In a recent article from Financial Planning magazine, Donald Korn writes about the thriving low-deductible plans under Obamacare. When the Affordable Care Act was signed into law four years ago, it seemed that the new law would all but bring an end to health savings accounts (HSA). Similar legislation in Massachusetts, has caused a dramatic decline in HSAs over the last several years. Much to the experts’ surprise, just the opposite has occurred. Nationwide we have seen a tremendous movement towards HSAs, or tax-advantaged vehicles available for high-deductible plans.
HSA-compliant insurance plans account for approximately 20% of the new offerings under Obamacare compared to only 7% before the law was passed. One advisor uses an example to explain this phenomenon,” Most people who pay their own premiums for health insurance on these exchanges are buying the bronze plans, which generally are the least expensive,” he notes. “With bronze plans, the minimum deductible is usually $5,000, with no first-dollar coverage except for preventative care. If people are on the hook for $5,000, they might as well get an HSA plan for the tax benefits.”
The tax benefits can be substantial for individual clients. The contribution limits for 2014 are $3,300 (for singles) and $6,550 (for family coverage), with all the payments qualifying as tax-deductible. Additionally, any earnings in the account grow tax-free and distributions are tax-free if used for qualified health costs. Perhaps the biggest advantage is that there are no income limits for contributions or phase-out’s for tax-deductibility. For clients in a high tax bracket, this can reduce your AGI and reduce exposure to the new 3.8% surtax on net investment income. As long as you use the funds for medical use at any age, the distributions will not be subject to tax or the 20% penalty. You might be wondering, what happens to those funds if I never need them for medical use? All funds already in the account can be used after you reach age 65 for any purpose, regardless of whether they are medically related or not. These non-medical distributions will be subject to tax, but will not be subject to the 20% non-medical withdrawal penalty since they are after age 65.
As the health insurance landscape continues to change in the coming years, HSAs are becoming more advantageous for individuals. If an HSA is an option available to you, advisors not only can explain the benefits, but also can help you determine which high-deductible plans will deliver the most tax-savings.