HSA / Health insurance questions

[taking fire]

I know that a health savings account is what HSA is. That's about all I know.

I was curious how some of you all use these, and how they are different from a typical health insurance plan. Would somebody please explain the differences to me?

[immocardo]

Essentially an HSA account is something that you can put pre-tax money into in order to save for future medical costs.  Any money invested in your HSA is YOURS TO KEEP.  This is different than an FSA (flexible spending account).

In order to have access to an HSA you must be enrolled in a high deductible health insurance plan (one that specifically states that it allows an HSA).

Most of the responses for this forum will be strong advocates for maxing out your HSA.  Here is a link for contribution limits

http://www.hsacenter.com/2015-hsa-contribution-limits.html

An HSA is seen as a "triple" advantaged retirement account because:

1) You can put money in it before tax (just like a 401k)

2) Any investments in your HSA will grow tax free

3) It can be used to pay "qualified" medical expenses.  If you choose to instead pay for these medical expenses with cash, you can save documentation and withdraw that amount of money from your HSA tax free at any date in the future.  This allows that money to continue growing tax free.

[Jack]

An HSA is essentially like an extra IRA that's even better because you can withdraw an amount equivalent to your medical expenses entirely tax-free. (Not just tax-free growth like a Roth IRA, or tax-deferred principle like a traditional IRA, but tax free principal and growth like a hypothetical IRA that would work like a traditional on the front end and a Roth on the back end.)

Instead of paying for medical expenses from the HSA directly, pay with after-tax dollars in the short term and then withdraw for living expenses after FI-- just keep your medical receipts forever so that you can match them up if the IRS asks.

(If you max out your HSA every year and wait a long time to withdraw from it, and aren't disastrously sick, it might grow so much you won't have enough medical expenses to take out all of it. In that case, the remainder just works like a traditional IRA.)

[rubybeth]

I know that a health savings account is what HSA is. That's about all I know.

I was curious how some of you all use these, and how they are different from a typical health insurance plan. Would somebody please explain the differences to me?

Well, an HSA on its own is not a health insurance plan. In order to fund an HSA, you have to have a qualifying High Deductible Health Plan (HDHP). These plans differ from regular health insurance plans in the US in that you pay for everything (except qualifying preventative care) up to your deductible. Generally, HDHPs are less expensive than traditional plans, but you may pay more out of pocket for care, up to the deductible or maximum out of pocket limit. But if you generally don't visit the doctor much, or get many prescriptions, it can be a good deal. Even if you do visit the doctor a lot and get prescriptions, it can still be a good deal because you save and invest within the HSA.

For example, in a traditional plan, you visit the doctor and may pay a $10-20 co-pay as your portion of the cost, get an Rx, pay $10. But if you visit a doctor with a HDHP, you get a bill for the full amount (let's say $150 for your visit, $50 for the Rx). You can use your HSA dollars to pay for the visit and the Rx, tax free. The way I like to do this is by putting the medical bills on my travel rewards card, then reimburse myself from my HSA later. You can also save up your receipts for qualifying medical expenses and reimburse yourself at any time--so you could do it annually, or wait until you FIRE to get some cash flow tax-free.

Also as another example is my husband with a chronic condition. He has a HDHP with a deductible of $2,000. He can easily meet this deductible at the beginning of each year, and then everything after that is covered--we can save $3,350 for him in an HSA the same year. We can either reimburse ourselves right away for the $2,000 in care, and then have $1,350 remaining in the HSA (like a savings/investment account) that can grow, or we can let the full amount grow, and reimburse ourselves later. Right now, we have more in our HSAs than our deductibles for 2016, but we'll still be fully funding at least my HSA in 2016, so we'll have even more savings.

Does this help you to see the advantages?

[RonMcCord]

Not OP, but I also need to get insurance and I don't know what kind of plan to get and have some other questions regarding ACA.  I make less than 20k a year and rarely ever go to the doctor.  I currently only take prescription eyedrops, but no other meds.  I know everyone here swears by a HDHP/HSA, but is that the best way to go for me?  Also, I've been facepunched in the past for making so little when I could easily be making more, so I've been looking for a new job.  Say I get a plan through the exchange, and based on my income I qualify for a large subsidy, but partway through the year I get a better job with a salary that pushes my income out of that subsidy bracket.  What happens then?

[Blueskies123]

I recently learned that there are restrictions on HSAs if you get all the different
 types of  insurance subsidies.

[Jack]

I make less than 20k a year... I know everyone here swears by a HDHP/HSA, but is that the best way to go for me?

With that little income, an HSA probably isn't useful, for several reasons:

• You might be eligible for Medicaid or a totally subsidized ACA plan that isn't high-deductible, or something like that.
• Unless your expenses are really crazy low, you probably can't afford to save more than the $5500/year IRA max. It's less hassle (no saving receipts) to have an IRA, and if you're in the 0% tax bracket (see next point) an HSA is no better than a Roth IRA anyway.
• IRAs count towards the Saver's Credit, while HSAs do not. At your income level, the Saver's Credit could almost certainly reduce your taxes to $0.

[boarder42]

Also the HSA can be treated just like a Trad IRA once you reach 65.  Meaning even if you have no medical expenses and build up a pile of money in your HSA, once you turn 65 all this money can be accessed just like a TRAD IRA ... you do however pay normal income taxes on it at this point.  So if you're always healthy and never use it, you just got an extra 3500 per year into what is essentially an IRA.  The more you save pretax the better off you are, assuming you make much more than you live on, which most here do.

[ThirdTimer]

I'm not the OP, but I have a question about this as well. I'm about to start a new job that has a HDHP as an option, but the employer doesn't offer an HSA for employees, just an FSA. So how does that work for me? Can I just go out and find an HSA on my own, and put the money into it? Would that mean that I'd pay with after-tax dollars, then get the taxes refunded at tax time?

[Spork]

I'm not the OP, but I have a question about this as well. I'm about to start a new job that has a HDHP as an option, but the employer doesn't offer an HSA for employees, just an FSA. So how does that work for me? Can I just go out and find an HSA on my own, and put the money into it? Would that mean that I'd pay with after-tax dollars, then get the taxes refunded at tax time?

Does the plan explicitly state "HSA compatible?"  I'm pretty sure HDHP isn't enough on it's own. 

[boarder42]

I'm not the OP, but I have a question about this as well. I'm about to start a new job that has a HDHP as an option, but the employer doesn't offer an HSA for employees, just an FSA. So how does that work for me? Can I just go out and find an HSA on my own, and put the money into it? Would that mean that I'd pay with after-tax dollars, then get the taxes refunded at tax time?

its not ideal.  start pushing you're employer to evaluate an HSA as an option b/c FSAs are terrible when considering their counterpart.

Think of it like an IRA you put money in and then claim it on your taxes at the end of the year.  So you save tax dollars.  BUT you do miss out on the FICA deduction this way.  If your employer lets you deduct it, it doesnt even hit FICA.  so you save an additional 7.5%

[boarder42]

I'm not the OP, but I have a question about this as well. I'm about to start a new job that has a HDHP as an option, but the employer doesn't offer an HSA for employees, just an FSA. So how does that work for me? Can I just go out and find an HSA on my own, and put the money into it? Would that mean that I'd pay with after-tax dollars, then get the taxes refunded at tax time?

Does the plan explicitly state "HSA compatible?"  I'm pretty sure HDHP isn't enough on it's own.

it just has to meet the requirements. 

ind. Min Dedudctible must be AT LEAST 1300 - Family 2600
Ind. Max out of pocket can be NO GREATER THAN 6550 - Family 13100

 

[rubybeth]

I recently learned that there are restrictions on HSAs if you get all the different types of  insurance subsidies.

Like what? I have not heard of this and can't find any evidence that it's true.

[RonMcCord]

I make less than 20k a year... I know everyone here swears by a HDHP/HSA, but is that the best way to go for me?

With that little income, an HSA probably isn't useful, for several reasons:

• You might be eligible for Medicaid or a totally subsidized ACA plan that isn't high-deductible, or something like that.
• Unless your expenses are really crazy low, you probably can't afford to save more than the $5500/year IRA max. It's less hassle (no saving receipts) to have an IRA, and if you're in the 0% tax bracket (see next point) an HSA is no better than a Roth IRA anyway.
• IRAs count towards the Saver's Credit, while HSAs do not. At your income level, the Saver's Credit could almost certainly reduce your taxes to $0.

I make too much for Medicaid.  I can get a Bronze plan for free or a heavily marked down Silver plan.  Bronze would probably be best, but there's still the issue of what kind of plan I should get (HMO, POS, etc.)  I contacted my GP to see what networks he's under but he hasn't responded yet.  As for the IRA stuff, I don't entirely understand it, but right now I'm saving up for emergency funds and moving to a new place when I get a better job, which will most likely be in a metro area.

The only other question I have is what happens if I get a plan through the exchanges, I get the subsidy, and then get a better job that pushes me into the next bracket, or I move out of state.  Healthcare.gov wants you to estimate what you will make next year for the subsidy, and I have no idea when/if I'll get anything better.

[Spork]

The only other question I have is what happens if I get a plan through the exchanges, I get the subsidy, and then get a better job that pushes me into the next bracket, or I move out of state.  Healthcare.gov wants you to estimate what you will make next year for the subsidy, and I have no idea when/if I'll get anything better.

My (possibly incorrect) understanding is that it all gets sorted out on the next year's taxes.  If you didn't get enough subsidy, it is a credit.  If you got too much, you pay it back.

[Jack]

As for the IRA stuff, I don't entirely understand it

If your adjusted gross income is $18,250* or less and you contribute at least $2000 to an IRA, then you get a tax credit (the Saver's Credit) of $1000 (or your total tax liability, whichever is less).

I'll run through an example (follow along on IRS forms 1040 and 8880*):

For this example, assume you file as 'single,' make $20K in W-2 income (and nothing else), can afford to contribute $2,000 to an IRA, have one exemption, take the standard deduction, and have no other complications.

Form 1040:

Line 7 (wages) and 22 (total income):	$20,000
Line 32 (IRA deduction) and 36 (total "above-the-line" deductions):	$1750
Line 38 (adjusted gross income):	$18,250
Line 40 (standard deduction):	$6,200
Line 42 (exemptions):	$3,950
Line 43 (taxable income):	$8,100
Line 44 (tax):	$813
Line 51 (saver's credit -- same as 8880 line 12):	$813
Line 63 (total [net] tax):	$0

Form 8880:

Line 1 (IRA contributions):	$2,000
Line 5 (net contributions):	$2,000
Line 6 (contributions vs. limit):	$2,000
Line 8 (adjusted gross income -- same as 1040 line 38):	$18,250
Line 9 (multiplier):	0.5
Line 10 (gross credit):	$1,000
Line 11 (limitation based on tax liability -- same as 1040 line 44, in this case):	$813
Line 12 (net credit):	$813

As you can (hopefully) see, making sufficient IRA contributions saves you not just the amount of the contribution multiplied by your marginal tax rate, but that plus $813. If you put the money in an HSA instead your AGI would be $18,000 but you would not get the Saver's Credit, so you'd have to pay $788 in tax.

Note that the IRA deduction on 1040 line 32 is different from the IRA contributions on 8880 line 1. This is because, of the $2000 total, $1750 would be traditional and $250 would be Roth. Once you get to $0 tax liability, additional traditional IRA contributions can't lower it any further, so you might as well make any IRA contributions above and beyond that as Roth contributions so you don't have to pay any tax on them at all (neither now nor later!). That's the same benefit you'd get from an HSA, without having to save receipts.

(* I'm mixing a 2015 form 8880 with a 2014 form 1040, so some of the limits might be a little off.)

[ThirdTimer]

I'm not the OP, but I have a question about this as well. I'm about to start a new job that has a HDHP as an option, but the employer doesn't offer an HSA for employees, just an FSA. So how does that work for me? Can I just go out and find an HSA on my own, and put the money into it? Would that mean that I'd pay with after-tax dollars, then get the taxes refunded at tax time?

Does the plan explicitly state "HSA compatible?"  I'm pretty sure HDHP isn't enough on it's own.

it just has to meet the requirements. 

ind. Min Dedudctible must be AT LEAST 1300 - Family 2600
Ind. Max out of pocket can be NO GREATER THAN 6550 - Family 13100

 

Thanks, boarder. This plan does meet the requirements as it has a minimum deductible of $1400 ind/$2800 family, and an OOP max of $2800 ind/$5600 fam. Too bad I can't get the FICA deduction, too. I'll talk to HR to see if they'd consider setting one up down the road. It seems like it'd be a win for them, too, because I assume they wouldn't have to pay their half of FICA, either, right?

[boarder42]

I'm not the OP, but I have a question about this as well. I'm about to start a new job that has a HDHP as an option, but the employer doesn't offer an HSA for employees, just an FSA. So how does that work for me? Can I just go out and find an HSA on my own, and put the money into it? Would that mean that I'd pay with after-tax dollars, then get the taxes refunded at tax time?

Does the plan explicitly state "HSA compatible?"  I'm pretty sure HDHP isn't enough on it's own.

it just has to meet the requirements. 

ind. Min Dedudctible must be AT LEAST 1300 - Family 2600
Ind. Max out of pocket can be NO GREATER THAN 6550 - Family 13100

 

Thanks, boarder. This plan does meet the requirements as it has a minimum deductible of $1400 ind/$2800 family, and an OOP max of $2800 ind/$5600 fam. Too bad I can't get the FICA deduction, too. I'll talk to HR to see if they'd consider setting one up down the road. It seems like it'd be a win for them, too, because I assume they wouldn't have to pay their half of FICA, either, right?

not sure about them avoiding FICA havent looked into it b/c it doesnt affect me.

[hope2retire]

Say I get a plan through the exchange, and based on my income I qualify for a large subsidy, but partway through the year I get a better job with a salary that pushes my income out of that subsidy bracket.  What happens then?

While filing tax returns, you have to submit a form 1095-A that you can download from the exchange  where it will give break for every month what subsidy you received. You have to attach this form and while filling out the tax return(say in turbo tax), it will ask a question like Did you buy health insurance thro' market place or something?. when you check this box, it will automatically ask you to fill the information from the form you downloaded from the exchange. Then it will determine at the end of the year, you still qualified for those subsidies and it will deduct from the tax return.

Uncle Sam is always watching your wallet, so you cant get away with it.


h2r

[Penny Lane]

Wait-- at 65, does the remainder of your HSA become like a Roth or a trad IRA? 

[Nothlit]

Penny Lane, starting at age 65, if you withdraw for non-medical reasons you pay regular income tax (but no additional penalty) so it is like a Traditional IRA. Of course you still have the option to withdraw for qualified medical expenses and pay no taxes, even after age 65.

To be clear: this IRA comparison only applies to withdrawals. You must still be enrolled in a qualifying HDHP in order to make contributions to an HSA, regardless of your age.

[Penny Lane]

Thanks, Nothlit; for some reason, I thought the opposite.  In my early 60's so will be relevant soon.