HSAs Are a Valuable Resource in Uncertain Financial Times

Doctor and nurse overlooking a patient on a hospital bed

“[I]t’s the only account that you can establish and fund outside of work. . . You don’t even need to have earned income. You can fund your account with unemployment benefits, stimulus checks, savings, gambling winnings, proceeds from the sale of an asset, or borrowing.”

William G. (Bill) Stuart

Director of Strategy and Compliance

April 15, 2021

The Consolidated Omnibus Budget and Reconciliation Act, passed in the mid-1980s, allows most former workers at companies with 20 or more employees to continue their group coverage if they lose their jobs or their eligibility to enroll in benefits for any reason other than gross misconduct. It also extends this privilege to other family members in certain circumstances. Coverage under COBRA can continue for between 18 months (the usual span) and 36 months from the date of the qualifying event.

The American Relief Plan Act (ARPA) provides special relief targeted toward people who have lost their lost their health insurance coverage due to an involuntary termination or involuntary reduction in hours during the pandemic, and don’t have other coverage. Among its many provisions are these:

  • Most of these people who were eligible for COBRA continuation (called qualified beneficiaries, or QBs) during the past 18 months but didn’t enroll are entitled to a special enrollment period during which they can continue their group plan effective April 1, 2021.
  • Employers can (but aren’t required to, and I suspect most won’t) allow these qualified beneficiaries the option to continue not only the plan on which they were enrolled, but also any other plan that the employer offers if the alternative has the same or a lower premium.
  • Most of these qualified beneficiaries are entitled to up to six months of full premium subsidies beginning April 1, 2021. The full subsidy continues until Sept. 30 unless their COBRA eligibility ends or they’re eligible to enroll in other coverage (such as Medicare or a spouse’s group plan).

Let’s examine how COBRA in general, and the ARPA rules specifically, affect Health Savings Accounts, as well as other coverage options and how they interact with Health Savings Accounts.

Health Savings Accounts and COBRA

Although a qualified beneficiary is entitled to continuation of coverage on the group medical plan, that right doesn’t include employer contributions to the Health Savings Account. Employers who contribute to their employees’ accounts aren’t obligated to the financial account. And most don’t.

So, if you receive contribution per pay period, don’t expect the contribution to continue after your employment is terminated. On the other hand, if your employer gives you an annual or periodic (such as semi-annual or quarterly) contribution, the company can’t take back a pro-rated portion of its deposit. That money is yours to keep.

If the sum of your own and your (former) employer’s funding exceeds the statutory contribution limit for the calendar year, you may have to withdraw some of the money and include it in your taxable income. It’s your business, not your former employer’s, to keep your account in compliance. And you’ll come out ahead if you must withdraw a portion and include it in your taxable income versus voluntarily returning the company’s contribution above the pro-rated amount. (See here for more information.)

Starting or Continuing Contributions

If you were enrolled in HSA-qualified coverage at the time your employment was terminated, you can continue to contribute to your account if you still meet eligibility requirements (and not being employed or not having earned income won’t affect your eligibility). If you haven’t opened an account yet but are eligible to do so, you can place the term “Health Savings Accounts” into a search engine and find many options. Compare key features – monthly administration fee, ease of withdrawals, and other factors relevant to you – and open an account. It’s a quick and easy process.

Key takeaway:  You don’t need to be employed to fund a Health Savings Account. In fact, it’s the only account that you can establish and fund outside of work (though workers enjoy additional tax benefits when they contribute via pre-tax payroll deductions).  You can fund your account with personal funds and deduct the contributions when you file your personal income tax return to recoup federal and state (except in California and New Jersey) that you paid on the income when you earned it. You don’t even need to have earned income. You can fund your account with unemployment benefits, stimulus checks, savings, gambling winnings, proceeds from the sale of an asset, or borrowing.

Enrolling in HSA-qualified COBRA Coverage

What if you weren’t enrolled on an HSA-qualified plan when your employment was involuntarily terminated? If (and it’s a big if) your employer allows you to switch plans during your COBRA special enrollment and the company offers an HSA-qualified plan, you should think about enrolling. The premiums are generally the lowest offered by a company, so you’ll save money if you remain covered on COBRA after your full premium subsidy ends. That difference may amount to several hundred dollars a month on a family contract when you’re responsible for the full premium.

You probably won’t be able to reimburse your eligible expenses tax-free from your Health FSA once your employment is terminated (though you may have COBRA continuation rights to this account in certain situations). A Health Savings Account is generally the only vehicle available to people who don’t work for a company to reimburse their medical deductibles, coinsurance, copays, and eligible out-of-pocket expenses for dental, vision, and over-the-counter drugs, medicine, equipment, and supplies. These expenses can total several thousand dollars during a typical year. Contributing $2,000 to a Health Savings Account saves about $500 in federal and state income taxes for most owners.

Enrolling in HSA-qualified Non-COBRA Coverage

Getting something free is always better than paying for it, right? Usually, but perhaps not always.

If you qualify for the full COBRA premium subsidy, you’ll receive up to six months of coverage at no cost. If you’re enrolled in self-only coverage, that benefit might be worth $3,000 during those six months. And you’ll remain on your current plan, so the deductibles that you’ve accumulated will bring you closer to richer post-deductible coverage by your insurer.

On the other hand, if you expect to be a longer gap in employer coverage (for example, you’re bridging the gap until you qualify for Medicare), nongroup coverage may be more attractive than six months of premium subsidy followed by additional months of paying the full premium yourself. That’s particularly true if your income is low, as ARPA temporarily caps premiums at 8.5% of income. You’ll have to satisfy a new deductible and out-of-pocket maximum, which is less of an issue of your expenses this year have been low. And the plans on the nongroup market may have higher cost-sharing and more restrictive networks. If you have low income and expect to need coverage for more than six months, though, this option is worth exploring.

The ideal scenario from a premium perspective might be to enroll in subsidized COBRA coverage for six months, then switch to a nongroup plan (although the deductible and out-of-pocket counters reset with this change). As of now, though, it’s not clear that losing the full COBRA subsidy after September constitutes a qualifying event to enroll in nongroup coverage outside the traditional open-enrollment period. It’s possible – but by no means certain – that the Biden Administration will allow enrollment off-anniversary in a nongroup plan. The administration has already extended the 2021 special enrollment period to August 15.

Medicare As an Option

If you’re eligible to enroll in Medicare (you’re age 65 or older), you don’t qualify for the COBRA premium subsidy. And there are inherent financial dangers to being enrolled in COBRA coverage once you’re eligible to enroll in Medicare.

If your only coverage option is Medicare and you’ve funded a Health Savings Account in the past, you can withdraw funds tax-free to pay your Medicare deductibles, coinsurance, and copays. Also, you can reimburse tax-free eligible services that aren’t covered by Medicare, like dental, vision, hearing, and over-the-counter drugs, medicine, equipment, and supplies. And that’s not all. See the section below for other Medicare expenses that you can reimburse tax-free from your Health Savings Account.

Paying Premiums

Health Savings Accounts can’t reimburse most medical premiums. But there are exceptions. And three of those exceptions are in play for many Americans today.

COBRA premiums are eligible for tax-free reimbursement from a Health Savings Account. So are premiums that you pay when you’re collecting unemployment benefits. Also Medicare Part B, Part D, and Part C premiums (as well as Part A premiums, though most Americans prepay their Part A premiums through payroll taxes during their working years).

If you already own and have funded a Health Savings Account, you can withdraw your accumulated  balances tax-free to pay your monthly premium when it’s not subsidized in full. If you haven’t opened an account and have the option to enroll in HSA-qualified coverage through COBRA or a federal- or state-facilitated marketplace, you can still benefit from this tax advantage. Simply establish an account and, rather than paying your premium directly, you can deposit that amount into your Health Savings Account (up to the statutory annual contribution limit for your contract type – $3,600 for self-only and $7,200 for family coverage in 2021) and then pay your premium from the account.

That extra step may save you 20% or more on monthly premiums. And during months that your premiums are covered in full by the federal subsidy, you can contribute to your account to pay your eligible out-of-pocket expenses.

Eligible Expenses

Finally, never forget the tax savings associated with reimbursing eligible expenses regardless of your circumstances. Once you fund a Health Savings Account, you can reimburse all future eligible medical, dental, vision, and over-the-counter expenses tax-free. It doesn’t matter whether you’re no longer eligible to fund your account, don’t have earned income, become someone else’s tax dependent, receive a taxpayer premium subsidy, enroll in Medicare, or have ceded authority to make medical or financial decisions to someone else.

The Bottom Line

The pandemic and resulting surge in unemployment have thrown many Americans’ lives upside down. Government programs are providing temporary relief. But Health Savings Account owners know that they can always seize a level of control over their financial futures by planning today for tomorrow’s uncertainty or today’s certainty. It’s a lesson that shouldn’t be lost as the immediate financial disruption fades.

What We’re Reading

How has the COVID-19 pandemic affected organ transplants – among the most expensive medical procedures? The Kaiser Family Foundation explores the topic.

The early months of the pandemic reduced Medicare spending below its 2019 levels for those months. Did spending increase in later months in 2020 as delayed services were rescheduled? The Commonwealth Fund analyzes Medicare spending here.

OK, it’s not reading. But I discussed the myths around HSA-qualified medical plans and Health Savings Accounts on a recent episode of WEX Health’s Benefits Buzz podcast. You can listen here.

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