Update on Health Savings Accounts

Recently, a number of appraisers have called me indicating rising health insurance premiums have forced them to take higher and higher deductibles in order to maintain affordable coverage for themselves and their families. They are often not aware of the existence of Health Savings Accounts (HSAs) and are surprised to learn that they can be a useful tool in the effort to keep premium costs in check while at the same ensuring that out-of-pocket costs for medical treatments do not become devastating.

There are three important HSA tax benefits:

Contributions to HSAs are not subject to federal income taxes. *

  1. Earnings to an HSA from interest and investments are tax-free.
  2. Distributions from an HSA to pay for qualified medical expenses are tax free.
  3. Money goes into and comes out of an HSA account tax-free (as long as funds are used to pay for qualifying medical expenses).
What is an HSA

In contrast to this favorable tax treatment of HSAs, most healthcare expenses are deductible only as itemized expenses, and they are typically deductible to the extent that they exceed 10% of your adjusted gross income. (HSA contributions are deductible even if you don’t itemize deductions.) As long as you later use the HSA money to pay or reimburse yourself for permissible medical expenses, then the distribution will be tax-free. This is very important to stress because it is a unique feature of HSAs: you make tax deductible contributions and yet the distributions are tax-free as long as they are used for qualifying medical expenses. Unlike flexible spending accounts offered by many employers, HSA contributions are not tied to a particular year and you don’t risk forfeiting your contribution if it is not used right away. Instead, you can carry forward unused HSA money as long as you want. It should be noted that HSA eligibility ends at 65 when you become eligible for Medicare, but you can keep the HSA account.

Appraisers are excellent candidates for HSAs since they are often self-employed and may not be eligible for employer sponsored health insurance. Further, many appraisers that I have spoken with over the past several years earn too much to be eligible for a subsidy under the Affordable Care Act (ACA), more commonly known as "Obamacare". They are in a "Catch 22" situation-ineligible for Obamacare subsidies and not covered by an employer plan.

What are the requirements for an HSA and how do you decide if one is right for you? First, you must carry an individual health insurance plan that qualifies as a High Deductible Health Plan (HDHP). That is, it must have a minimum annual deductible of $1,300 for an individual and $2,600 for a family. The HDHP cannot have annual out-of-pocket costs exceeding $6,550 for an individual and $13,100 for a family. If your plan qualifies, you can contribute up to $3,400 annually as an individual and up to $6,750 as a family. In addition, there is a $1,000 catch-up contribution allowed for those who are 55 or older by the end of 2017. So if you'll turn 55 by December 31, 2017, you can contribute up to $4,400 for individual coverage or $7,750 for family coverage toward an HSA.

All of these features make HSAs a health insurance option well worth considering for many appraisers. If your traditional individual health insurance plan consistently increases its premiums and (or) deductibles to the point that it strains your finances, you should consider this alternative. You should also consider your tax situation and ability to make regular annual contributions to an HSA.

Finally, you should think about your willingness to manage the account, check to make sure an expense is permissible and generally take a more active role in the claim payment process than is necessary with traditional health insurance. (There are banks that offer accounts specifically for this purpose with their own checks or debit cards.)

(Note from the author: When I had an HSA I found it was more work than a traditional health plan. In addition to writing checks for the premium, I had to pay doctors, hospitals and other providers until the deductible was reached. This is quite different for people who are used to going to the doctor whose office submits the bill to the insurance company with the insured then receiving an Explanation of Benefits (EOB).)

*Contributions to HSAs may be subject to state taxes in Alabama, California and New Jersey. For more information consult with your tax professional or your state department of revenue.

Paul Porter of LIA Administrators and Insurance Services has been involved in the health insurance industry since 1980. He may be reached at 800-334-0652 extension 140 or via email at [email protected].