Tax Facts: A quick view of short-term health plans and HSAs

Short-term health insurance plans have been in the news quite a bit for the last few years. The Obama Administration issued regulations in 2016 limiting short-term plans to three months and prohibiting renewals. Then in 2018, the Trump Administration issued new regulations allowing short-term plans to have initial terms of up to 364 days, and to be renewable (if the insurer offers that option) for up to three years. Only about a third of U.S. states have currently embraced these new federal rules.

The new regulations took effect in October 2018, in time for open enrollment in the ACA-compliant individual health insurance market. To complicate matters, the ACA's individual mandate penalty was eliminated as of January 2019. So, while people who relied on short-term plans prior to 2019 were subject to the ACA's individual mandate penalty (unless they qualified for an exemption), that's no longer the case.

The discussions surrounding short-term health insurance plans have been tricky. So let's cut through the noise and clarify how these plans work and what consumers need to understand.

You can buy a short-term plan at any time…

...if you're healthy and plans are available in your area.

If you're buying your own health insurance, ACA-compliant plans are only available during open enrollment (November 1 to December 15 in most states) or during limited special enrollment periods triggered by qualifying events. Employer-sponsored plans are also only available during open enrollment or a special enrollment period.

But short-term plans can be purchased year-round, if they're for sale in your state (click on your state on this map to see if plans are available).

You (almost) certainly can't contribute to an HSA while you have a short-term plan...

...but you can withdraw money that's left over in your HSA.

In order to contribute to your HSA, you must have coverage under an HSA-qualified high-deductible health plan (HDHP). And the IRS defines what constitutes an HDHP.

The IRS rules for HDHPs don't specifically preclude short-term health insurance plans. It appears to be possible for a short-term plan to be designed so that it meets the definition of an HDHP, and at least one company is marketing short-term plans that claim to be HSA-compliant.

But in almost all circumstances, short-term plans are not HSA-qualified. So you'll have to stop making contributions to your HSA while you have coverage under the short-term plan. You can, however, continue to use any remaining funds you have in your HSA to pay out-of-pocket qualified medical expenses while you're covered by a short-term health plan.

Short-term plans have a lot of holes...

...but they're far better than being uninsured!

Short-term plans are a lot less expensive than full-price coverage in the regular individual market. But that's because they cover a lot less (if you're eligible for premium subsidies in the exchange, you might find that ACA-compliant health insurance is actually less expensive than a short-term plan, while also providing far better coverage).

Short-term plans do not have to cover the ACA's essential health benefits. The benefits that are most often excluded are maternity care, prescription drugs, and mental health care, but insurers are free to design short-term plans however they wish (within the parameters set by each state, which vary considerably from one state to another).

Short-term plans can also have higher out-of-pocket limits than the ACA allows for other plans, and can place limits on the total amount they'll pay for your care. They can also reject applicants altogether due to medical history, and generally have blanket exclusions for any pre-existing conditions.

All of those factors combine to explain the much lower prices that insurers charge for short-term plans: Essentially, these plans are only covering unforeseen medical conditions that arise in people who were healthy when they bought the plan, and some high-cost services (like prescriptions) might not be covered even in that case.

But with that said, if you're otherwise uninsured—and unable to enroll in your employer's plan or an ACA-compliant individual market plan until the annual open enrollment period—buying a short-term health plan is a far better choice than remaining uninsured.

Keep in mind, however, that relying on a short-term plan is certainly a gamble. You might remain perfectly healthy, but what if you get diagnosed with a chronic condition and need medications that cost a lot more than expected each year? The point of health insurance is to provide a safety net that covers not only the things we might expect, but also the things that blindside us from out of the blue.

So if you end up using a short-term health insurance plan in 2019, it's probably wise to plan to transition to better quality coverage—offered by your employer or purchased in the individual market—during the next annual enrollment period or during a special enrollment period if you experience a qualifying event.

And when you're selecting a plan, give HDHPs at least a second glance, as enrolling in an HSA-qualified option will give you access to all the benefits of being able to contribute to an HSA.

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Tax Facts is a weekly column offering straight up, no-nonsense HSA tax and finance tips, written in everyday language. Look for it every Tuesday, exclusively on the HSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.

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