Everywhere I go, I hear the benefits of the Health Savings Account, or HSA for short. People say it’s one of the best ways to save for retirement and pay for inevitable medical expenses given the tax benefits. But is it worth having a high deductible plan to be eligible for a health savings account? I’m not so sure.
Not wanting to miss out on an obvious financial benefit, I did what most lazy husbands do and asked my wife about it. She is, after all, the CFO and COO of our online business. As such, she is also in charge of our healthcare plan.
She told me we aren’t eligible for Health Savings Accounts because we don’t have a High Deductible Health Plan. Hmrph. Well that doesn’t seem right. Based on what I heard, everybody is eligible, otherwise, that would be discrimination!
But then I realized the government consistently discriminates against some of us all the time. For example, if you make over a certain income threshold, you cannot contribute to a traditional IRA or Roth IRA. What’s up with that? We should all be allowed to save for our financial future.
In the past, if you made over $75,000 as a single filer or $110,000 as a joint filer, you couldn’t receive a child tax credit. Children are already expensive and stressful enough. Why was the government incentivizing lower-income households to have more children and disincentivizing higher income households to have fewer children?
Maybe they were looking to increase the divorce rate due to powerful lobbyists in the legal community.
Luckily, the child tax credit income threshold is now a more reasonable and logical $200,000 for single filers and $400,000 for joint filers in 2020. Why the government thought 1+1=1.5 in the past made no sense. Same thing with the marriage penalty tax that has since been abolished with the passage of the Tax Cut And Jobs Act.
Slowly, we are heading towards equal treatment of all American citizens. But not yet when it comes to healthcare.
Things To Know About The Health Savings Account Plan
People who say the Health Savings Plan is the best thing ever and is available to everyone really need to stop being so insensitive. There are real people out there who do not qualify, whether by choice or by circumstance.
In order to qualify for an HSA, you must be covered by a High Deductible Health Plan (HDHP). An HDHP generally costs less than what traditional healthcare coverage costs, so the money that you save on insurance, can therefore, be put into the Health Savings Account.
To qualify to contribute to an HSA in 2021, you must have a health insurance policy with a deductible of at least $1,350 for single coverage or $2,700 for family coverage. Some feel uncomfortable paying such a high deductible each year.
If you happen to have a rockstar Gold or Platinum healthcare plan with a lower deductible or no deductible, you are not eligible.
If you are eligible you can contribute up to $3,550 pre-tax to an HSA if you have single coverage or up to $7,100 pre-tax for family coverage in 2020. If you’re 55 or older anytime in 2020, you’ll continue to be able to contribute an extra $1,000.
HSA funds can pay for any “qualified medical expense,” even if the expense is not covered by your HDHP. If the money from the HSA is used for qualified medical expenses, including dental and vision, then the money spent is tax-free.
If the money is used for other than qualified medical expenses, the expenditure will be taxed and, for individuals who are not disabled or over age 65, subject to a 10% tax penalty.
The unused balance in a Health Savings Account automatically rolls over year after year. You won’t lose your money if you don’t spend it within the year. Further, the money in your HSA can be invested and earn compound gains tax-free.
When Is It Worth Getting A High Deductible Health Plan?
Healthcare might be the biggest ripoff in America. Most people get little-to-no medical usage while still having to pay on average $20,000 a year in healthcare premiums.
The reason why there isn’t a bigger uproar is because most of an employee’s healthcare costs are subsidized by the employer. The same goes for paying higher taxes.
Once you become a business owner, you feel the pain of paying all the various taxes much more acutely. Therefore, you tend to stop voting incessantly to raise more taxes to pay for more wasteful government spending.
The only reasons I can think of for people to get a High Deductible Health Plan are:
- You rarely get sick or injured. Folks in their 20s and 30s may be prime targets.
- You can afford to pay your deductible without having to go into debt.
- You’re willing to pay your deductible to get medical treatment.
- You have enough money to fund an HSA each month.
- You don’t have little ones or sick dependents.
- You want another financial way to support your retirement.
- The Out Of Pocket Maximum is affordable.
The conundrum is, if you are getting an HDHP because you can’t comfortably afford higher monthly premiums, how is it then possible for you to make significant contributions to an HSA each month?
Such logic seems contradictory.
Related post: The Health Affordability Ratio
Who Should Get A Low Or No-Deductible Health Plan
In general, low-deductible or no-deductible plans have higher premiums. Despite the higher premiums, however, it makes healthcare expenses easier to estimate.
A low- or no-deductible plan might be right for you if:
- You are pregnant, planning to become pregnant, or have small children.
- You have a chronic condition or need to see a doctor frequently.
- You’re considering or anticipating a big surgery.
- You take several expensive prescription medications.
- You or your children like to partake in high-risk activities such as mountain climbing, scuba diving, sky diving, skiing/snowboarding, and the like.
- You’re not a good budgeter and like more certainty.
- You put a premium on peace of mind and want to minimize the stress of dealing with health insurance providers who may refuse payments.
Before our son was born we decided to get a no-deductible platinum healthcare plan. The cost of giving birth sometimes runs in the tens of thousands of dollars. Further, we were unsure about our baby’s health. You really don’t know how healthy your little one will be until s/he is around 10 years old or so.
With a no-deductible healthcare plan, we made our healthcare costs predictable so we could focus our time being first-time parents. Focus is one of the main reasons why we sold our SF rental house right after he was born as well.
Health Insurance Horror Stories
Some insurance companies always seem to find a way not to pay out a claim, despite years of receiving premiums. I’ve heard so many stories about patients getting screwed by the insurance company or their health provider because of a low-quality health plan or some type of mix up.
Here are some headlines from Vox, which has done a great job uncovering individual health insurance horror stories here in SF.
- A $20,243 Bike Crash: Zuckerberg Hospital’s Aggressive Tactics Leave Patients With Big Bills
- Hit by a city bus — and hit with a $27,660 city hospital bill
- She tried to go to an in-network emergency room. She ended up with a $28,254 bill anyway.
As new parents, we don’t have time to deal with this BS, nor did we want to risk the potential extra stress of dealing with difficult insurance providers or health providers.
I have friends who are doctors and they tell me straight up the worst part about their job is dealing with insurance companies followed by increasing bureaucracy.
A couple of doctors have admitted to me that if their patient has a “more difficult” health insurance plan, they are more reluctant to return calls or e-mails or fit them into their schedules.
Doctors, too, are economically motivated, particularly given the amount of time and money required to become a doctor. If they can join a healthcare network whose patients have higher quality health plans, they will.
It’s not hard to believe more money attracts better doctors.
And yes, one would hope that just because one has a high deductible doesn’t mean once the deductible is reached, the quality of care is any less. But some people just aren’t willing to take that chance.
Income Threshold Consideration For A Health Plan
In terms of deciding what type of healthcare plan to get based on income, an easy rule of thumb is to go with the high deductible health plan if you earn less than $100,000 a year and are relatively healthy.
Once you earn over $100,000 per person in your household, you might as well pay up for the highest quality health plan possible. Again, having young children is a big X factor in terms of how much healthcare your family will need.
You may initially feel like you’re missing out on the HSA party, but you won’t feel bad for long because your income is high enough to where you can comfortably max out your 401(k) and still save additional after-tax money for retirement.
Further, you might receive more healthcare benefits that could save you money in the future. You will be logically more inclined to proactively seek medical treatment since your costs are more fixed.
The next time you hear someone say an HSA is the best retirement savings vehicle on Earth, you now know what they’re sacrificing. There is no free lunch.
The good thing about a HDHP or a low or no-deductible health plan is that so long as we have one, we are insured from disaster. Make sure you know what your maximum out of pocket expense is for each plan. Once you’ve run some calculations with various scenarios, choose the plan that’s right for you.
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Readers, do you think it’s right that only folks with HDHPs are eligible for a Health Savings Account? Why does the government discriminate so much? Personally, I still don’t think having a health savings account is worth it.
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