HSAs Part II: Funding Hacks, Resources and Smart Healthcare Decisions
I’ve already explained the economic and tax advantages of HSAs.
Now, let’s talk about how to optimize HSA funding with an IRA rollover to provide a “cushion”, some resources for where to spend your HSA funds on everyday “health expenses”, and how to be a smarter healthcare consumer.
Funding – IRA to HSA Rollover
Married couples can contribute up to $6,900 annually to HSAs. Generally, open enrollment season is in October or November, but benefit changes technically don’t go into place until January first of the following calendar year. You have to wait until your HDHP plan goes into effect to contribute to your HSA.
So, you start the year with the low premium health plan, but no funds in the HSA. Here’s a way around that—the IRA > HSA Rollover.
This is the HSA funding hack most folks don’t know about.
The IRS allows a once per lifetime IRA > HSA tax-free rollover for the joint-filer maximum annual contribution amount of $6,900.
November Year 1: Elect HDHP/HSA
January Year 2: IRA > HSA rollover
This solves a major problem for new HSA owners—where do we find the cash for out of pocket expenses in year 1? With tax-free access to $6,900 of IRA funds, you have a cushion for spending and head start on building the HSA medical account war chest for future years. Generally, IRA owners would pay a penalty and taxes for accessing IRA funds prior to age 59 ½ (save for a few exceptions). This HSA rollover rule relieves some cash flow issues of starting an HSA.
Be wary of some restrictions on this strategy. First, this is a once per lifetime benefit. Second, if you have to keep the health plan for twelve months, otherwise the distribution is disqualified and you will pay taxes and a 10% penalty on the IRA distribution.
Everyday Items You Can Buy with HSA Funds
HSA qualified spending is very broad, and folks should always seek to purchase items “tax-free.” HSA holders can make tax-free purchases of birth control items, sunscreen, athletic braces, shoe inserts, prescription sunglasses, sleep aids, and almost anything in the “health aisle” at the local drug store. You can see a list here at HSAstore.com, which is an excellent resource for practical HSA advice and a market for HSA qualified items.
How to Be A Better Healthcare Consumer
HSA Accounts incentivize people to make smart healthcare choices. They care about cost and value for procedure X— and might ask:
What does this hospital charge for procedure X?
How have others faired after having procedure X by this hospital?
Making these basic economic value decisions is new for healthcare consumers, but luckily there are some new helpful startups to assist.
Startups like Amino and Healthy Hive are compiling health data across the country to help consumers research the best providers for specific services. While the most prestigious hospital might be the choice for cancer treatment or complex brain surgeries—local hospitals can be a better value for more routine or basic procedures.
A Little More on How HSAs Help Solve a Major Healthcare Problem For the US
The way we pay for healthcare is broken. Our health insurance system is somewhat of an anomaly when compared to other insurance markets in the US. Think about owning a home or a car—both of which require insurance. We pay a monthly premium, but all non-major expenses are paid out of pocket with insurance claims only covering major or catastrophic events.
Pop a tire in your car? Pay out of pocket. Get in an accident? File an insurance claim.
Busted hot water heater? Pay out of pocket. Tree falls on your house? File an insurance claim.
With healthcare, nearly every payment goes through insurance. No matter how minor the healthcare needs, patients present their insurance card at the visit. They will usually pay a small co-pay for that day’s visit, with insurance handling the rest.
The actual cost of the service is between the medical group and the insurance provider. Most medical services are routine—the human equivalent of an oil change or rotating the tires—but as consumers, we often have no idea what an x-ray or blood test costs. Economic laws of supply and demand aren’t present here.
As a result, folks are more inclined to have everything done at major, prestigious, expensive hospitals. It doesn’t “cost” them anymore, and these hospitals are perceived to be the best.
But without knowledge of true cost, and often times little comparative understanding of service quality (some big hospitals aren’t great at routine procedures, but charge extensively for the service), the entire healthcare market becomes severely distorted and inefficient.
Here’s a characterization from a Harvard University article on the economic distortions of paying for healthcare services vs. “Basic Economic Principles”for all other free-market exchanges for goods and services.
Basic Economic Principles for non-health care related free market exchanges
The main interested parties are the buyers and sellers in the market.
Buyers are good judges of what they get from sellers.
Buyers pay sellers directly for the goods and services being exchanged.
Market Prices are the primary mechanism for coordinating the decisions of market participants.
The invisible hand, left to its own devices, leads to an efficient allocation of resources.
Paying for Healthcare Services
Third parties -- insurers, governments, and unwitting bystanders--often have an interest in healthcare outcomes.
Patients often don't know what they need and cannot evaluate the treatment they are getting.
Healthcare providers are often paid not by the patients but by private or government health insurance.
The rules established by these insurers, more than market prices, determine the allocation of resources.
In light of the foregoing four points, the invisible hand can't work its magic, and so the allocation of resources in the healthcare market can end up highly inefficient.
Just imagine never having to “pay” for any service to your car. You would choose the expensive dealership for even small, routine service, who would charge many multiples vs. the local mechanic, and bill that out to your insurance company. Also, it turns out that the dealerships weren’t doing a good job and many cars had serious problems after procedures like replacing brake pads—and this required more work, insurance payments, etc. No one would be surprised if monthly car insurance premiums skyrocketed, big dealerships and car insurance companies profited, and small mechanics all went out of business.
The HSA helps with the highlighted items above. Folks are incentivized to treat health insurance like they would with car or homeowners’ insurance. Pay most things out of pocket (tax preferred) and use insurance for only major items. This is smart consumerism, and when it happens across markets, it creates greater efficiency.
Over the long term, HSA owners will have greater funds available and more flexibility to make a smart healthcare decision.
Disclosure: Claro Advisors, LLC ("Claro") is a registered investment advisor with the U.S. Securities and Exchange Commission ("SEC"). Information contained herein is for educational purposes only and is not to be considered investment advice. Claro provides individualized advice only after obtaining all necessary background information from a client. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. It is for informational and planning purposes. Nothing herein shall be construed as an offer or solicitation to buy or sell any securities. Nor is it legal or accounting advice. Investing carries risks and expenses and involves the potential loss of investment. Past results are not indicative of future results.