The Affordable Care Act and Health Savings Accounts

The Affordable Care Act (ACA) may allow you to open a Health Savings Account (HSA) if you have a “high-deductible” plan. Here’s how it could work and why it might be worth considering.

A Health Savings Account is a savings account that allows you to set aside money to cover medical expenses. It’s typically coupled with a health plan with lower premiums but a steep deductible, so that only catastrophic medical bills are covered.

The idea is that the money you place in the HSA can be used to pay those high deductibles if you should incur them. And you can roll them over year to year, so unlike a Flex Spending Account (FSA), you do not lose the funds in your account if you do not use them within the required time frame.

For 2014, you can contribute up to $3,300 per year pre-tax ($4,300 if you are over 55) to an HSA. Earnings are tax-free as are withdrawals if used for qualified medical expenses. “Qualified medical expenses” include:

• Medical care

• Dental care

• Vision care

• Prescriptions

• Prescribed over-the-counter medications

• Medical equipment

After you turn 65 you can also use the funds in your account to pay insurance premiums, including Medicare, and to pay Long Term Care premiums. Any withdrawals for these purposes are tax free. And, just like an IRA, you can also use the funds for any other purpose and only pay tax on the amount you withdraw.

The only restriction is that you must have a high-deductible health plan in order to make contributions to a health savings account.  That’s where the Affordable Care Act comes in since many of the “Bronze” classifications under the ACA will qualify for pairing with an HSA.

You may also set up your high-deductible health plan and health savings account separately, with two different providers. For example, while you may enroll in one of the high-deductible health plans available on the exchanges, you could consult a bank or other financial institution to establish your HSA.

So, if you are already enrolled in a “high-deductible” health insurance plan, or are considering doing so in the future, it may be worth exploring a Health Savings Account. For many individuals doing so might be the only way to make the Affordable Care Act affordable.

If anyone has any experience with a high-deductible insurance plan coupled with an HSA, please let me know how it has worked out for you.