account (i.e. child or an employee’s estate), has the HSA treated as a distribution subject to tax on the FMV of the entire HSA account.  Therefore, it is not like a 401k in that there is no tax free accumulation of earnings in the account.  The best you can hope for in a HAS’s accumulation is a tax free mechanism to fund post-retirement medical expenses and long term care insurance or to make a distribution to a beneficiary who may be taxed on the FMV at a lower tax bracket.  Any scenario of accumulating money in an HSA depends upon avoiding medical expenses, which as discussed below, isn’t easily done.

The employee relations issues of HSAs stem from the design of the high deductible health plan because it puts more financial burden on employees who use the insurance than a traditional health plan would place on them.  The employee’s HSA funds the amount of the minimum annual deductible (at least $1100 or $2200) which must be satisfied before any insurance payments will be made.  After satisfying the minimum deductible, the insurance plan acts like any other insurance plan, including co-payments, out of network charges, and other individual benefit deductibles.  These other costs are only reimbursed by insurance when the maximum out of pocket expense levels are reached.  Even though the employee gets reimbursed from the HSA for the minimum annual deductible, there is still a higher than normal maximum out of pocket deductible that may not  be reimbursable from the HSA.  The HSA’s ability to reimburse maximum out of pocket deductibles depends on whether the employee has any excess accumulation in the account. Excess accumulations will only occur for years when the employee doesn’t have medical expenses that reach the minimum annual deductible. An employee who doesn’t have expenses that exceed the minimum annual deductible will not get any reimbursement from the high deductible health plan  For employees who don’t use the plan, it allows them to accumulate money in the HSA, but such accumulation has limited usefulness.