The BullNBear Corner

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Why 80% of Obamacare plans are ineligible for this tax break

MARKETWATCH 11:05 AM ET 3/29/2016

Only 19% of marketplace high-deductible plans are HSA-eligible

The high-deductible health plan and the health-savings account: we tend to think of them as the peanut butter and jelly of consumer-driven health care. Yet the two aren't in fact inseparable, causing many consumers in high-deductible plans to miss out on possible tax savings, according to a recent study.

A study early this year (http://www.valuepenguin.com/2016/01/get-health-savings-account-hsa-if-you-can) from ValuePenguin, a financial education website, found that only 19% of health plans on the federal Obamacare marketplace were eligible for health savings accounts (HSAs), even though the vast majority of them had high deductibles. HSAs help ease the financial burden of high-deductible plans by allowing workers to sock away pretax money to pay for qualifying medical expenses before their deductible is reached and the health plan's coverage kicks in. When a marketplace health plan is eligible for an HSA, the consumer in that plan would have to go to a nearby bank or other financial institution to open his own account -- an extra step, for sure, but one that can reap rewards down the line.

Since HSAs are portable and never expire, tax-free funds can be withdrawn for eligible medical expenses now or in retirement. "They are really advantageous," said Jay Savan, a partner at Mercer, a consulting firm in Atlanta.

Savan said he was surprised at the study's findings, that so few high-deductible plans qualified for an HSA on the federal marketplace. Deductibles have risen steadily in recent years, pushing up consumers' out-of-pocket expenses along with them. Those without access to an HSA won't reap any tax savings when they pay for these expenses.

For those with individual coverage through the federal Obamacare marketplace, the average combined medical and drug deductible for 2016 bronze plans is $5,719 and for silver, $3,075, according to Avalere Health. Among those with group coverage through their job and a general annual deductible, the average deductible for single coverage was $1,318 in 2015, versus $917 in 2010, according to the Kaiser Family Foundation.

As the ValuePenguin study illustrates, simply having a high deductible doesn't qualify a health plan for an HSA. The plan also has to meet Internal Revenue Service criteria that stipulate plans cover only certain preventive services, such as immunizations and cancer screenings, before the deductible is met. Under these guidelines, consumers would have to pay the full, negotiated amount for all other services, like a sick visit to the doctor, until they hit their deductible.

Paradoxically, the roughly four in five federal marketplace plans that don't qualify for an HSA are ineligible because they are a bit more generous than the regulations stipulate. They cover additional benefits before the deductible, which could include specialist visits or prescription drugs, beyond those that the regulations allow.

As currently structured, the government requirements for HSA-eligible plans require an unfortunate trade-off, said Len Nichols, a health economist and director of the Center for Health Policy Research and Ethics at George Mason University in Fairfax, Va. Consumers can either reap the immediate benefits of additional coverage before the deductible, or they can benefit from longer-term tax savings if they put pretax money into their HSA and then withdraw it tax-free to pay for qualifying expenses (earnings on the account also grow tax-free).

In crafting their plans as HSA-ineligible, the insurance carriers have made a calculated judgment call, experts say: they have decided that the additional, pre-deductible health benefits will appeal more to consumers than the potential tax savings that come from an HSA. "Generally, carriers don't create plans that people don't want to buy," Savan said.

This might hold true for lower-income Obamacare enrollees. More than 80% of enrollees are eligible for government subsidies that help offset their premium costs, and for them the more generous coverage before the deductible might indeed outweigh potential tax savings, Nichols said. While these consumers could benefit from an HSA if offered one, the more immediate wallet impact for them comes from having more services covered before the deductible, Nichols said.

A recent study by the Robert Wood Johnson Foundation found that, for a majority of consumers, the price of the monthly premium was the driving factor when selecting a health plan on the Obamacare marketplaces. High-deductible plans tend to have lower premiums than plans with lower deductibles and more comprehensive coverage before the deductible.

However, the pendulum could swing in the other direction for other Obamacare enrollees, especially those who make too much to qualify for premium subsidies. A successful, self-employed entrepreneur might prefer the ability to sock away tax-advantaged funds over the ability to fill another prescription before the deductible. In that case, her options on the federal marketplace are relatively limited.

For those who have an HSA and take a strategic approach to their account, the savings can be "fairly substantial," said Mike Thrasher, research analyst at ValuePenguin, who worked on the study. The maximum contribution allowed into an HSA for 2016 is $3,350 for individuals and $6,750 for families. One effective way for people to use health-savings accounts is to sock away money for a planned procedure, such as Lasik eye surgery or a root canal, Thrasher said.

The savings could look something like this: On $3,000 in medical bills, a Florida resident with a total tax rate of 32.7% who makes $50,000 in adjusted gross income will save $1,206 in taxes with an HSA, according to the ValuePenguin analysis. A New York resident with the same salary and medical bills and a total tax burden of 41.6% would save $1,885.

While relatively few Obamacare enrollees with high-deductible plans are eligible for such savings, many more of those with group insurance benefits have access to an HSA. Some 87% of large employers who offered high-deductible health plans offered them paired with an HSA, according to the National Business Group on Health, a nonprofit organization that represents large employers on health policy issues.

Employers see HSAs as an attractive benefit for their employees, so they offer plans that meet the Internal Revenue Service specifications, said Brian Marcotte, president and CEO of the National Business Group on Health. To ease the sting of the high deductible, large employers contribute a median $750 annually to employees' accounts, he said.

Those who are unsure whether their high-deductible health plan is eligible for an HSA can call their insurer to ask.

-Elizabeth O'Brien; 415-439-6400; [e-mail]

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03-29-161105ET
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