more questions about ACA HSA plans

[DEC-1982]

My understanding of ACA HSA plans after retirement is still poor.

I had a 401-k that has now been transferred into an IRA. Let's say I withdraw $10K from that rollover IRA, $5K for medical expenses and $5K for other expenses. Normally $10K would be taxed.

Q1. Can I put the first $5K into a HSA plan and not have $5K taxed? I got the impression that I can from MichaelB's post in this discussion. But it's from 2 years ago.

http://www.early-retirement.org/forums/f38/definition-of-hsa-compatible-plan-68596.html

Q2. Does putting money into a HSA affect ACA subsidies in any way? Obviously if the $5K is not counted, that's lower MAGI but my question is whether subsidies are disabled if you use an HSA plan.

Q3. What are the disadvantages of using HSA plans? I assume it's costlier because you get some tax advantages. Apart from that, what else is bad about it?

 

[Mulligan]

I did an IRA ROLLOVER to an HSA. You can do this one time. The limit is defined as the yearly contribution limit minus any contributions you have made that year. For example, me. The limit for an individual when I did it was $3250 I believe. I had a small stranded IRA of $2k. I rolled it over and then contributed the remaining $1250 for a tax deduction on that. Obviously no tax break occurs on the rollover money.
Keep in mind if you are on a family plan, your rollover limit is higher and if you are 55 you can increase the maximum rollover amount by an additional $1k.
I will skip question 2, since I do not get subsidies.
Some people have mentioned HSA exchange plans don't incur them any savings. In my situation that has not been true. My plan was $3 a month more, but my tax savings is near $1000 annually. Plus I have no intention of using this money for health costs. I am investing it and it is growing nicely without any taxes. I will keep all medical receipts next 15-20 years and then use the receipts to withdraw tax free if ever needed.


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[sengsational]

I think of an HSA as a Roth on steroids. With a Roth and HSA, you pull basis and gains out tax-free. Contributions to a Roth not only require you to have earned income, those contributions don't do anything to help this year's taxes. The steroids of an HSA is that you get to reduce your income by the amount you contribute. HSA's only act like a Roth if you treat it like a Roth (i.e. don't take any money out until you run out of other kinds of funds). This way, the gains can compound on themselves, which is the reason lots of people like Roth accounts.

I'd say the only "bad" thing would be if you never needed the money for medical expenses. Frankly, with most people, you'll have medigap to pay for, and your portion of medicare. I know very little about this, but I'm very confident I'll be spending more than I can cram into the HSA account. The other "bad" thing could be they drop income taxes and switch to a value-added tax. That would be bad for Roth and HSA since those funds could have been spent tax-free.

Actually, the biggest downside for most people is that they want to "get something back" from their health insurance. HDHP's must be designed only to pay out if you have a big annual medical bill, so anything you spend on health care comes right out of your pocket.

 

[MichaelB]

I had a 401-k that has now been transferred into an IRA. Let's say I withdraw $10K from that rollover IRA, $5K for medical expenses and $5K for other expenses. Normally $10K would be taxed.

Q1. Can I put the first $5K into a HSA plan and not have $5K taxed?

Yes, if you enroll in an HSA policy, then open an HSA account and deposit $5K, it would reduce your adjusted gross income by that amount.

Q2. Does putting money into a HSA affect ACA subsidies in any way? Obviously if the $5K is not counted, that's lower MAGI but my question is whether subsidies are disabled if you use an HSA plan.

It's my understanding (see here) that an HSA plan is eligible for premium assistance but not cost sharing subsidies.

Q3. What are the disadvantages of using HSA plans? I assume it's costlier because you get some tax advantages. Apart from that, what else is bad about it?

In my zip code the HSA plans offered by BCBS and Humana are just a few $$ different than non-HSA plans with similar cost sharing. That makes it a great deal for us, as the tax benefit is valuable.

 

[Throwdownmyaceinthehole]

Yes, if you enroll in an HSA policy, then open an HSA account and deposit $5K, it would reduce your adjusted gross income by that amount.
Can that be done every year?
It's my understanding (see here) that an HSA plan is eligible for premium assistance but not cost sharing subsidies.
Can you explain cost sharing subsidies or point me to a simple explanation? I'm getting ready to move to an ACA policy.

 

[MichaelB]

Can that be done every year?

Can you explain cost sharing subsidies or point me to a simple explanation? I'm getting ready to move to an ACA policy.

This paper (here) by CRS explains premium assistance and cost sharing, with examples. Basically, premium assistance is a tax credit that helps pay the policy premium to the insurer. Cost sharing is additional financial help that pays part of the deductible and copay. And yes, the HSA deposit and exclusion from income can be done yearly, as long as you remain eligible and are under age 65. Here are the limits Contribution Limits & IRS Guidelines | Webster Bank

 

[Sue J]

We have had ACA HDHP with HSA plans for the past 2 years and the tax benefits were substantial. Our taxable income was reduced, because of lower taxable income our ACA subsidy was increased and then the HSA investments had some growth.

Q2. Does putting money into a HSA affect ACA subsidies in any way? Obviously if the $5K is not counted, that's lower MAGI but my question is whether subsidies are disabled if you use an HSA plan.

No, subsidies are not disabled if you use an HSA plan.

I wish we could go this route again in 2016 but all the HSA plans in our area are at least $175/mo ($2100/yr) more than non HSA plans. One insurer with a great network that we liked is $267/mo more. Does not make sense to me at all that non HSA would be more expensive than HSA plans.

I really like the principle of a HDHP with HSA. I bear all the costs of care while the insurance protects me from the BIG stuff. I'm willing to do this for a reduced premium. If the premium is not reduced it's just not worth it.

 

[SomedaySoon]

Going directly to the Healthcare.gov Marketplace website (for PA), when I specify different expected 2016 income levels (199% , 249%, and 251% of Federal Poverty level), the Silver Level HDHP plan which is HSA elligible shows different deductibles based on each income level. Therefore I concluded that Silver HSA plans are incorporating Cost Sharing reductions.

 

[gauss]

Going directly to the Healthcare.gov Marketplace website (for PA), when I specify different expected 2016 income levels (199% , 249%, and 251% of Federal Poverty level), the Silver Level HDHP plan which is HSA elligible shows different deductibles based on each income level. Therefore I concluded that Silver HSA plans are incorporating Cost Sharing reductions.

Sounds correct.

Basic requirements to obtain ACA Cost Sharing Reductions (CSR) include:
- income no more than 250% of FPL
- enrolling in a Silver plan.

-gauss

 

[DEC-1982]

Thanks for the replies folks. I don't plan on doing a rollover to an HSA, just take some dollars out of IRA and put it into the HSA on an annual basis.

My planned MAGI when I enroll into ACA (or at least when I file my taxes) will be slightly less than $60K so AFAIK I should be eligible for premium subsidies but not cost sharing.

I went through a trial run at Healthcare.gov. Premium tax credit was $391/mo. The plan I looked at closely was Kaiser Permanente KP GA Bronze 6000/40%/HSA. Can I take it that this is a HSA plan, that I can move tax-deferred money into? I guess I would have to talk to Kaiser to learn the details of exactly how I would move the IRA money into the HSA.

 

[Mulligan]

Thanks for the replies folks. I don't plan on doing a rollover to an HSA, just take some dollars out of IRA and put it into the HSA on an annual basis.

My planned MAGI when I enroll into ACA (or at least when I file my taxes) will be slightly less than $60K so AFAIK I should be eligible for premium subsidies but not cost sharing.

I went through a trial run at Healthcare.gov. Premium tax credit was $391/mo. The plan I looked at closely was Kaiser Permanente KP GA Bronze 6000/40%/HSA. Can I take it that this is a HSA plan, that I can move tax-deferred money into? I guess I would have to talk to Kaiser to learn the details of exactly how I would move the IRA money into the HSA.

I wouldn't recommend that December based on the fact that is ILLEGAL! You get to do it once and only once so make maximum use of it.
And my recommendation is a direct transfer not rollover incase the bookwork gets sloppy. Plus you may (a guess) incur a 10% withholding on funds too.

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[audreyh1]

Thanks for the replies folks. I don't plan on doing a rollover to an HSA, just take some dollars out of IRA and put it into the HSA on an annual basis.

My planned MAGI when I enroll into ACA (or at least when I file my taxes) will be slightly less than $60K so AFAIK I should be eligible for premium subsidies but not cost sharing.

I went through a trial run at Healthcare.gov. Premium tax credit was $391/mo. The plan I looked at closely was Kaiser Permanente KP GA Bronze 6000/40%/HSA. Can I take it that this is a HSA plan, that I can move tax-deferred money into? I guess I would have to talk to Kaiser to learn the details of exactly how I would move the IRA money into the HSA.

You can do a once-in-a-lifetime rollover, but it is limited to the contribution limits for the year.

In your case I don't see any benefit since you are planning to fund it with dollars that you are withdrawing from the IRA anyway. Direct rollover is an option for someone who can't otherwise withdraw funds from an IRA without penalty.

Do you know your annual contribution limits for your case (single or family insurance plan)? Be sure not to exceed those each year, rollover or direct contribution.

 

[DEC-1982]

audreyh1, this would be a family insurance plan, and I think the limit is around $6750 for 2016.

I spent some time looking at healthsavings.com but it doesn't really tell me what I want to know. So let's take a simple scenario and see if I got this right so far.

Step 1.
2016
I withdraw $50K from my tax deferred IRA.
I put in $5K into a HSA plan.
When I file my taxes for 2016, I show income of $45K.
I will pay taxes on $45K.
Is this correct?

Step 2.
Year 2020
$5K in HSA has grown to $5500.
In 2020, I have medical expenses of $5500. I take out $5500 from HSA and pay for my medical expenses. Taking out $5500 from HSA and using it for medical expenses DOES NOT add to my taxable income, so I don't pay taxes on this $5500. Is this correct?
The expenses don't all have to be in 2020, I could just have medical expenses of $1100 each year for 5 years and withdraw $5500 in 2020.

I'll ask more questions after I find out if I am good so far.

 

[DEC-1982]

Mulligan, after reading Publication 969 just now, I understand what you are saying. A qualified HSA funding distribution means it has to be a one-time (one in a lifetime) transfer from the IRA trustee to the HSA trustee.

 

[audreyh1]

audreyh1, this would be a family insurance plan, and I think the limit is around $6750 for 2016.

I spent some time looking at healthsavings.com but it doesn't really tell me what I want to know. So let's take a simple scenario and see if I got this right so far.

Step 1.
2016
I withdraw $50K from my tax deferred IRA.
I put in $5K into a HSA plan.
When I file my taxes for 2016, I show income of $45K.
I will pay taxes on $45K.
Is this correct?

Step 2.
Year 2020
$5K in HSA has grown to $5500.
In 2020, I have medical expenses of $5500. I take out $5500 from HSA and pay for my medical expenses. Taking out $5500 from HSA and using it for medical expenses DOES NOT add to my taxable income, so I don't pay taxes on this $5500. Is this correct?
The expenses don't all have to be in 2020, I could just have medical expenses of $1100 each year for 5 years and withdraw $5500 in 2020.

I'll ask more questions after I find out if I am good so far.

Right, $6750 for family if you are under 55. $7750 if you are 55 or older in 2016.

You can take money out for HSA qualified medical expenses as long as they were incurred after the HSA account is opened and funded, and you won't pay taxes on the withdrawal. You can wait years even, to reimburse yourself the expense. You need to maintain the records of any eligible expense you might want to reimburse in the future.

 

[Mulligan]

Mulligan, after reading Publication 969 just now, I understand what you are saying. A qualified HSA funding distribution means it has to be a one-time (one in a lifetime) transfer from the IRA trustee to the HSA trustee.

Yes, if time is not a matter, I fully recommend the direct transfer. If you rollover you have 60 days to complete it or its considered a distribution. Plus IRA may withhold 10% for taxes that you may have to file to get back. Plus paperwork could get all screwed up making government believe you took the money as a distribution.
The government only allows one rollover of any tax deferrable accounts per year also, so they frown on it. It just eliminates a lot of potential problems doing it this way. Because of sheer laziness I was going to do the Rollover to eliminate paperwork. But after hearing about all the pitfalls and recommendations from both companies, I elected to do the IRA to HSA by transfer last year.
It really wasn't that big of a deal and process was smooth.


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[Animorph]

My understanding of ACA HSA plans after retirement is still poor.

I had a 401-k that has now been transferred into an IRA. Let's say I withdraw $10K from that rollover IRA, $5K for medical expenses and $5K for other expenses. Normally $10K would be taxed.

Q1. Can I put the first $5K into a HSA plan and not have $5K taxed? I got the impression that I can from MichaelB's post in this discussion. But it's from 2 years ago.

http://www.early-retirement.org/forums/f38/definition-of-hsa-compatible-plan-68596.html

Q2. Does putting money into a HSA affect ACA subsidies in any way? Obviously if the $5K is not counted, that's lower MAGI but my question is whether subsidies are disabled if you use an HSA plan.

Q3. What are the disadvantages of using HSA plans? I assume it's costlier because you get some tax advantages. Apart from that, what else is bad about it?

A lot of posters getting hung up on the IRA part I think.

Yes, you can certainly withdraw money from your tIRA and use it to fund your HSA, subject to HSA limits. The tIRA withdrawal would be taxed, but you would get a compensating deduction for the HSA contribution. So the net effect would be no tax owed for that transaction.

However, I suspect your MAGI would include the tIRA withdrawal and not the HSA deduction. So it might hurt you if that is the case and you are limiting income to get an ACA subsidy.

I'm sure the direct tIRA to HSA transfer everyone else is talking about would avoid the MAGI problem, but as they say it is a one time thing.

So check the MAGI calculation and verify the effects of your tIRA withdrawal and HSA deduction.

 

[DEC-1982]

OK, I think I have got it.
The thing that I didn't know till now was that the tax-deferred IRA to HSA was a one-time thing. I had in my mind a possible plan that I would transfer $5K per year for many years and reduce my taxes again and again. Once I open the HSA I should transfer the maximum ($6750) allowed because it is a one-time transfer.

Also, I need a HDHP plan, but with a family deductible of $12K for the two of us, that's not an issue.

Thanks folks.

 

[Theseus]

Step 1.
2016
I withdraw $50K from my tax deferred IRA.
I put in $5K into a HSA plan.
When I file my taxes for 2016, I show income of $45K.
I will pay taxes on $45K.
Is this correct?

Yes - Form 1040 line 25 HSA deduction, line 13 Cap gain loss helps too

Step 2.
Year 2020
$5K in HSA has grown to $5500.
In 2020, I have medical expenses of $5500. I take out $5500 from HSA and pay for my medical expenses. Taking out $5500 from HSA and using it for medical expenses DOES NOT add to my taxable income, so I don't pay taxes on this $5500. Is this correct?

Yes, as long as they are "qualified medical expenses"

The expenses don't all have to be in 2020, I could just have medical expenses of $1100 each year for 5 years and withdraw $5500 in 2020.

I'll ask more questions after I find out if I am good so far.

And for the bonus question, - Yes!

It's my understanding (see here) that an HSA plan is eligible for premium assistance but not cost sharing subsidies.

I realize the cost-sharing element does not fit into DEC 1982's situation as defined, but my understanding so far is that as long as the cost sharing does not cause the deductible to fall below the minimum threshold (i.e. $2,600 for a husband wife 'family' in 2016), that insured couple is still HSA eligible. If I'm not understanding that correctly I will need to change my selected plan, which is why I'm redirecting my comments in that direction.

 

[Mulligan]

OK, I think I have got it.
The thing that I didn't know till now was that the tax-deferred IRA to HSA was a one-time thing. I had in my mind a possible plan that I would transfer $5K per year for many years and reduce my taxes again and again. Once I open the HSA I should transfer the maximum ($6750) allowed because it is a one-time transfer.

Also, I need a HDHP plan, but with a family deductible of $12K for the two of us, that's not an issue.

Thanks folks.

Animorph, has a VERY good point, December.... I am "hung up" on the transferring the IRA to HSA as was your desire, plus I am looking through the lens of being too young too withdraw IRA, so I was directly connecting the literal dots.... Stepping back a second... Since you are old enough and are planning on withdrawing your IRA money anyways you can do it the way you wanted to originally. Your money is fungible, and do not have to use the exact dollars.
Refer to other people on tax implications for insurance, etc. Yes, you will have a gap between maximum contribution and a 12k deductible, but I also have same problem. I can only contribute $3300 and my deductible is $6500.


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