Wednesday, September 24, 2014

Health Insurance Exchange: Turning bronze into gold!

If you are one of the thousands of Washington residents purchasing their health insurance from the state exchange then you should consider the potential benefits of selecting a bronze level plan and pairing it with a Health Savings Account.  Not all of the bronze level plans offer HSA accounts so be sure to verify the plan details when purchasing your insurance from the exchange. 

This option is especially attractive for people in good health and looking to save for future medical expenses.  The bronze level plans have the cheapest monthly premium, but they also require you to pay the most out-of-pocket.  Again, this is a nice offset for someone in good health.  In this case, you are purchasing insurance to protect yourself from a catastrophic event.  Under the bronze level plan, the maximum annual out-of-pocket expenses range from $5,250 to $6,350 for individuals.  So, be prepared to pay if you incur a catastrophic health event.  Obviously, this may be a poor strategy for someone with a lack of emergency funds.
In addition to offering the lowest monthly premiums, the bronze level plans allow you to establish a health savings account (HSA).   Health savings accounts allow you to deduct contributions from your income taxes (up to annual dollar limits).  Funds within the HSA may be used to purchase and hold investments.  The gains realized on these investments are tax free as long as the money is left within the HSA account.  Finally, the money within the account may be distributed tax free as long as the funds are used for qualified medical expenses. 
In addition to the traditional tax benefits of an HSA, the Affordable Care Act has created a fourth possible tax benefit.  If you purchase your insurance from the exchange then your contributions towards an HSA will lower your adjusted gross income and may help you qualify for federal tax credits to pay for your health insurance premiums. 
The best part is the HSA is your money!  Think of these funds as another form of retirement savings. The money stays with you forever, even if at some point down the road you switch to a silver or gold level insurance plan and are no longer eligible to continue future contributions.  Once you reach the age of 65, you can withdraw your HSA funds for any reason without penalty.  After turning 65, if you use the funds for non-medical expenses, you will have to pay regular income tax on the withdrawals.  Upon your death, the account is transferred to the beneficiary listed on your account.
There is no perfect answer when trying to evaluate your health insurance options but this is a strategy that should be considered very carefully by individuals and families who are young and in overall good health.  There are many options to choose from and many variables at play.  All you can do is make an educated decision.
Nick S. Wold, CPA, MA