Tag Archives: HSA Benefits

Can I Use My HSA to Pay for Spouse’s COBRA Premiums?

This question was submitted by an HSA Edge reader. Feel free to send in your question today to evan@hsaedge.com.

I will be going on Medicare soon however my spouse will not be eligible until 7 months later. She will continue on COBRA coverage on my old plan. Can I use my HSA account to pay premiums entirely for her COBRA plan? Several sites I have searched on state only the amount over 10% of income like a medical deduction.

Being on Medicare does not affect how money in your HSA can be spent. One of the great things about HSA’s is that your contributions remain yours forever, so you can keep them and spend them how you like. This is true whether you change insurance, employers, or even retire and go on Medicare. The real question here is whether you can treat your spouse’s COBRA continuation coverage as a qualified expense and pay it from your HSA.

We know that HSA contributions can be a great safety net, as they can be used to pay for insurance premiums when you are receiving unemployment benefits or are on COBRA coverage. We also know that all of the benefits of your HSA extend to your spouse and dependent’s qualified medical expenses. Luckily, these two uses combine such that you are allowed to pay for COBRA coverage for your wife or dependents.

More explicitly, IRS Form 969 calls out the COBRA coverage for spouses in the “Insurance Premiums” section:

HSA-pay-COBRA-coverage-for-spouse

Thus, I see no problem with using HSA funds to pay for your spouse’s or dependent’s COBRA continuation coverage. This is another great benefit of HSA’s in that they can be used to provide for your family when they are in need or need care. As an aside, that 10% rule you mention generally applies to deducting large scale medical expenses compared to your income, which is separate (and not as useful) as an HSA.

Note: to help track your spending on eligible COBRA insurance premiums, please consider my service TrackHSA.com for your Health Savings Account record keeping. You can store purchases, upload receipts, and record reimbursements securely online.

Health Savings Accounts – the Pros and Cons

Overview

A frequent question those considering Health Savings Accounts often ask is, “What are the Pro’s and Con’s of HSA’s”? There are many different aspects of HSA’s that may benefit your particular situation, but there are some disadvantages as well. To clarify the issue, we have summarized the pro’s and con’s of Health Savings Accounts in a digestible format. Hopefully this information can help you decide if participation in HSA insurance is right for you.

The Pro’s of HSA’s

There are many reasons that Health Savings Accounts are beneficial and can help your family financially. Enrolling in HSA eligible insurance and opening a Health Savings Account can offer you the following benefits:

Lower Insurance Premiums

A core tenant of High Deductible Health Plans (HDHP’s) is a trade off of lower monthly premiums in exchange for a higher deductible. This reduces guaranteed costs (premiums) at the expense of occasional costs (deductible). This benefits healthy individuals and those that can pay for limited out of pocket care.

Lower Cost of Health Care

Part of the HSA’s triple tax advantage is that qualified medical expenses are paid on a tax free basis. The actual mechanism occurs first through tax free contributions to a Health Savings Account, then spending those dollars on qualified medical expenses. By not paying tax on healthcare, you reduce your cost by your marginal tax rate, which can be 15%, 25%, or 35%.

Lower Taxes

HSA’s are an effective vehicle to lower your income tax burden. For those in strong financial standing, they can allocate part of their income to an HSA instead of paying full taxes on it, creating a nest egg and lowering that year’s taxable income.

Keep the Money Forever

Unlike Flexible Spending Accounts (FSA’s) whose contributions expire at year end (the horror!), anything you contribute to your HSA remains yours for life. There is no need to operate under a “use it or lose it mentality”. This makes an HSA an investment since it becomes savings that you can spend as you see fit.

Get Started Quickly

Unlike other health plans and savings vehicles, you can open Health Savings Account very quickly. It does not require much paperwork or employer approval; all you really need are an HDHP and an account with a financial institution. Moreover, in the first year you can utilize the Last Month Rule to contribute the max amount, even if you only had partial year insurance.

Retirement Investment Vehicle

A major benefit of HSA’s occurs when the account holder turns 65, at which point HSA funds can be spent on anything without penalty. This differs than prior to age 65, when using HSA’s for non qualified medical expenses invokes both tax and penalty. Note that HSA funds spent on non qualified medical expenses will be taxed (like a 401(k)) but not penalized. However, the benefit is they would have grown tax free in your HSA. That means you can save diligently through your working years, spend what you need on medical, and use the rest to pad your retirement account.

Unemployment Safety Net

Health insurance premiums are generally not considered a qualified medical expense. However, if you are collecting government unemployment benefits, you are allowed to spend your HSA on health insurance premiums during that time. That means your HSA can function as your own unemployment insurance and help you through difficult times after losing a job.

Employer Contributions

If you are so lucky that your employer makes contributions to employee HSA’s, you may be able to receive some of that free money by signing up an HSA. This incentive can factor into your calculation when determining what type of insurance to buy.

The Con’s of HSA’s

Even though there are many positive aspects of HSA’s, there are some Con’s as well. Generally these involve the insurance itself and the IRS rules surrounding the account mechanics. Either way, it is important that you are aware of the following when making a decision about HSA’s.

Reduced Insurance Choices

Since not all insurance plans are HSA eligible, if you want an HSA you will be restricted to a subset of health insurance plans. These plans may or may not fit all of your health care needs, so be sure that your needs are being met by the insurance. In that regard HSA eligibility may be a “bonus” or a secondary factor in deciding which insurance to purchase.

Higher Deductible

The increased deductible required by HDHP’s is a reality that can cause financial hardship. It is not fun to have to spend $X,000 before your insurance kicks in, and the higher the number, the more you spend first. That is why if you have high medical costs an HDHP may not be the best fit for you.

Money tied up for Health Care

One downside of HSA contributions is that they are illiquid. Once they have been contributed, they are designated for medical expenses and nothing else. This can cause financial issues when you have a bunch of money in your HSA but have a non-medical need for the cash. There are a few ways to cash out an HSA but they often involve taxes and penalty.

Risk of Penalty and Fines

There are quite a few rules that govern the use of HSA’s, and some of them are very specific and (dare I say) onerous. By using an HSA you receive benefits but run the risk of putting yourself in a position to actually pay penalties if something goes wrong. The most common cause of fines is the Last Month Rule, so it is in your interest to familiarize yourself with it and other HSA rules.

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Note: if you have an HSA, please consider using my service EasyForm8889.com to complete Form 8889. It is fast and painless, no matter how complicated your HSA situation may be.

HSA vs. FSA – How to choose between a Health Savings Account and a Flexible Spending Account

HSA vs FSA: which is better?

The age old debate – which should I use, a Health Savings Account or a Flexible Spending Account? Maybe both? Each person’s health care situation is different with different needs and objectives. The goal of this article is to educate you on the similarities and differences so that you can choose the plan that makes sense for you and your family. But the name of this site may provide a hint as to which (I feel) is superior.

Flexible Spending Account defined

A Flexible Spending Account (technically, Arrangement) or FSA is an employer established benefit plan that allows employee and employer contributions to a tax advantaged account to offset the cost of medical expenses. Contributions and distributions to/from the account are tax deductible if they are used for qualified medical expenses. FSA monies generally expire at the end of the year, sometimes with a 3 month grace period or maximum amount ($500) allowed to be rolled over.

Health Savings Account defined

A Health Savings Account or HSA is a tax advantaged account managed and owned by the individual used for medical expenses. Only individuals with certain types of insurance (High Deductible Health Plans, or HDHP’s) are allowed to open HSA’s. Monies contributed to, or distributed from, HSA’s are tax deductible if they are used for qualified medical expenses and have advantages if saved for retirement. HSA funds are owned by the individual, can be invested, and remain theirs forever.

Differences between HSA and FSA

While they sound similar, there are subtle differences between Health Savings Accounts and Flexible Spending Accounts and how they operate.

	FSA	HSA
Established by	Employer	Employer or Individual
Insurance Required?	No	Yes
Type of Insurance?	Any or none	HDHP only
Managed by	Employer	HSA holder
Contribution Amount	Determined at enrollment	Determined during year
Contribution available	Immediately	As contributions occur
Contribution method	Deducted from paycheck	Deducted from paycheck or contributed post tax
Contribution Limit	$2,550	$3,400 / $6,650 (single / family)
55+ Contribution Amount	none	$1,000
Ideal Contribution	Amount you will spend that year	max Contribution Limit
Unused Contributions	Expire at year end	Yours forever
Invest Contributions	No	Yes
Prior Year Contribution	No	Yes
Employee leaves job	Unspent contributions lost	Takes HSA with them
Self Employed	Ineligible	Eligible
Tax reporting	none	IRS Form 8889
Retirement benefits	none	many

As you can see, the list is long and there are some key differences there. Overall, HSA’s appear more flexible and offer more options for how you manage those contributions long term.

Similarities of both HSA’s and FSA’s

Being government sponsored and tax friendly accounts, both Health Savings Accounts and Flexible Spending Accounts share some similarities in how they operate.

	FSA	HSA
Employee Contributions	Yes, optional	Yes, optional
Employee Contributions	Yes	Yes
Payroll Contributions	Yes	Yes (optional)
Tax Deductible	Yes, if spent on Qualified Medical Expenses	Yes, if spent on Qualified Medical Expenses
Can be spent on	Qualified Medical Expenses per IRS 502	Qualified Medical Expenses per IRS 502

Advantages of HSA over FSA

There are many advantages of a Health Savings Account over Flexible Spending Accounts, and I believe it to be the better plan all things considered. The biggest one is that HSA contributions are yours forever, no matter if you change jobs, change insurance, get fired, get old, retire, or what have you. They are yours to keep and can be spent on qualified medical expenses in a tax free manner at any time (or year) your wish. That is huge because you worked hard for that money, you shouldn’t forfeit it because the year changed. The fact that HSA contributions remain yours have other benefits, too. It provides flexibility to spend them as you need them, not try to cram all of your spending into the given year. You can save them for a rainy day, and even invest and grow your HSA. Once you turn 65, your HSA can be spent on whatever you want without penalty (you just pay tax on it, which you would have paid anyway). Hopefully at that point, your tax rate is low and and your HSA has grown for many years tax free. In this way, it is similar to a 401(k) or IRA investment account

Advantages of FSA over HSA

Notice in the “Differences” chart that the Contribution Available row for FSA says “Immediately”. That is because employers actually make the full year’s FSA contribution at the beginning of the year, and you pay them back every paycheck throughout the year. So for example, if you elect to contribute $24 to your FSA, on January 1st the employer puts $24 in your FSA. That money is immediately available and you can go out that day and spend $24 on a copay (for example). The advantage is the employee gradually “pays back” the contribution through the year, which smooths the contribution and doesn’t take so much out of pocket. So in each bimonthly paycheck that year you pay back $1, which is a huge cash flow advantage.

This advantage can (perhaps nefariously) be taken a step farther. With an FSA program, employers take on the risk of gain or loss with each employee’s FSA account since they make the full year contribution at the beginning of the year. This is because employees can leave or be terminated throughout the year. This occurs because 1) employees are not required to pay back spent but not contributed FSA amounts, and 2) employees do not receive FSA benefits that are contributed but not spent. This is best illustrated with some examples:

1) Employee wins

Let’s assume that John signs up for an FSA and contributes the full amount for 2015, $2,550. This amount goes into his account immediately at the beginning of the year, so on January 1st his employer contributes $2,550 to John’s FSA. Per the FSA, John agrees to contribute $2,550 over the course of the year, so John will have $106.25 deducted from each bimonthly paycheck. Let’s say on January 4th John has a surgery and uses his full FSA to pay for it. His account is now at $0, he has spent $2,550 and has contributed $0. On January 7th, John gets an offer from BigCorp and decides to leave his FSA employer. Guess what – John does not owe back the FSA amount of $2,550. Employees are not responsible for making up FSA amounts spent but not contributed You read that right, as John gets away free and the employer takes it on the chin.

2) Employer wins

However, the reverse is also true. Assume Paul elects to contribute the full amount of $2,550 to his FSA for 2015. Paul is healthy and doesn’t spend anything through December, and has diligently contributed $106.25 from each paycheck. He has an FSA with $2,550 available to spend and has personally contributed something like $2,444 as of December 15th. The next day, his company BigCorp lays off John unceremoniously just before the holidays. Unfortunately, John is given no warning and cannot spend the $2,550 in his account. This amount will expire when he is terminated and all of that money he contributed is lost. Ironically, the employer recognizes this unearned money as a gain.

Choosing between an HSA and FSA

As you can see above, there are many factors that apply to Health Savings Accounts and Flexible Spending Arrangements. Some of those may apply to your situation, and some may not. You will probably give some factors different weight in your decision than I do in mine. That said, here are some general guidelines in choosing between an HSA and FSA. [Note that you generally cannot contribute to both an HSA and FSA in the same year unless your FSA is a limited-purpose, or HSA compatible, FSA].

All things equal, choose the HSA. You will thank me later.
If there is money on the table, that should weigh heavily. If your employer is generous enough to contribute to a program free of charge to you, that is probably a good choice to make.
Choose an HSA if your spending is long term. If you are considering contributing amounts close to the max of either plan, the HSA will allow you to keep those amounts and roll them over year over year.
If your only option is FSA, choose it, but contribute wisely. You definitely still want a tax advantaged plan for your medical spending, and an FSA will do this. However, be very cautious over contributing to an FSA as you will lose that money at year end (or be forced to buy a bunch of stuff you don’t really need).

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Note: if you do go with an HSA, please consider using my service TrackHSA.com to manage your Health Savings Account. You can store purchases, receipts, and reimbursements securely online.