Tag Archives: ACA

Contributions when Changing to non-HSA Eligible Coverage

This was a reader question submitted by HSA Edge reader Kevin. If you have a question get in touch and we’ll try to help. Email us at evan@hsaedge.com any time.

My wife and I began a HSA-eligible policy August 1 of 2016. On January 1, we will switch to a non HSA-eligible plan… and will NOT be eligible to make HSA contributions in 2017 under this plan. If so, does that mean we are ALSO not able to make contributions in 2016 (without failing testing period and paying penalty)? This seems excessive. It would seem reasonable to allow a person to make a pro-rated (5 month) HSA contribution for 2016 in this case. But I cannot find confirmation anywhere that this is allowable.

If I understand you correctly, you have HSA eligible coverage from Aug through Dec of 2016. On January 1st 2017 you are switching to a new plan that is HSA eligible but ACA modifications make it de facto HSA ineligible.

If that is true, you can definitely still contribute to your HSA for 2016 but on a pro rata basis, i.e. proportionate for the months you had coverage. By my count that is 5/12 months so your contribution limits would be:

Single coverage = 5/12 * $3,350 = $1,395.83
Family coverage = 5/12 * $6,750 = $2,812.50
If you are 55 or older add 5/12 * $1,000 = $416.67 to above amounts

Using the Last Month Rule would allow you to contribute the full amount (e.g. $3,350 or $6,750) to the HSA, but as you point out, you would fail the Testing Period next year, resulting in penalties. The key point (that I will make clearer in that article) is the Last Month Rule is optional and if you don’t use it, you can just contribute for those months that you had coverage. Often this is the safest way to play it.

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Donald Trump and the Future of HSA’s

Overview

Regardless of your political leanings, Donald Trump’s election was an upheaval which will have stark implications for health care in this country. We know he has campaigned to repeal and replace Obamacare, but exactly what he attempts to replace it with is still an open question. Based on the limited evidence that we have, Health Savings Accounts (HSA’s) will make up a core tenant of Trump’s health insurance policy. In this article we will dive into this proposal and what it may mean for the future of Health Savings Accounts.

How Obamacare nearly killed HSA’s

First a quick story. We know that the Affordable Care Act (ACA or Obamacare) is broken: not only for the insurers who lost billions of dollars in ACA markets last year, but the subscribers whose premiums are unaffordable and options severely limited. However, 2017 was to be a critical year for Obamacare regarding Health Savings Accounts, as a process designed to systematically phase out Health Savings Accounts (HSA’s) from ACA coverage began. They engineered this by making all ACA plans ineligible for HSA’s – by exceeding the limits on the upper bound. This was based on how the IRS defined HDHP’s for 2017:

For calendar year 2017, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.

So what did the brilliant engineers of Obamacare come up with? Roy J Rantham explains how they “stacked the deck” in this excellent article (from April 2016). His analysis:

Bronze standardized plans will be required to have a deductible of $6,650. This amount is $100 above the projected maximum deductible of $6,550 for HSA-qualified plans for 2017.
Gold standardized plans will be required to have a deductible of $1,250. This amount is $50 below the projected minimum deductible for HSA-qualified plans for 2017.
Bronze and Silver standardized plans will be required to have out-of-pocket limits of $7,150, well above the projected out-of-pocket limit of $6,550 for HSA-qualified plans for 2017.

In summary, Obama’s team made their ACA plans so bad that they fell outside the upper bound for what constitutes an HSA. A maximum deductible of $6,550/year is incredibly expensive, and every single ACA plan in 2017 had a higher deductible. This pattern would likely continue in future years, with HSA’s being priced out for subscribers to government run health insurance. They would no longer be an option for the ACA population, and while HSA’s would still be available for non-ACA plans, they would remain at risk in a government not favored to their existence.

Trumps Proposed Health Care Policy

While specifics are not yet available for Donald Trump’s numerous policy recommendations, we can gauge the general ethos based on his history and current documentation on his website. Trump took to his favorite medium Twitter back in February 2016 to (concisely) explain how to fix Obamacare, which made mention of Health Savings Accounts:

trump_twitter_health_savings_accounts_hsa

So a general repudiation of the signature law enacted by President Obama, with more free market choices for the consumer. Trump recently provided some specifics on his website, and the page is worth a read. There are good ideas there about making health insurance more competitive across state lines, allowing consumers to deduct health insurance premiums (like corporations), and eliminating the individual mandate. Notably for this website, he even includes a section on HSA’s saying:

Allow individuals to use Health Savings Accounts (HSAs). Contributions into HSAs should be tax-free and should be allowed to accumulate. These accounts would become part of the estate of the individual and could be passed on to heirs without fear of any death penalty. These plans should be particularly attractive to young people who are healthy and can afford high-deductible insurance plans. These funds can be used by any member of a family without penalty. The flexibility and security provided by HSAs will be of great benefit to all who participate.

Clearly Trump is in favor of Health Savings Accounts. However, like much of his policy at this time, not much exists in terms of details. That leaves us to speculate on how Trump may implement a broader HSA approach in lieu of Obamacare.

Possible Changes Trump Will Make to HSA’s

Since we don’t know exactly how Trump will further the use of HSA’s, we have come up with some predictions (suggestions?) of how he may utilize these plans to provide more Americans with better options for their health insurance. The goal of each of these would be to offer more consumers more choices to help ease the pain of rising health insurance costs.

1) Increase HSA contribution limits

One quick win would be to increase the amounts individuals can contribute to HSA’s. In 2017, the contribution limit for self-only/family coverage is $3,400/$6,750, respectively. Trump could increase those amounts to give more choices to those who can fully fund their HSA, including workers in the prime of their working years and those who receive employer contributions. Doing so would better allow them financially manage health care costs (and retirement) in the future.

2) Widen HDHP Definitions

Working in conjunction with the IRS, Trump could widen the net of to whom HSA plans apply by changing how High Deductible Health Plans are defined. By allowing more plans to be considered HDHP’s, more consumers would benefit from the option available from a Health Savings Account. For example, for self-only coverage in 2017, the minimal annual deductible could be reduced from $1,300 to $1,000 or even $500, lowering the lower bound of what constitutes an HDHP. In turn, Trump could raise the maximum out-of-pocket limit from $6,650 to $7,000 or even unlimited, which would include more plans, including all of those ACA plans that were left behind this year.

3) Increase eligibility for Health Savings Accounts

A stronger form of point 2 above, Trump could in theory make Health Savings Accounts allowable for anyone in the country, regardless of insurance coverage. Any why not? Why does someone have to have a certain type of health insurance to receive this government benefit? Is that truly “fair”? In an age where everyone’s health insurance costs are increasing, why would we limit access to a savings vehicle to help consumers manage costs? Trump could work with Congress to change HSA’s to a similar structure as IRA’s, which are allowable for anyone. Some would argue that the “rich” would receive an added $3,400 / $6,750 tax break, which is true (editor: as if this were a bad thing). However, the other side of this is anyone (poor, middle class, rich) who saw benefit could contribute to an HSA and save money on their medical expenses. In this situation, Trump would give everyone the opportunity to benefit from HSA’s equally.

4) Expand definition of qualified medical expenses

Trump has already hinted at this in the second point of his policy, which would make health insurance premiums tax deductible for individuals. In essence this makes them a qualified medical expense, but without the need for an HSA (since it would apply to everyone). The same could be done for a wider list (see page 16 of Publication 502 (PDF)) of common medical expenses that are commonly consumed, such as drugstore medications. Others include weight loss programs, cosmetic dentistry or procedures, nutritional supplements, and personal use items.

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Note: if you have an HSA, please consider trying my service TrackHSA.com for free for your Health Savings Account record keeping. You can store purchases, receipts, and reimbursements securely online.

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.