Why New York State’s Self-Employed should consider an HSA health insurance plan

Credit: 401(K) 2012 via Flickr under Creative Commons

Healthcare costs in the Empire State are among the highest in the country, especially in the downstate Hudson Valley and New York City regions. Coping with these increasing prices, which show signs of slowing but not stopping, is difficult for New Yorkers from all walks of life.

Those New Yorkers hit particularly hard by these exploding healthcare costs are the self-employed. In fact self-employed New Yorkers have repeatedly been victims of the Affordable Care Act (ACA) over the last year.

However there is a small, but significant, ray of hope for self-employed New Yorkers looking to finally start making their health insurance plans work for them instead of the other way around, and that is high deductible health savings account eligible health plans (HSAs).

What is an HSA health insurance plan?

HSA is short for health savings account, which is sort of like a bank savings account whose contents you can only use towards the cost of health care. An HSA health insurance plan typically comes bundled with a high deductible health insurance plan, known as an HSA-eligible plan.

Maybe you guessed it, but a high-deductible HSA health insurance plan has a fairly steep deductible. That is, the money you need to spend yourself on health care before your insurance kicks in and starts paying. You cannot have an HSA without a high-deductible health plan.

When you’re enrolling in an HSA-eligible health insurance plan, you are given the option to also open up an HSA through the health insurance company you’re buying from, however, you can also opt to open an HSA through another company and link it up with your health insurance. There is a pretty wide variety of HSA providers out there to choose from.

Then once you have your high deductible plan set up with your chosen HSA, you can begin paying into it. If the plan is being offered through your job typically your employer will opt to pay a certain amount each month into your HSA for you. Then you as an employee can set up an automatic contribution amount per paycheck or contribute manually when you have the money to spare.

The money that you contribute to your HSA is tax-free up to a certain amount every year. For example in 2014 the maximum you can contribute to your HSA tax-free as an individual is $3,300, and in 2015 it will be $3,350.

That money is yours and can be used tax free for any and all eligible medical expenses covered by your chosen health insurance plan. Because it’s your money, you can withdraw and use it for other purposes if you want. However doing that will incur a 20 percent tax penalty on the amount of money withdrawn.

HSAs are actually a fairly new fixture on the New York health insurance scene. They only came into existence after former President George W. Bush signed his Medicare Prescription Drug, Improvement, and Modernization Act into law back in 2003. Since then they’ve become a staple of the American health care system, even in the face of health insurance reform in the form of the ACA.

According to a May 2012 report from the advocacy group America’s Health Insurance Plans (AHIP), the number of Americans enrolled in an HSA-eligible high deductible health plan more than doubled between Jan. 2008 and Jan. 2012, going from 6.1 million to 13.5 million.

So why do I want an HSA for my sole prop?

In general, the most immediate benefit of an HSA plan is that its monthly premium amount is meager. The premium is much lower in fact than more standard comparable plans in New York State. For self-employed New Yorkers, this is a big plus, as they’re actively working and less likely to get sick.  Lower monthly premiums mean less money spent on health insurance and more money that can be invested in building the business.

Of course, this specific monetary benefit quickly evaporates if you have a medical emergency or an accident. However, it’s possible that, depending on the size of your HSA, in the event of a medical emergency the total amount of money you pay out of pocket could be equal to or even less than what you would pay with a more traditional health insurance plan.

You can invest in your health with an HSA plan

One of the more positive aspects of a high deductible HSA plan, especially from a business perspective, is that you can use it to invest in your good health now for a future where you might not be as healthy. Let me explain:

HSAs have a cap on the amount of money you can put in them during any given year. However, that money is sheltered from income taxes and rolls over from year to year. This means that if you have an HSA this year and max it out with investments because you’re having a good year running your business you can keep that money in your HSA for next year tax-free. So next year if your business is not doing as well and you get sick, you have the money in your HSA to cover your expenses.

You can also literally invest your HSA money in the market. An HSA, like a 401k, can be invested when you’re not using it as a way to grow your balance. Of course, this carries the same risks as anything does when investing in the stock market. The variety and aggressiveness of your HSA investment options will depend on the company you have your HSA through.

Exchange Plans vs. HSAs for New York’s Self-Employed

Maybe by this point, you’re interested in enrolling in an HSA plan, or at least speaking with your health insurance broker about enrolling in one. But which option would be best for you and your business, an exchange health insurance plan or an HSA?

Some of the lower level plans offered at the New York State Health Insurance Exchange, Silver and Bronze, have deductible levels that would make them HSA eligible. However these exchange plans come with smaller networks of doctors and hospitals, and in many cases, they may not even include your local doctors.

On the other hand, under the Affordable Care Act, New Yorkers with annual incomes between 133 and 400 percent of the current year’s Federal Poverty Level are eligible for a federal health insurance subsidy. This subsidy can be very large depending on your income level. The closer to 133 percent you are, the bigger the subsidy.

If you did decide to make the switch to an exchange plan, what would happen to your HSA?

That depends on if you’re signing up for an HSA-eligible plan or not. If you’re enrolling in a non-HSA eligible exchange plan then your current HSA is essentially frozen. You can still withdraw money from it for qualified medical expenses, but you can no longer make contributions to it.

If the exchange plan you picked is HSA eligible then you will need to discuss with your insurer or broker the options available to you to roll over your HSA money into a new account of continue using your current one.