Now that President Donald J. Trump and a Republican-controlled Congress have delivered a glimpse of their plan for repeal and replace of the Affordable Care Act, it’s time to take a closer look.
In particular, let’s review health savings accounts and how they can help your clients.
With ObamaCare in peril, the “replacement” portion of the repeal equation promises a good dose of HSAs. With that in mind, it's about time advisors educated clients (especially older ones) on the pros and cons of HSAs.
HSAs are tax-advantaged savings vehicles, funded with pre-tax dollars, usually with employer contributions, that enable users to pay for medical services when they need them. The plans are portable, never expire, and allow users to keep plan assets they don’t use, on a tax-free basis.
Traditionally, HSAs were limited to medical consumers with high-deductible health care plans (defined as plans with $1,300 in deductibles for individuals, and $2,600 for families.). But in the past few years, companies have been rolling out HSAs to curb costs, and give employees another health care insurance option.
In 2015, 30 percent of U.S. companies offered Health Savings Accounts, according to the Employee Benefit Research Institute.
All told, between 20-22 million Americans are currently enrolled in HSA-eligible health plans, according to EBRI.
Besides the high-deductible plan provision, there are several other rules that apply to HSAs:
• The HSA enrollee cannot be covered by any other health insurance plan, such as a spouse’s plan.
• The HSA enrollee must be under age 65.
• The HSA enrollee cannot be claimed as a dependent on someone else’s federal income tax return.
Popular Among Consumers
Consumers who have HSAs seem to approve of them.
“We actually enrolled in an HSA for the first time in December and doubled down in January because of the uncertainty with regard to ACA and health insurance in general,” said Nick Braun, owner of PetInsuranceQuotes.com, in Columbus, Ohio. “As a small business owner it's been frustrating trying to find a stable, consistent plan for my young, growing family.”
Braun invested in an HSA to hedge against the uncertainty with his family’s health insurance, he said.
“Now we have $13,500 to use to pay for our son's health care and my pregnant wife's needs,” he added. “As an entrepreneur, health insurance has been a nightmare so having cash in the bank provides us additional security during a turbulent time.”
HSAs are an indication the system needs to change to empower patients and physicians to work together to provide the most appropriate and cost-effective treatment, experts say.
In addition to HSAs, “the government must require that all doctors, laboratories, hospitals and other services post their rates, and cash must be the least expensive rate,” said Dr. Kent Holtorf, the medical director for The Holtorf Medical Group, and outspoken critic of the Affordable Care Act. “With these entities competing against one another, costs will plummet and quality will improve,”
Some laboratories and doctors and others will take up to 70 percent less if paid in cash at the time of service, Holtorf said. “With cash as leverage, as in HSAs, CT scans and MRIs, usually billed $2,500 to $3,000 to insurers, are contracted at a rate of $300. And colonoscopies that doctors bill at $1,500 are done for $400.”
Financial experts agree that HSAs offer several advantages.
“It’s the only place in the U.S. tax code where you can contribute money pre-tax and then withdraw the funds for health care expenses without taxation,” said Greg Sanders, a financial advisor with Peachtree Insurance Advisors, in Marietta, Ga.
“Even if you're healthy and rarely see the doctor, HSA funds can be used for dental, vision, and alternative health care.”
HSAs are an “above the line” deduction on your 1040, so it will reduce your taxable income “dollar for dollar,” he added. The money can grow on a tax-deferred or tax-free basis (tax-free if the money is spent on qualified health expenses).
For higher income earners, this is a very smart way to purchase health insurance, Sanders added, noting that a high-deductible health plan (HDHP) is a requirement for an HSA.
“Some folks are nervous about plans that don't have copays for doctor visits and prescription drugs,” he said. “However, when you do the math, the numbers favor HSA compatible plans - even if you meet your deductible every other year.”
For financial advisors, Sanders advised using an online calculator to accurately gauge out-of-pocket costs of both HSA plans and traditional plan. Similar calculators will determine tax savings potential.
With the ACA on the brink, expect HSAs to flourish. That’s reason enough for financial advisors to get to know HSAs, before they recommend them to their clients.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at firstname.lastname@example.org.
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