First of a three part series: The Benefits of Health Saving Accounts
Written by: The Deerfield Team
Not many people know about the benefits of Health Savings Accounts (HSAs), a relatively new addition to the healthcare menu. With premium healthcare costs during retirement for the average couple recently estimated at over $260,000,¹ starting a tax-advantaged savings account for health expenses now may make the future a bit more manageable from a financial standpoint.
In July 2015, CNN Money published an article titled, “Why your next dollar shouldn’t go to your 401(k).” The author argues, in spite of conventional wisdom, that contributing to a Health Savings Account may make more financial sense than contributing to a 401(k). Published on the heels of a 23% increase in the number of HSA accounts in a year,² the article reflects the growing popularity of this relatively new addition to the healthcare scene. With annual per capita healthcare costs topping $9,000 per year in the U.S.,³ setting aside pre-tax income for potential future health care costs is a wise decision for people of all ages, and the sooner the better of course.
What exactly is an HSA?
Sometimes referred to as a “Medical IRA” or “Medical 401(k),” a Health Savings Account is a tax-advantaged IRA-like creation designed for people covered under a High-Deductible Health Plan to pay for qualified medical expenses, including dental and vision. To qualify, the individual must not be covered by “other insurance,” including a spouse’s Flexible Savings Account (FSA).⁴ The account may be set up with any qualified trustee or custodian.
Anyone, including employers on behalf of employees (restrictions apply), can make a contribution to an HSA account, but total contributions are limited to a maximum each year, currently $3,300 for an individual and $6,550 for a family and if you’re 55 or older you can contribute an extra $1,000 which means $4,300 for an individual and $7,550 for a family. Contributions can be invested in financial assets like stocks & bonds for the long term. The account is portable and therefore belongs to the individual, no matter what employment changes they undergo.
Tax advantages of an HSA
Possibly the most attractive aspect of HSAs is that they enjoy a lot of tax advantages. Contributions to the account are deductible from taxable income, income & capital gains occurring inside the account are tax deferred and distributions for qualified medical expenses are not considered taxable income.
A little Background
The American healthcare industry has been struggling for many years from problematic & stubborn cost increases. In 2014, the U.S. ranked last among eleven wealthy countries in healthcare, with significantly more money per capita and a higher percentage of GDP or Gross Domestic Product spent on healthcare than in any other country.⁵ Several attempts have been made at health care reform to address issues of quality, efficiency, and equity in the industry. In 2003, as an answer to those rising costs, the Medicare Prescription Drug, Improvement, and Modernization Act was signed by President George Bush, creating Health Savings Accounts to replace the Medical Savings Account system.
CDHPs and HSAs today
HSAs and HDHPs fall under the category called Consumer Driven Health Plans (CDHPs), which offer a combination of high-deductible plans with relatively lower premiums, supplemented by a savings account for expenses. CDHP proponents want to put more control in the hands of consumers so that they have more skin in the game as it were. Paying more out-of-pocket should make individuals better consumers, more aware of fraud and unnecessary services and less willing to put up with poor care. Wiser consumers could drive change in the industry from the bottom up, forcing service providers to compete with each other and provide better care and lower costs.
Consumer driven health plans, like everything else in healthcare today, are controversial. Liberals argue that individuals in HDHPs are more likely to avoid getting needed care, including services and medications, because of the cost.⁶ This issue would be particularly pronounced for those with poor health or lower incomes. Many studies have attempted to analyze these issues, including the Rand Corporation.
CDHPs have also always lagged behind traditional plans in terms of enrollee satisfaction. Nevertheless, satisfaction rates have been trending upward for CDHP enrollees and downward for traditional enrollees,⁷ and the number of CDHP enrollees has been growing.
In 2015, HSA assets exceeded $28 billion in a record 14.5 million accounts, according to Devenir’s mid-year report. The report also stated, “The average investment account holder has a $14,656 total balance,” and investors received “an average annualized return of 11.3% on their HSA investments over the last three years.”⁸ Please don’t think those types of returns are the norm because they certainly are not. Three or four percent seems infinitely more likely going forward.
HSAs offer incredible tax advantages and are an interesting, often overlooked option on the healthcare market. If you are eligible for or currently covered by a high deductible health plan, we recommend you consider investing in an HSA for medical costs in the immediate future and in retirement.
In two upcoming articles, we will compare HSAs with other kinds of savings accounts and describe how to start and use an HSA.
As always, we are here to help you any way we can. Please don’t hesitate to call or email if you need us.
The Deerfield Team
8. Devenir “2015 Midyear Devenir HSA Research Report”
Centers for Disease Control and Prevention, Faststats: Health Expenditures. http://www.cdc.gov/nchs/fastats/health-expenditures.htm
Devenir, “2015 Midyear Devenir HSA Research Report,” August 11 2015. http://www.devenir.com/research/2015-midyear-devenir-hsa-research-report/
Employee Benefit Research Institute, “’Satisfaction Gap’ Narrows Between Traditional and Consumer-Driven Health Plans,” July 16 2015. http://www.ebri.org/pdf/PR1133.CEHCS.16July15.pdf
HealthView Services, “2015 Retirement Health Care Cost Data Report,” 2015. http://www.hvsfinancial.com/PublicFiles/Data_Release.pdf
HSA Resources, Frequently Asked Questions. https://www.hsaresources.com/faq/#opening-06
K. Davis, K. Stremikis, C. Schoen, and D. Squires, “Mirror, Mirror on the Wall, 2014 Update: How the U.S. Health Care System Compares Internationally,” The Commonwealth Fund, June 2014.
S. R. Collins, “Health Savings Accounts and High-Deductible Health Plans: Why They Won’t Cure What Ails U.S. Health Care,” Invited Testimony, Committee on Finance, Subcommittee on Health, United States Senate Hearing on “Health Savings Accounts,” September 26, 2006. http://www.commonwealthfund.org/publications/fund- reports/2014/jun/mirror-mirror
This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015