Are These the Best Arguments That the Critics of HSAs Can Muster?

When the criticisms of a program are hollow, it's time to take a serious look at the benefits.

Since their introduction in 2004, Health Savings Accounts have help Americans save hundreds of billions of dollars in out-of-pocket medical, dental, and vision expenses. That's real savings that hard-working Americans have used to fund retirements, buy homes, take vacations, repair vehicles, and donate to charity.

I recently read an article distributed by AOL (seriously, who even knew that the company still existed, never mind that it publishes content) that outlined the benefits and drawbacks of Health Savings Accounts. The criticisms are, to put it politely, weak. In fact, their weakness merely reinforces the financial benefit of opening and funding these tax-perfect accounts. Let's review the criticisms below (with the complete text of criticisms in the article in italics and my commentary in regular type).

Enrollment in an HSA-qualified Plan

AOL: The big drawback of an HSA is that you have to sign up with a high deductible health plan to be eligible for one. It is difficult to forecast medical expenses accurately. So a family hit with a surprise medical expenses could have to spend as much as $14,100 in out-of-pocket costs in a single year before the insurance starts paying those costs.

Comment: What the article doesn't point out is that millions more Americans are enrolled in plans with high deductibles that aren't HSA-qualified than are in HSA-qualified plans. They too face very high out-of-pocket expenses with no opportunity to open and fund a tax-perfect account to pay those expenses at a 25% to 35% discount.

Yes, a family enrolled in an HSA-qualified plan might a potential $14,100 of out-of-pocket expenses. But that same family enrolled in plan with a high deductible could face out-of-pocket exposure as high as $17,400. That's right - the statutory ceiling for a family's total deductibles, coinsurance, and copays on an HSA-qualified plans is less than that for other plans with high deductibles. For high-claim patients with plans that cap out-of-pocket spending at the statutory maximum, HSA-qualified plans result in savings of $3,300 in 2022.

Limits on Tax-Free Distributions

AOL: Tax-free HSA withdrawals can be made only for qualified medical expenses, which include costs incurred to treat or avoid illness. That covers expenses such as doctor bills, prescription medications and lab test as well as insurance copays and co-insurance. However, it doesn't cover other health-related costs such as gym memberships and cosmetic surgery.

Comment: Seriously? A typical patient saves between 25% and 35% on all medical, dental, and vision expenses when reimbursing through a Health Savings Account, and the criticism is that they can't spend it on every health-related or vanity product or service? That's like criticizing an offer of a 30% discount on a visit to an all-inclusive resort because it extends the discount only to the room and unlimited food, but not drinks at the pool bar or Hawaiian shirts in the gift shop.

Penalties for Non-Qualified Withdrawals

AOL: If withdrawals are used to pay for non-qualified expenses, the IRS will levy 20% penalty on those amounts. In addition the withdrawals will be taxes as ordinary income. HSA users may have to keep detailed records showing withdrawals were used for qualified expenses, or risk these penalties.

Comment: Think about this one. Congress approved Health Savings Accounts so that people can use the funds to better manage their out-of-pocket medical, dental, and vision expenses with pre-tax dollars. The law extends tax advantages to people who use the account for that purpose. But Health Savings Account owners can also spend the funds on other expenses, subject to taxes and a 20% penalty. This structure is like a qualified retirement plan: enjoy the tax break as you save for retirement, but use the funds for purposes other than those intended under the law and face taxes and penalty. Freedom has a price! Yet no one criticizes 401(k) plans or Individual Retirement Arrangements because they reverse the tax break and add a penalty for people who use the funds for other purposes.

And those detailed records? Taxpayers who itemize deductions must maintain the same records for charitable donations, unreimbursed business expenses, mortgage statements, stock transactions, and other tax-related activity.

Fees

AOL: Other considerations include the fees that HSAs charge. While these can add up over time, they are generally much less than the potential savings on taxes that HSAs offer.

Comment: At least the article acknowledges the potential savings outweigh the potential administrative fees. Account-maintenance fees are generally low: often $3 to $3 monthly, often waived with high balances, and often paid by employers when the Health Savings Account program is workplace-based. An account owner who contributes $3,000 to pay for her child's braces or treatment for a medical condition saves between $750 and $1,000 or so in taxes. Paying $25 to $40 annually for that privilege hardly seems like a drawback. That criticism is akin to buying a $3,000 item on e-bay for $2,100, then balking at a $50 shipping charge.

I just paid a service fee of $4 per ticket to purchase online passes to a local theatre production (an anniversary gift to my wife) because I purchased the tickets online rather than visiting the box office (located an hour's drive away). I don't love fees, but I understand that the third party that maintains the ticketing software is adding value to both the theatre (more accessible tickets) and me (save time and gas money by buying tickets without leaving home). The same principle holds true for Health Savings Accounts. I don't love fees, but I love my wife and I appreciate tax savings. I'll pay a small fee if I must do so to enjoy those benefits.

Medicare Enrollees Aren't Eligible

AOL: Another limitation is that people who are covered by Medicare, which includes most people over age 65, cannot make contributions to their HSAs, although they can keep them and use them to pay future medical costs.

Comment: This is an unfortunate drawback on Health Savings Accounts - that the 60-million-plus Medicare enrollees don't have access to these accounts. If they did, they could continue (or begin) to fund accounts to reimburse their current Medicare premiums (Part B alone, which covers outpatient services, carries an annual premium of $2,000 or more) and Medicare deductibles (patients pay $1,556 for each inpatient stay, plus daily copays on longer visits) and other cost-sharing.

But it's hardly a criticism of a tax benefit that not everyone can participate. Only homeowners benefit from the home mortgage deduction, and only employees who contribute to tax-deferred workplace benefit plan receive a tax deduction for their deposits. Only consumers who buy electronic vehicles receive government rebates, and only taxpayers with children benefit from the child-tax credit or the savings associated with a Dependent Care FSA. The fact that not everyone benefits from targeted tax breaks designed to encourage certain activity is hardly a criticism of these programs - or Health Savings Accounts.

No State Tax Breaks in Two States

Finally, some states do not exempt HSA contributions from state income taxes. So while an HSA can save on federal income taxes, it may not help with state taxes.

Seriously? Most Americans pay a marginal federal tax rate of 22% (family income between roughly $83,500 and $178,000) and payroll taxes of 7.65%. That's nearly 30% savings on federal taxes. Yes, two states with high state income taxes, California and New Jersey, don't extend the tax deduction to their income taxes. But it's hardly a criticism of Health Savings Accounts that two states don't help hard-working residents more to manage their out-of-pocket costs. Even California and New Jersey residents benefit from the federal tax breaks. They simply pay a price to live in their states that residents of other states don't pay.

The Bottom Line

Owners of the more than 32 million Health Savings Accounts (with balances exceeding $100 billion) benefit from Health Savings Accounts. Like any program in the federal tax code, the benefit flow to those who engage in the prescribed behavior by virtue of knowing about it, having direct access, or qualifying due to particular circumstances. Like all tax-related activity, people who use that provision of the tax code must maintain some documentation to share at tax-filing time or retain in their tax records. Like all programs, there may be small fees associated with a third party's administration of the program.

The weakness of these criticisms confirms the benefits of a Health Savings Account.

#HSAWednesdayWisdom #HSAMondayMythbuster #HSA #HealthSavingsAccount #TaxPerfect #yourHSAcademy #yourHealthSavingsAcademy