Health Savings Accounts Can Help Freelancers Address Their Top Concern
by William G. Stuart | Originally posted on LinkedIn
Freelance workers love their freedom and flexibility. But they're concerned about medical coverage and care. Health Savings Accounts can help them manage both.
A recent survey of 2,000 freelance employees reflected some interesting insights into people who work for themselves and contract out their services rather than choose a formal employer-employee relationship. Not surprisingly, these contract workers appreciate the freedom to choose projects that they enjoy, value a flexible work schedule, and enjoy being their own boss.
But freelance work comes with drawbacks as well, as evidenced by the 38% who said that paying for health benefits was their No. 3 pet peeve. Only 58% say they have medical insurance (without distinguishing between whether they enrolled on a spouse's or parent's plan or purchase nongroup coverage directly from an insurer or through a public or private marketplace). Among the 42% who aren't covered, nearly half (48%) report that they haven't taken proper care of their health because they can't afford to.
That's a real problem. one serious illness or a condition that becomes chronic because it's not diagnosed and treated promptly can ruin a family financially.
HSA-qualified Plans Make Coverage More Affordable
HSA-qualified plans generally have lower premiums than plans with comparable cost-sharing. That's because the deductible is broader on HSA-qualified plans. Other deductible plans often cover certain common services - like diagnostic office visits and low-cost prescription drugs - in full after a copay. Under federal law, HSA-qualified plans must apply all services except select preventive care to the deductible.
Also, the statutory ceiling on out-of-pocket financial responsibility on HSA-qualified plans is lower than other coverage, which makes these plans a good option for high utilizers as well. For example, the federal out-of-pocket maximum for self-only coverage is $7,500, versus $9,100 for all other plans. This difference may not matter, as many plans - particularly employer-sponsored coverage - cap a patient's financial responsibility at lower levels.
But that's often not true in the nongroup market, where freelancers buy their coverage. Because the Affordable Care Act, passed in 2010, doesn't allow insurers to adjust premiums to reflect risk (as companies offering life, auto, homeowner's, long-term care, and other insurance can), issuers must attempt to discourage high claimants from enrolling. The only tools that they have are out-of-pocket responsibility, breadth of the network, and the prescription formulary (which drugs within each therapeutic class are covered). As a result, nongroup plans often have narrow networks, cost-sharing approaching the statutory maximum, and limited access to expensive drugs.
These characteristics are common within all plans in a market. But the HSA-qualified plans at least can offer savings by capping the patient's out-of-pocket financial responsibility at up to $1,600 less than competing coverage.
Health Savings Accounts Make Care More Affordable
To add to those savings on out-of-pocket responsibility, HSA-qualified plan enrollees who are eligible to open and fund a Health Savings Account can enjoy tax savings when they pay those bills. A high claimant on another plan who incurs claims to the out-of-pocket maximum must pay providers $9,100 in 2023. But that person doesn't have access to an employer-sponsored plan like a Health FSA to pay those expenses with pre-tax dollars. If she is in the 22% federal tax bracket, pays 15.2 FICA payroll taxes (the self-employed pay both the employer's 7.65% and employee's 7.65% tax), and is assessed a state income tax of 5%, she must earn more than $15,750 to pay her provider bills and the taxes on those funds (but only $14,500 if she lives in a state that doesn't assess state income taxes).
In contrast, a freelancer who is eligible to fund a Health Savings Account can deposit $7,500 into that account, avoid all income and payroll taxes on that amount (except for residents of California and New Jersey, whose Health Savings Account contributions aren't deductible from state income), and use those funds to pay her full out-of-pocket responsibility.
In other words, the Health Savings Account owner pays as much as less than half as much out of her income to pay her financial responsibility for the same services incurred by the freelancer who chooses another form of coverage.
Given this difference in the net cost of care based on whether the patient is eligible to fund a Health Savings Account, why would anyone purchasing coverage in the nongroup market choose any plan but an HSA-qualified option?
It's important to note that Health Savings Account funds don't expire at the end of the year. They are, like a savings account of 401(k) plan, not tied to a plan year. Thus, a freelancer who contributes more than she spends on qualified expenses can preserve the balance to pay qualified expenses next year, a decade hence, or even in retirement. This unlimited time span makes Health Savings Accounts an ideal option for would-be freelancers before they leave the world of traditional employment. Who wouldn't feel better about entering the uncertainty of freelancing knowing that she had funds already set aside to pay qualified medical, dental, and vision expenses?