The rising cost of healthcare has dominated the news cycle in recent years. A Health Affairs study projected national health care spending will grow an average of 5.5% every year through 2026. (source) A recent RBC Wealth Management study estimated that a healthy 65-year-old couple today can expect to spend more than $400,000 on health care in retirement! That is an astronomical number! Further compounding the impact on the average family is the effect healthcare premiums have on wage stagnation. The escalation of health care premiums have absorbed most or all compensation growth in recent years for many workers, thereby leaving very little to add to their paychecks. As a result, analysts are forecasting “destructive effects that exact an ever-higher claim on the American Dream of economic progress for all those willing to work for it.” (source) It is a real problem for most Americans and there are no easy answers.
For a Special Needs Family, there might not be a more important topic. Unfortunately, healthcare is a complex, complicated, and frustrating. What makes any discussion on healthcare even more challenging is that there is no one-size-fits-all solution. Those who have special needs add even more complexity to the process. If I had a nickel for every minute my wife or I spent finding in-network specialists, coordinating referrals, scheduling tests, calling the insurance company, and keeping track of co-payments and deductibles I would be a wealthy man.
Over 19.8 percent of U.S. children under the age of 18 had a special health care need representing 14.6 million children and families who experience the same frustrations. (source) Without wading too deeply into the healthcare debate I do think it worthwhile to look at a newer funding solution that just may benefit your family; the Health Savings Account (HSA).
Standard Care: Private and Public Insurance
For decades we have relied on insurance to provide for our healthcare needs. Most families probably have some form of private insurance. As the name implies, private insurance is distributed privately to individuals and families, often through an employer or other organization as part of their compensation package. Private insurance takes many forms including health maintenance organizations, preferred provider organizations, and point of service plans. They generally work the same way; by combining the risk of high health care costs across a large number of people the individual or employer will pay a premium based on the average cost of medical care for the group; making health care affordable for most people. However, not all families have quality private insurance and the type and quality of insurance will often vary. Each year it seems as if insurance plans are increasing deductibles co-pay amounts.
Fortunately we live in a generous society. Those who have a “severe” diagnosis may qualify for public insurance paid for by our collective taxes. Public insurance is funded by your local, state, or federal government and is often used by those who do not receive employer-sponsored insurance or those who simply cannot afford it. Three of the most well-known sources of public insurance that typically help families of children with special needs are Medicaid, Medicare, and the Children’s Health Insurance Program (CHIP).
Limitations of Public Insurance
Some children with special needs will qualify for Medicaid; many others will not. Individual states establish and administer their own Medicaid programs and eligibility is based on the parent’s income. For children with disabilities the parent’s income must be below 185 percent of the federal poverty level ($46,435 for a family of 4). Because middle class families typically earn too much to qualify for Medicaid, most states have what are called State Waiver Programs designed to prevent families from going destitute. Medicaid Waivers help provide services to people who would otherwise require long-term care in a treatment facility if on their own like those with severe intellectual disabilities, developmental disabilities, and autism.
When Congress authorized the 1915(c) waiver program in 1982, there was a clear intent to provide services to individuals in need of an institutional level of care who, absent the waiver program, would be receiving institutional-based services. States were required to demonstrate participants would otherwise be required to be institutionalized. Furthermore, the community-based services under the waiver were required to be no more expensive than institutional care.
Because of these limitations many children with special needs will not qualify for public insurance because of their parent’s income, nor will they qualify for a waiver program because they may not be considered “severe” enough to meet the constraints outlined in the law. Special needs children are not monolithic and are often diagnosed along a spectrum. Conditions like autism are difficult to diagnose and as such many children with less severe forms will simply not qualify for public insurance. Enter the Health Savings Account (HSA).
Health Savings Accounts (HSA)
Those families who ARE NOT receiving benefits from a Medicaid program may be eligible for an HSA. HSAs were implemented in 2004 through a change in the Internal Revenue Code to allow an individual to deduct HSA contributions from their taxes. An HSA is not something you purchase like private insurance; rather it’s a savings account into which you can deposit money on a pre-tax basis. The only product you purchase with an HSA is a High-Deductible Health Plan (HDHP), which is a requirement and will cover you should your medical expenses exceed your annual deductible. You will have two components of coverage; the HDHP and the HSA.
The HSA custodian is a bank, and the account initially works similarly to a bank account. You can make deposits and withdraw money with checks or a debit card. Once you have enough money in the account, the bank will allow you to link the account to a mutual fund or brokerage account for investment purposes. The ability to earn market returns on your savings is the true genius of an HSA.
Because you have to buy a HDHP, you will still have insurance coverage. HDHPs typically are somewhat cheaper for you on a monthly premium basis than other types of private insurance. However, when you see a doctor or have to go to the emergency room, you will likely pay more up front as a deductible before the insurance kicks in.
HSAs can be a particularly useful tool for parents of special needs children. The accounts are funded through payroll deductions, allowing workers to set aside pretax money that grows tax-free and can be withdrawn tax-free when used to pay for qualifying medical expenses. Account holders are given the opportunity for the assets to grow tax-free, and they represent an attractive option particularly for parents of special needs children whose health-care bills are almost certain to mount in the later years of life. (Source)
Shopping for health insurance means weighing the costs. Your typical co-pay health insurance is often going to seem cheaper upfront, but an HSA will often create more savings in the long run. An added benefit with an HSA is you will have more independence and autonomy in deciding where your health care money is being spent since you own and control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third-party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow. As a result, an HSA could mean you come out ahead on medical bills in the long-run.
HSA vs FSA
Heath Savings Accounts (HSA) are often confused with Flexible Spending Accounts (FSA). The main difference between the two is that the FSA is opened by an employer on behalf of an employee, whereas the HSA is opened by the individual. Since the HSA component of the plan is not insurance and must be opened with a bank or brokerage firm, it is therefore different from a flexible spending account which involves an outside provider serving as a custodian (source).
Another difference is that a FSA will often have a “use it or lose it” feature where any unused funds in the FSA will become the property of your employer if not used in the given time period. As a result, FSA holders will likely be under pressure to not over-contribute to avoid risking their money. An HSA, on the other hand, belongs to you even though an employer may contribute to the account on your behalf as a benefit to you.
Benefits of an HSA
A significant benefit of an HSA is that funds can be used for a wide range of medical services that may not typically be included in your private health insurance. For example, In addition to your full range of medical visits and specialty care, an HSA can also be used for durable medical equipment or even therapy received as a medical treatment. Additionally, it can also be used for tutoring and special schooling for learning disabilities or special education expenses. (Follow this link for IRS section 502 for an extensive list of qualified medical expenses an HSA is authorized to pay for)
One of the biggest concerns for Special Needs Families (SNF) is what will happen if a job is lost resulting in a period of unemployment, or there is an upcoming transition that will result in a period where the family may not have health insurance. Because the HSA is not tied to your employer, you will retain the ability to pay for medical expenses even in the event of job loss. The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, change employers, or retire while the funds left in your account continue to grow tax-fee.
Limitations of an HSA
HSAs are not perfect. According to the rules, HSAs are essentially limited to adults. As a result, you cannot establish a standalone HSA for your children if they are eligible to be claimed as dependents for tax purposes. Healthcare reform legislation passed in 2010 does allow adult children up to age 26 to be covered by their parents’ health plans, including high-deductible plans (HDHP). However, unfortunately the tax laws regarding HSAs have not changed. An adult child must still be considered a tax dependent in order for their medical expenses to qualify for payment or reimbursement from a parent’s HSA. This means that your child can only be covered on your HSA up to the age of 24. Fortunately for SNF, a child of any age who is permanently and totally disabled is still allowed to be under their parents HSA irregardless of age. (source)
There are also limitations in the amount of funds allowed to be contributed each year in an HSA account. In 2018, a family can only contribute up to $6,900 annually. Also true to its name a “High Deductible”, a HDHP will require you to cover up to $2700 a year for a family. While your monthly premiums are generally lower than private insurance, you do need to budget for your out-of-pocket costs and deductibles.
When you place the difference between the monthly premium in the HDHP and traditional private insurance coverage into an HSA, you are pocketing the savings. Over time this can add up and you’ll have a balance to use for medical expenses if needed. It is also important to note that preventive care such as a physical, well-child visit, vaccination, or mammogram are covered at 100% without a co-pay or deductible.
Tax Benefits and Growth Potential
The tax benefits of HSAs are quite significant. Eligible individuals can make tax-deductible contributions to HSA accounts and since funds in the account may be invested there is opportunity for tax-free growth just like your IRA or 401(k) retirement savings plan. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are also tax-free. Because healthcare suffers from significant inflation, the ability to invest and grow the premium to keep abreast, or even in some cases outpace inflation, is a tremendous advantage.
Another benefit is that HSAs with unused balances can supplement your retirement income or continue growing on a tax-deferred basis for the future benefit of your family, similar to your IRA and 401(k). Unlike most other retirement savings vehicles, there are no required minimum distributions (RMD) from HSAs. Additionally, the money you and your employer contribute to your HSA through payroll is not subject to social security (FICA) and Medicare taxes! This may allow you to leverage tax-deferred compounding growth to build up a large account for your heirs.
Your HSA has great flexibility. While your account and investment earnings grow tax-free overtime you can still withdraw your money tax-free at any time, as long as you use it for qualified medical expenses (source). Medical expenses that are deductible through an HSA follow the guidelines established for the medical and dental expense deduction on your tax return under internal revenue code section 502.
HSA and Estate Planning
If you are going to own an HSA, you should ensure you have a Special Needs Trust (SNT) in place in addition to your other estate planning documents. You do not want your HSA to contribute to your special needs child’s income should you pass away, and thereby exceed the $2000 cap established by Medicaid and trigger a loss of government benefits.
You should also pay close attention to your HSA’s beneficiary designation. When you die, any remaining HSA balance becomes the beneficiary’s property. This is not a problem if the beneficiary is your spouse. However, if the beneficiary is someone other than your spouse, such as a trust, the account no longer will qualify as an HSA and will be included in the federal gross income of your estate or named beneficiary. If you name your child’s SNT as a contingent beneficiary, your trustee should be prepared to pay taxes on the capital gains.
Is an HSA Right For You?
I’ve outlined many benefits of an HSA. Perhaps the biggest one is that an HSA allows you to be more involved with decisions on how your healthcare dollars are actually spent and encourages you to budget effectively to save money over the long-run. To determine which is the best solution, you should look at your financial situation and the type of healthcare you and your family require and conduct a thorough cost-benefit analysis.
HSAs aren’t ideal for everyone. If having a high deductible seems too risky, or if you anticipate having significant routine health care expenses, a plan with a lower deductible and lower co-pays like traditional private insurance might make more sense. Before committing to an HSA plan, you will want to compare the flexibility and tax advantages of HSA distributions with the coverage offered by low-deductible, but typically higher premium, traditional health plans to determine which option is right for you. Until you do, do not make assumptions which plan will ultimately come out ahead. It may surprise you.
For more reading on HSAs there is a nice guidebook at: https://healthequity.com/doclib/hsa/guidebook.pdf
For those interested in pursuing an HSA, it pays to compare and shop around. The White Coat Investor also has a nice post on the Best HSA Accounts: https://www.whitecoatinvestor.com/the-best-health-savings-account/