Spotlight Series: Avoiding the Pitfalls of Health Savings Accounts

Having already beaten the drum of HSAs in a previous post, it’s also prudent to identify the negative aspects that can be associated with the use of these accounts. After you’ve decided that an HSA-qualifying HDHP is for you and you’re ready to spend the year relaxing because you made an excellent decision for you and your family, there’s still more you need to do. An HSA, after all, is a tool - and tools are only as effective as the person wielding it.

You can make the most of your HSA by avoiding these main pitfalls throughout your plan year.

Allowing the fear of catastrophe to dictate choice
This is a consideration you make before selecting an HDHP and also as you use money in it. This is important to mention since most of us do a lot of worrying about the “what if” factor. Considering the possibility of something bad happening is not without value - but when it comes to a decision about your health care planning, you have to decide if that “what if” is more important than other considerations.

After we know all we can know (through data) and take care of all we want (through planning) - the thing we consider to assuage our what-if reflex is luck. How much do you want your assessment of your luck to dictate your health care plans? It’s cliche in the extreme but if you are armed with the knowledge of your OOP costs, premium costs, and a solid plan for your future and are still worried about whether an HSA is for you - you have to ask yourself if you feel lucky.

Being undisciplined with contributions
In terms of contributions, there are two ways you can miss out on the maximum advantage of HSAs - by not putting money in - and by not tracking how much money you do. Unlike an FSA however, you don’t need to track and file receipts with your company.

HSAs are advantageous in part because they allow us to re-purpose savings - but they’re only re-purposed if you use the money you would have spent in premiums to contribute to your HSA - so there is some math involved. For example, if you have an HDHP and now spend $100 less than you were spending on a low deductible/higher premium plan - it behooves you to put all if not a portion of that money into your HSA. This comes back to the house money mentality of the insurance gamble. One thoughtful approach to your long term wellness planning is to use the money that would have gone to insurance companies towards the maintenance of your health. Contributing premium savings is a way to do that.

But the limits are there for a reason and will be enforced by the IRS. Putting more money than allowed ($3,350 for Single plans and $6,650 for Family) comes with a steep penalty. You’ll owe taxes on that money anyway, eliminating the pre-tax benefits of HSAs, and also pay a 20% excise tax on the excess. Don’t also make the mistake of thinking that the contribution limit is the same as your year-end account balance. Regardless of how much you may need to take out for medical expenses, you are only allowed to put in the maximums each year, like an IRA.

There are also certain pitfalls if you don’t remain in an eligible HSA plan for a year but contributed the maximum and deducted it from your taxes -- we’ll explore that in a future post.

Trying to pay for non-medical expenses
The sexy pre-tax benefits of HSAs come in triplicate if you do all things properly. You don’t pay tax on contributions within limits, you don’t pay tax on the interest earned in the account, and you don’t pay taxes on the withdrawals you make for qualified medical expenses.

But in addition to paying fines for contributing more money than allowed, you will face a penalty if you attempt to use HSA money on something that is not a qualified medical expense. Unless you’re 65 or older, you’ll pay taxes on the cost of that unqualified expense and pay a 20% excise (punishment) tax. After 65, while you’re still taxed if you spend HSA money on something unqualified, you no longer have to pay the excise tax. While there is no comprehensive list of what constitutes a qualified medical expense, generally, the expenses must have been towards the alleviation of some physical or mental defect or illness, including dental and vision.

Not seeking medical care because of pressure to save money
Some of us might feel the pressure to save looming like a dark cloud. We fear that if we don’t put as much money as we can away and leave it there, we’re going to be screwed like the lazy grasshopper come winter. But hoarding money in your HSA at the expense of your health does nothing to benefit you and will likely work to take away the reason an HSA was good for you in the first place, your good health.

Most ACA plans include coverage for preventative care anyway, so you won’t need to use the money in your HSA. But when other things arise that don’t count under preventative care but are still within a reasonable budget without depleting your HSA, you shouldn’t fear spending your money. You get the most of an HSA by using it as a tool to maintain good health rather than simply to pay for catastrophe. Again, a fear-based mindset inhibits us from making strong choices. When we fear catastrophe we can spend too much (going to the ER when you don’t need to) or too little (hoarding HSA money) and neither helps us in the long term.

As we mentioned in the HSA rundown, a benefit of HSAs is that they help us become more conscientious about our health care spending, so by all means, go to the emergency room when it’s necessary.

Not keeping track of medical expenses
The record-keeping necessity of HSAs cannot be overstated even if they can be mitigated. You will need to track medical expenses for two important reasons - to maintain proof to the IRS that you’ve been spending the money on qualified medical expenses - and to maintain a good read on whether your annual OOP expenses remain low enough for an HSA to be valuable to you. The penalties for thoughtless medical spending may be enough of a motivator (beyond our good health) to keep strong records similar to those we keep for our taxes.

After you’ve been diligent
Seeing an increase or decrease in OOP over the course of the year will continue to help validate the benefits of your decision to re-enroll in an HDHP or switch to a low deductible/high coverage plan as health needs fluctuate.

Subscribe to get an update on our next post in the Lumity Spotlight Series as we continue to take you through the need-to-know aspects of HSAs.

You can alleviate some of the worry when considering HDHPs using estimates of OOP expenses and value-driven health plan recommendations with Lumity’s data analytics technology. Give us a call at 1-844-2-LUMITY and find out more about how data makes a difference.