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Alternatives to Health Savings Accounts

by Tony Novak, CPA, MBA, MT, last revised 7/5/2012

Some people are disappointed to learn that they do not qualify for a Health Savings Account (HSA) due to the restrictions built into our tax taws or a lack of available quaifying health insurance. This relatively new type of health plan was introduced in 2004 to help individuals and employers save money by promoting lower-cost health insurance costs and adding a tax-deductible savings account to cover most out-of-pocket health costs. Less than two percent of Americans actually use HSAs. The vast majority of us still need to find alternate ways to control health care costs and cover unexpected out-of-pocket costs when necessary.

This article does not cover the many reasons most people cannot use a Health Savings Account since that topic has been covered at length in other articles reprinted at TonyNovak.com and in other publications. This article focuses only on the alternatives that may be available to replicate the tax and insurance savings of a health savings account.

Other employer-sponsored health plans

A Health Reimbursement Arrangement (HRA), Flexible Spending Account (FSA) or Medical Expense Reimbursement Plan (MERP) are attractive options when an employer wants to cover out-of-pocket health expenses for employee.

Unused benefits can accumulate year after year in some HRAs but ultimately the unused benefits revert to the employer. The employee does not receive a cash value for the residual plan balance.

A similar design that allows employees to use their own salary to pay for health benefits on a pre-tax basis is called a “Flexible Spending Account” or “FSA”. The Flexible Spending Account plan has a “use it or lose it” feature that limits the benefits to the current year. Both of these are employer-sponsored plans so an employee cannot enroll in one of these plans without the employer’s sponsorship.

These plans cost about $1000 for initial setup at a typical small business, but often save thousands of dollars in wage taxes and health insurance premiums over time. More detail on both of these plans can be found at www.FreedomBenefits.org. A chart comparing all three types of plans is available from the “Resources” page at www.healthsavingsaccount-hsa.com. Neither of these employer-sponsored plans can be used by self-employed people.

Self-employed pension plan

Retirement plans can be designed to provide provisions for out-of-pocket medical expenses. For self-employed people, it is also easy to incorporate coverage for post-retirement out-of-pocket medical costs into a more comprehensive retirement plan. The liberal designs allowed in pension plans make these natural vehicle to fund post-retirement health benefits.

Since self-employed individuals operating as a proprietorship, S-corp, LLC or partnership typically cannot have their business cover current out-of-pocket health expenses on a pre-tax basis, other compensation options and strategies are often welcome. 

See the pension plan page at www.FreedomBenefits.org for details.

PPO discount plans

One of the most important but often overlooked benefits of an HSA is the discount pricing applied to expenses that would otherwise be paid at a provider's higher cash billing rates. This same benefit can be replicated without the need for other insurance or a HSA.

Almost anyone who pays cash for health care expenses can save money by using a PPO discount plan that covers medical visits, prescriptions, dental care, vision and other related expenses. A PPO plan member typically pays about 25% less than a cash-paying patient for the same services.

Unfortunately a number of disreputable PPO plans have entered the market and are currently being promoted on the Internet. A good plan should cost less than $20 per month (inclusive of medical, dental, prescription and vision) for a family plan and should offer you a free trial period to test the amount of the network discounts like the PPO discount plan from Careington at www.ehealthdiscountplan.com. An article that helps make the distinctions between PPO plans titled “Comparing Health Discount Plans” can be found at TonyNovak.com on the article page.

Low cost health insurance plans

Most low cost health insurance plans are not HSA plans. There may be other insurance options that save money by cutting out benefits that you do not need or limit the length of coverage to the time you expect to need the insurance. If you have a clear medical history then a discounted "preferred risk" rate plan may be available. See FreedomBenefits.net for a listing of low cost health insurance plans. Low cost health insurance plans are currently not available in Massachusetts, New Jersey, New York and Vermont.

IRA accounts

IRA accounts may be used to cover medical expenses in the same manner as an HSA except that the withdrawals are taxable. The chart below summarizes the differences. IRAs are available to a much wider range of individuals than a health savings account. See the account disclosure forms that include details on tax treatment of IRAs.

 

Individual Retirement Account

Health Savings Account

Typical maximum contribution

$3000

$2600 (single) $6150 (family)

Are contributions tax deductible?

Yes, for most people

No, unless in a qualified health plan

Health insurance Requirement?

No

Yes, specific coverage is required.

Penalty for medical expense withdrawal? No No
Penalty for non-medical withdrawal? Yes if early withdrawal and other exceptions do not apply Yes

Are withdrawals for medical expenses taxable?

Yes

No

Status: available for reprint

This article is available for republication in its entirety without charge after obtaining the express written permission of the author.

Please e-mail a request to the author that includes the name of the requestor (individual and corporate) and the intended destination of publication.

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Member of New Jersey Society of Certified Public AccountantsThis Web site is independently owned and operated by Tony Novak operating under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator". Opinions expressed are the sole responsibility of the author and do not represent the opinion of any other person, company or entity mentioned. Tony Novak is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. Novak is compensated as an accountant, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to the commercial companies listed on this site or non-governmental commercial insurance exchanges. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Novak would be pleased to perform the requisite research and provide you with a detailed, written analysis at your request. Such an engagement would be subject to an engagement letter that would define the scope and limits of the desired consultation services.

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