How the Affordable Care Act affects HSA’s

With the recent train wreck of an implementation of the Affordable Care Act (i.e. Obamacare), many are wondering how their HSA plans are affected. Are there still HSA plans available? What has changed?

The good news that HSA plans are still available and, given current incentives from the administration, will likely continue to grow in popularity. However, the administration has used the 1000+ page Affordable Care Act (2010) to take a few hits at HSA plans.

Major changes to HSA plans

  • Increased penalty for early withdrawal of funds. Previously, if you needed to withdraw funds for non Qualified Medical Expenses, the penalty was 10% of the withdrawal. Now, the administration has upped this penaly to 20%. Thus, further care should be considered when planning your finances as the penalty is higher – even though it is your money.
  • Over the counter drugs (except insulin) are no longer a Qualified Medical Expense. Previously, spending on medical related over-the-counter drugs that you find at a local pharmacy were considered QME. However, these are no longer considered QME, so only prescription drugs will qualify.
  • Coverage for dependents ends at age 24. Unlike regular health insurance plans that can cover dependent up until the age of 26, HSA plans are only eligible to cover dependents until the age of 24.

Like the majority of the healthcare market, Obamacare has affected the HSA industry with the above (arbitrary) changes. The changes seem punitive in nature in that they reduce the benefits of an HSA. It is a shame that the administration does not use the law to create advancements in HSA policy but instead uses it to penalize hard working savers.

Choosing an HSA Plan under Obamacare

Either way, the HSA is still the best way to save for your future medical care and retirement. Don’t let the changes hold you back.

If you are purchasing health insurance on a state exchange, you still need to make sure your plan meets certain requirements to be considered eligible for an HSA. You can review the 2014 HSA Plan Definitions and ensure your plan fits. Likely, these will be in the Bronze and Silver categories.

The short answer is your plan will need to a have minimum yearly deductible of $1,250 / $2,250 (individual / family) and a maximum out of pocket expense of $6,350 / $12,700. If your plan falls within these guidelines, and you are not a dependent, have other health insurance, or be on Medicare, you can open an HSA. See the full guidelines here.

What if I already have an HSA plan and need to change?

If you already have a health savings account and are required to change plans, you have a few options.

Ideally, you could change into a plan that is also HSA compatible (see above). That way, you can still contribute to your health savings account and continue to save and invest for the future. Nothing materially changes with your HSA except for your health insurance provider.

However, you may find that you are purchasing a new plan that is not HSA compatible. In this case, you can no longer make contributions to your HSA but, have no fear, the money is still yours (forever). In this case, you have a few options:

  • Continue to purchase qualified medical expenses using the HSA until it is depleted. In that case, you have saved yourself your expense x your tax rate since HSA contributions are tax free.
  • Make qualified medical expenses using a non HSA account. This creates unreimbursed credits that you may withdraw in the future. That way, these monies may grow safely in the HSA tax free. See the article Using your HSA like an ATM.
  • Withdraw your HSA account (not recommended). Unless you really need the money, you should not withdraw from your HSA for non-qualified medical spending. If you do so, you incur a 10% 20% penalty against that money you withdraw. You can thank changes to HSA’s resulting from the ACA for that (see above), and this is quite a steep penalty indeed.

2014 HSA Contribution Limits, Minimum Deductibles and Maximum Out of Pocket Expenses

For reference, here are all HSA relevant limits, maximums and minimums for the year 2014.

The federal government continues to increase the amount you can contribute to your HSA, but at a snails pace. The $50 increase in contribution limit compared to 2013 represents a 1.5% increase. With Obamacare, federal reserve printing, and business taxation, do you think healthcare costs are growing above or below 1.5% per annum?

2014 HSA Limits
2014 2013 2012
HSA Contribution Limit Individual: $3,300
Family: $6,550		 Individual: $3,250
Family: $6,450		 Individual: $3,100
Family: $6,250
HSA Catch up Contribution (55+) $1,000 $1,000 $1,000
Minimum Deductible to Qualify for HSA Individual: $1,250
Family: $2,500		 Individual: $1,250
Family: $2,500		 Individual: $1,200
Family: $2,400
Maximum Out of Pocket Expenses for HSA Individual: $6,350
Family: $12,700		 Individual: $6,250
Family: $12,500		 Individual: $6,050
Family: $12,100

The Difference Between HMO and PPO Plans

There are often a lot of questions about the differences between HMO’s (Health Maintenance Organizations) and PPO’s (Preferred Provider Organizations) insurance plans.  Understanding this difference can help you select the best insurance plan for your situation and family.  Moreover, people wonder if an HSA (Health Savings Account) is also an option, and how this relates to the big picture.

First, Understand Your Plan’s Network

An insurer has a unique network of doctors, care centers and hospitals that they partner with. Because they have contracts and partnerships, they work together to provide you care at pre-determined rates. Additionally, since they are aligned with costs, billing, and procedures, the process is much easier for the patient. Basically, they know what to do and how to handle your case.  Visiting a member of this partnership is considered in-network care and is significantly cheaper than any other alternative.  Basically, you want to receive care in-network if possible.

Out-of-network care are providers outside of this realm and are generally more expensive. These hospitals/providers are not in your insurance company’s “club” and you do not gain the “club’s” advantages by visiting them. Because they do not regularly do business together, their cost structure, billing, and information exchange may be separate or disjointed. More importantly, in-network providers have a quid pro quo type of relationship. Since they work together, they agree to bill each other at reduced rates and generally make things easier all around. This is completely lost when you visit out-of-network providers, and you may be surprised how expensive some procedures can be. As you can imagine, reimbursement rates are lower (if at all) for out-of-network care. This means you end up paying the entire bill for out-of-network care.

Both HMO’s and PPO’s have in-network and out-of-network care. The difference is how much of each is covered by insurance.

HMO (Health Maintenance Organization)

The main tenant of an HMO is that you select a primary care physician (from a list) who manages your health care. Think of this as the family doctor that you see first whenever something happens. When you fall sick, he assesses your symptoms and either prescribes medicine or schedules further tests. Often times, visiting other specialists requires a referral from your physician, so in this regard they act as a gatekeeper. Many people find confidence in developing a relationship with their doctor, which can lead to better care. For others, the process is more indirect and time consuming.

HMO’s have a smaller network than PPO’s. It is more localized with fewer options, which will often be determined by the doctor. Think of it this way: you fall ill, visit your doctor, who points you to the specialist who is in network. Just because the network is smaller does not mean that the coverage is any less excellent; the “club” is just smaller. Moreover, cost of in-network care at HMO’s is the lowest. This is your return for following the rules and visiting your physician. The downside is that out-of-network care is often much more expensive and may not be covered by the HMO.

PPO (Preferred Provider Organization)

The PPO is based on a network of “Preferred Providers” through whom you are allowed to schedule care. While you may have a primary care physician, you do not need referrals or to see them before seeing a specialist. Instead, you can research which specialists are considered preferred in your plan’s network and make an appointment. This list of “Preferred Providers” constitute the in-network portion of care. This network is generally larger than a HMO’s network.

PPO’s also have an advantage in out of network care. Because they are larger, they have more contacts with other networks and can afford you cheaper care should you venture out-of-network. Check your plan for details, but many PPO’s offer coinsurance for out-of-network care, which can help you should you require it. Moreover, monthly premiums are generally lower for PPO plans, while in-network rates may be slightly higher than HMO’s.

General Comparison of PPO vs. HMO
HMO PPO
Primary Care Physician Yes No
Referral for Specialist? Yes No
Network size Smaller, local Larger, broader
Monthly Premiums Generally higher Generally lower
In-Network Lowest rates Low rates
Out-of-Network May not cover May reimburse a %
Copay Often Often
HSA eligible Some Some



How does an HSA fit in?

People often wonder how an HSA relates to a PPO or HMO. A succinct summary of the difference:

Your health insurance plan is either an HMO or PPO, which may also qualify you to open an HSA

Thus, they are two separate characteristics.  Your plan’s network and cost structure is determined by whether it is an HMO or PPO.  Your ability to contribute to save money tax free is determined by whether that plan is HSA eligible. You can have a PPO, a PPO with an HSA, an HMO, or an HMO with an HSA. You can’t just have an HSA, because it is an benefit allowed by health insurance plans that are HSA eligible. According to the AHIP’s Center for Policy research, the majority (80-93% across groups) of HSA plans were in PPO products.