Financial planners have been encouraging the use health savings accounts for several years, but for all the tax advantages of these plans, are the underlying health insurance plans appropriate for the insureds?
At the base of a health savings account is a high deductible health plan that meets specific federal requirements. Deductibles and out of pocket limits are prescribed by the government annually so please do not assume that, just because the deductible in your plan is “high”, it meets the criteria to be eligible for H.S.A. treatment. Another idiosyncrasy of a qualified high deductible health plan is that all claims must apply to the deductible before the insurance company can participate in claims. This means that a true H.S.A. eligible high deductible health plan will not have copays for services like office visits, prescriptions or emergency room charges. The effect this has on the insured needs to be addressed before the tax advantage is considered.
In a year in which individuals have low claims costs the ability to pay these claims with dollars spared from taxes is a wonderful benefit. Do remember that these claims will be billed at the discounted rate, and that this will generally be higher than copays in a comparable non-high deductible health plan.
In the same way, if individuals have a year with very high claims and meet their out of pocket maximums, they would have saved paying the higher premiums and had the same claims expenses as in a copay plan.
The problem that we see is that individuals often elect high deductible health plans over copay plans without properly educating themselves on the differences in plan design. There are many situations where the slightly higher premiums for copay plans are actually advantageous. Too often we hear the lament after a claim has been incurred and the patient discovers that the actual cost is much greater than the amount expected.
Even more traumatic is when individuals thought that their medical plans were H.S.A. eligible and they funded H.S.A. accounts. At that point a quick phone call to the accountant is in order as something must be done to notify the IRS of this particular error.
In short, please read plan options very carefully before making plan choices and be sure to verify your plan is an H.S.A. eligible high deductible health plan before opening or contributing to a health savings account. Great tax savings may not offset extra claims costs.
Questions? Contact us at Czajkowski Dumpel & Associates, Inc. – We are here to help!