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.
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 HSA 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 2020, 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.
Loading ...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 an HSA? Why does the government discriminate so much?
A high deductible health plan can be an excellent value even for someone who is chronically ill, as many plans have a reasonable out of pocket max, after which everything is free. Its easy for me to compare health plans, as unless the out of pocket max is super high, I’m guaranteed to meet it just with my guaranteed medical needs (prescriptions and doctor copays). So I only need to look at premiums + out of pocket max.
I max out an HSA every year and pretend its a retirement account. ie. I pay all medical bills out of pocket, and let the HSA grow (most have investment options available for balances over $1,000-3,000. If you use it for medical expenses in retirement (age 65+), its even better than a 401k, IRA, Roth 401k, or Roth IRA, as you never pay taxes on the contributions or withdrawals.
I find the HSA as another bucket of retirement money. Once you make over a certain amount of money and max out your 401K, safe harbor contributions and back door Roth you start running out of tax sheltered retirement/investment vehicles. Here is where the HSA comes into play. As a family we can contribute $7,000/year (I am 41). So far we have over $50,000 in this account and growing. I understand through various polls that a couple in retirement will average about $275,000 in health care costs. Isn’t it better to have a bucket of cash that grows tax deferred (tax free for medical expenses) over the years to offset some of these costs? The only exposure you have is your MOOP (maximum out of pocket expenses) which is defined in many Health Care Plans. In our case that is $12,500. Therefore, I keep an extra $12,500 in my emergency fund just in case this happens. Luckily we Never hit that max, although having kids isn’t cheap. Again this is not for everyone, but I rather have $12,500 in exposure a year and have this extra bucket in retirement for health costs. At 40 I also added a Long Term Care plan to my portfolio through Lincoln Financial which is pretty interesting. Everyone’s financial situation is different, but if you have extra disposable income then instead of that fancy car or watch invest in your retirement! Good luck.
Wow — 1%er problems.
I often enjoy your posts, Sam, but you are a bit out of the loop with HSAs. I ‘get’ that you are upset your wealth and choice of “platinum’ healthcare plan precludes you from opting into a HSA, but the plan wasn’t designed for your privilege. You didn’t go into the history of the HSA, which Congress wrote to supplant the MSA plans — shifting the concept of personal responsibility of finances on to the individual rather than the employer. Right or wrong, HSA plans save employers a ton of money, and most Americans of a certain income bracket would benefit from using a HSA over their ‘normal’ or your ‘platinum’ plans. Encouraged savings is one of your mantras, and one of your stances I most respect. Yet, you clearly didn’t do much homework for this post — and have NO experience with the plans. It shows.
Another HUGH benefit of HDHP options: HSA contributions are tax-deductible. You mentioned they behave very similarly to a Roth for tax-free earnings but maybe without sufficient detail. They benefit from withdrawals being tax-free for expenses on qualified medical expenses (dr visits, prescriptions, optical and dental visits, along with the more ‘worst-case’ stuff we all fear medically. If one is >65, HSA funds can be used for those medical categories+Medicare premiums _AND_ anything else with non-qualified spending only taxed as ordinary income). Yes, most of American with paychecks under $100k/yr worry about those dimes. $7k (or $8k >55) are a lot of dimes.
When you dig into most employer plans (I can reference an economic sector not normally represented in these board — the retail worker), you might find that an HSA plan will be 52% of the paycheck deduction from the ‘best’ option available to the worker. Someone making $10 or $15/hr spends $44/paycheck and gets very reasonable coverage instead of $85 from the available ‘optimal coverage’ plan. What’s the maximum out-of-pocket for both plans (serviced by BCBS-Al)? In-Network Family=$12,000, out-of-network=$26,200.
So one says, ‘but wow, that $12,000 annual catastrophic would easily consume all of my HSA contributions for two full years of maximum deposits (not counting savings interest or investment compounding gains). Yep — it would. The poor soul that had the optimal coverage plan would be out the same amount of money (without the legal option of having a savings plan to soften the blow the savvy HSA participant had). Yes, that’s worse-case. Life would suck.
What about reality for most folks who just have wellness visits, vaccinations (for those of you with children) or ordinary life events like the rare wrenched back or sprained ankle? There might be a small donut hole where the various co-pays has the HSA participant at a disadvantage by several hundred or a $1k issue, but it’s not huge. My recent tweaked L4-L5 forced a Dr. office visit, a steroid shot, and a X-ray to insure the disc and nerve bundle didn’t need more attention. My copay was $35 under HSA, it would have been $0 under the optimal plan. More fun facts: My X-ray was billed at $240. Submitted to insurance, who offered to pay $130, that was accepted by the radiologist, and my bill was $0. Yes, you read that correctly — different pricing for different payers. Almost like they just make it up — unless you’re the hapless Joe-public without any insurance, and now you’re that deeper in debt. (Just having a plan changes the cost of care — perhaps THAT is the unfairness of the system you should explore.) If you’d like more cost comparisons given a birth, or diabetes treatment, or such between the two plans I’ve touched upon, I’d be happy to share ACTUAL costs.
What about gains? Someone investing in HSAs at $7k/yr with 7% investment gains, compounded over 25 or 35 years is worth how much more? Heck, even at 2.5% savings, the poor soul has a ton more cash than otherwise. The mostly unused ‘optimal plan’ would have been 50% more out of their paycheck that whole stretch, no tax deductions, and no savings to show for it. Financial stewardship indeed.
Real-world situations make having an HSA fiscally more rewarding for most situations than the default ‘optimal plan’ most employees blindly choose with their employer. I live in a different fiscal world than most of the readership here. As a financial ‘expert’, a more fact-filled piece offers greater value than this opinion post with limited real-world exposure.
I’m not upset. I just want to highlight the downside to having a high deductible health plan and HSA because that’s what most people say is the way to go.
What more facts do you want in terms of data and charts? And how much do you pay for your healthcare so we know where you’re coming from.
Sorry — I took the snarky tone of the post to think you held the plans in disdain. The lengthy lead-in before the meat of the blogpost, and a poll seemed to reinforce a negativity toward HSAs:
“Is it worth having a high deductible health plan to be eligible for an HSA?
Yes, it’s worth having a HDHP to be eligible for an HSA. I like to roll the dice to try and save money in the short run.
No, I’d rather have a low or no-deductible health insurance plan that also has better coverage. Who cares about the tiny HSA. I put a premium on peace of mind.”
Where in fact, the HDHP offerings have very similar coverage to the ‘best’ plans offered by one retail employer, and offers nearly all of the same peace of mind considering costs. HSAs aren’t perfect: I suspect there is a donut hole for costs for someone with unique medical needs, but I haven’t seen it yet. And no, I haven’t yet run a monte carlo on that scenario, just a gut feeling. You likely meant some of the original post tongue-in-cheek while I was in Serious Sunday mode. I should stay off the Internet before the first coffee cup is done.
Gut feelings don’t help anyone here, so let’s sling data. I happen to have some. One retail employer in the Fortune 50 group offers four separate healthcare plans, two each of similar format. These plans are available as voluntary opt-in programs for part-time and full-time staff upon hire, or once-a-year choices for existing staff that may wish to join or change. Premiums are deducted from each biweekly paycheck. Two of the plans are non-HSA ‘normal’ plans, and two are HDHP HSA-types. They vary by the cost, deductibles, and co-pays for various covered services, with the pricier/paycheck plans covering more early on. Note that ALL plans have the SAME Out-Of-Pocket Maximums, as I mentioned before. ALL plans have some level of service coverage before the deductible is met (in-network), such as wellness visits/annual physical and preventative care/childhood vaccinations for most school-required items
To keep my verbosity down, let’s compare only the Family plans, between the ‘Best’ fullest coverage option with the ‘Least’ HSA choice — leaving alone the two in between. For most of these items, I’ll choose in-network rates/costs as the primary care is assumed to be in-network. Most out-of-network expenses are the same for ALL plans, and generally ranging from a little to a lot heftier cost until the OOP max is reached.
Best Least (HSA)
Per Paycheck cost $300 $175
Deductible, in-net $3000 $3500
Deductible, out-net $6000 $7000
Out-of-pocket max, in-net $12000 $12000
Out-of-pocket max, out-net $26200 $26200
Need referral for specialist? no no
Primary care wellness visit (in) $0 $0
Primary care wellness visit (out)50% coinsurance 60% coinsurance
Primary sick/injury visit (in) $30 copay/visit 50% coinsurance
Specialist visit $50 copay/visit 60% coinsurance
Diagnostics 30% coinsuranc 50% coinsurance
Drugs $10-$340 copay/script 50% coinsurance
Outpatient surg/ER/Hospital $250-30% coinsurance 50% coinsurance
Childbirth 30% coinsurance 50% coinsurance
and so forth. Individual plans have deductibles 1/2 of the family plans.
So a different comparison, I’ll use Employee-only costs from a couple of the plan examples. There’s a diabetic and a birth example, that includes limits and exclusion costs. These are those nebulous items that any carrier seems to be able to deny at will — but at least they are the same denials for both plans.
Jack’s Type 2 Diabetes Best Least (HSA)
Per Paycheck cost $85 $44
Deductible, in-net $1000 $1750
Out-of-pocket max, in-net $6000 $6000
Out-of-pocket max, out-net $13100 $13100
Specialist copay/ins $50 copay/visit 60% coinsurance
Jack needs primary care visits, diagnostic blood work, script meds and a glucometer.
Total ‘retail’ cost $7400 $7400
Deductibles $1000 $1750
Copayments $100 $0
Coinsurance $120 $190
Limits/exclusions not paid by plan $420 $420
Total Jack pays out that year: $1640 $2360
Jill’s having a baby Best Least (HSA)
Per Paycheck cost $85 $44
Deductible, in-net $1000 $1750
Out-of-pocket max, in-net $6000 $6000
Out-of-pocket max, out-net $13100 $13100
Specialist copay/ins $50 copay/visit 60% coinsurance
Jill needs ob/gyn prenatal care, delivery services/facitily, diagnotic blood work and ultrasound and we’ll throw in an Epi for anesthesia specialist visit.
Total ‘retail’ cost $12800 $12800
Deductibles $1000 $1750
Copayments $0 $0
Coinsurance $3480 (30%) $4250 (50%)
Limits/exclusions not paid by plan $60 $60
Total Jill pays out that year: $4540 $6060
Now, Jack and Jill aren’t rich. They work retail, above average sales specialists in their departments, maybe making $20/hr if they’ve been with the company for 5 years and they aren’t yet in management. Assuming Jack and Jill are putting in the differential between what they could pay for the Employee-only Best program, and what they would pay for the Least HSA annually, that’s $1066/yr into a HSA savings compounding at 2.5%, or dump it into VTI for ~7%. And if they are particularly wise, they max out the accounts annually at $3500. (We’ll keep them <55yo) Jack could let the investment ride, or he could use his HSA savings to pay off the bill. Jill's probably not producing babies annually, so at two years, she's invested in more than she paid out for her child's entry into our world.
Remember, they work retail. @$40k/yr, they pay out an average tax rate of ~18% in California, so their taxes are ~$7170/yr. But the HSA contribution lowers their taxable income by ~$630/yr. So Jack has $630+$3500-$2360, or $1770/yr that can be earning tax-free interest or investment gains per year, disallowing the compounding. Of course, he had to come up with the difference between what he saved and what he contributed to max the HSA account, so $3500-$1066=$2434/yr out of his take-home pay. Or Jack can pay out $85*26=$2210/yr for the Best plan, plus $1640 for his Best plan treatment, to be out $3850 a year. To put it back into your poll:
Jack 'rolls the dice' and has $1770 additional wealth annually with tax-free earnings for life after investing $2434 of his own cash (for a net loss of $664). [With consistent investing, the compounding will overcome the accumulated net losses in time while also building a fiscal safety net.]
– or –
Jack's put a 'premium on peace of mind', and pays OUT $3850. No savings, no safety net.
———————————————-
To answer your question, I purchase the $175/pchk HSA family plan outlined above. A healthy family of four with the occasional active lifestyle needs for the medical profession, our HSA eclipsed our Roth years ago. It's one of many tools toward our personal wealth building.
Sam, you're an incredibly bright fellow, and you are in an enviable position of being too wealthy to reach down to the HSA level. The people who can qualify for a HSA plan — they'd LOVE to trade places with you. I hope you see that the original blog post does them a huge disservice by actively dissing these plans. People who aspire to have 1/1000th of your wealth — they might look up to you here. The HSA plan is a solid wealth-building opportunity even on their meager rations. One of my favorite lines of yours is, 'Money matters are too important to be left up to pontification.' That's a good statement.
Arrgggg… the astute reader will see I wrote
‘But the HSA contribution lowers their taxable income by ~$630/yr.’
and that should have been
‘But the HSA contribution lowers their income taxes by ~$630/yr.
Where’s the coffee…
I didn’t have time to read all of the comments this time so my apologies if someone already mentioned this but one other great thing about an HSA that I didn’t see in Sam’s post is that if you can afford to, you don’t have to pay for your medical expenses out of your HSA. You can continue to leave that money in there to grow tax-deferred. So in theory you could contribute $7,000 a year to the HSA and never take any of it out.
Now you have 2 options.
1) You can wait until age 59 1/2 and begin taking withdraws from the HSA as retirement income. You will pay taxes on the withdraws like a 401K, but no penalties. OR,
2) What many people don’t know is there is no expiration date on when you can withdraw the money for qualified expenses. So in theory during retirement, at whatever age that is, you can effectively treat your HSA as a Roth IRA and withdraw amounts from the HSA each year as long as you have eligible expenses and pay no penalty and no taxes and you don’t have to be age 65.
The trick is to keep meticulous records for all qualified medical expenses you incur after you open your HSA. I would suggest scanning them and keeping back-ups on a flash drive or external hard drive. If you open an HSA when you’re 25, keep 20 years of records, and retire at 45, you can begin to withdraw tax-free, penalty-free money as you want to as long as you’ve accumulated enough qualified medical expenses that have not been previously reimbursed from your HSA.
Personally I am following option 2 because you can’t beat putting in pre-tax contributions, having tax-free growth, and getting tax-free withdrawals in retirement. If you are already maxxing out your 401K, I would put your next $7,000 into a HSA before you put a dollar into a taxable brokerage account.
You have to do the math on these programs. After analyzing the plan for my family at my employer (state university) which contributes each month into my HSA ($125 per month) the plan works out as follows for different scenarios:
a) If you are rarely goes to the doctor, the lower price for the high deductible plan and the money the employer gives you makes it the best alternative.
b) If you are using doctors some four five visits a year, the co-pay premium plan is best.
c) If have high medical expenses the maximum out of pocket cost for both the high deductible and the premium plans are almost the same so it makes sense going with the high deductible plan.
Since we have a son with an autoimmune disorder with a very expensive treatment we are maxing out every year and save about $4,000 going with the high deductible plan.
So the regular co-pay (low deductible plans) only have a “sweet spot” when they are the best deal.
I’ve checked out the math, and the HDHP + HSA combination turned out to be a better deal for me and my family, compared to a health plan with a low deductible or no deductible, even before considering the tax advantages of the HSA. However, I should provide additional information that is specific to my situation: My employer will pay 80% of the premium for either health plan (no deductible or high deductible), leaving me to pay the other 20%. And my employer contributes $1,200 per year to my HSA, if I choose the HDHP + HSA option.
Paying for health expenses up to our deductible was a bit difficult during the first half of the first year that we had the HDHP, because we hadn’t yet built up much money in our HSA. But now that we have had this plan for a few years, we always have enough money in our HSA to pay for any medical bills, even though our expenses exceed our $2,700 deductible every year (and we even reached our $6,000 out-of-pocket maximum one year). The HSA has been a great way to save for orthodontic expenses (braces) for our kids too.
I’m not really sure what is so bad about a deductible. I assume that most people have deductibles on their home and auto insurance, but I don’t hear too much complaining that home or auto insurance is a bad deal because of the deductibles.
I have a high deductible plan and choose “other” for your second question of “Is it worth having a high deductible health plan to be eligible for an HSA?”
I picked it because of the way I came to having a HDHP plan. My employer has a marketplace for choice health care similar to the ACA marketplaces. In 2007, I had the “platinum plan” with blue cross blue shield and paid the Platinum premium over the HDHP option. I went into the doctors for my regular physical/regular tests that should have only cost me the $20 co-pay. Instead I got a bill for $300 from my in network provider. Apparently the week before Blue Cross had decided that all tests must go to lab corp instead of quest to be considered in network, mine went to the wrong lab. I switched to the HDHP the next open season. I figured if I was going to be stuck with charges that should be covered but aren’t for some reason, I might as well have a lower premium and have an HSA that rolls over if I don’t use it.
Crunching the numbers is actually fairly easy. In my case, once my wife’s plan allowed for a High Deductible health plan paired w/ HSA, we jumped all over it. The spread between premiums for the low deductible plan and the “worst case” scenario with the out of pocket max on the high deductible plan made the High Deductible plan SLIGHTLY less costly in a worst case scenario. Then I love the HSA. I’m 50, wife is 48 and we plan on maxing out the $7,000 contribution (which hopefully goes up over time) until we’re in our early 60s when we fully retire. Tax deduction to go in, grows tax deferred and tax free if used for the inevitable health care costs later in life. Or even to pay for COBRA or Medicare premiums. We have plenty of cash flow and emergency accounts to pay for the out of pocket expenses in the meantime. In our case, the HDHCP and HSA works beautifully.
Self employed person living abroad where I have free health insurance. For me, since I have free insurance through the country I live in (yes it’s one of the Nordics), and I didn’t pay for health insurance in the states, then I am not eligible to contribute to an HSA. For me, it wasn’t worth paying out of pocket for another HDHP and letting the “HSA tail” wag the dog.
Fortunately, I have never met my deductible since I have been an adult (> 8 years). I have saved 20k in an HSA and have it all invested in stock. Even if I switch to a low deductible plan I can continue investing that money and use it at age 65 for any medical expenses, including LTC premiums (should that be necessary). Perhaps the crossover point is having children? I think that you are better off with HDHP, even if every now and again you have to pay the full deductible. On the other hand, if you are a power user of the medical system maybe that math wouldn’t make sense. Like most financial planning topics there is the quantitative aspects (i.e. the mathematically correct choice based on the variables) and the qualitative aspects (behavioral finance).
Local gov’t worker here.
Have had HDHP w/HSA for 8 yrs now and love it.
For one, my employer kicks in the entire deductible amount every year, into our HSA.
$3k deductible with $6k max out of pocket. Work puts $3k every year on Jan 1 into the HSA.
Took me a while to realize that some day I can use this money to pay for Medicare.
Some employers also contribute to their employees’ HSAs. My employer contributes about $50 per paycheck to my HSA on top of paying for my HDHP. I’m healthy (never spent more than a couple hundred per year on doctors in my adult life and have an intense distrust of conventional doctors from some bad childhood experiences), no children yet, and a high earner. The tax shield is great for reducing the amount of income that gets taxed at over 30% federally. I will definitely switch to a zero deductible plan once I get married though.
My husband goes with his employer health plan (HDHP) and maxes out on his HSA. My kids and I go with my employer health plan (low deductible) and generally use an FSA. This is the best combination for us. I do have an old HSA account from prior years.
My employer just held a learning session on HDHP with HSA since they will be offering it next year in addition to our existing no deductible plan with FSA. Of course, we can only choose one plan. I may have missed something, but it was my understanding that if your spouse has an HDHP and HSA and you have a low deductible plan through your own employer that you could not use the FSA benefit. Can someone please clarify?
My company covers the HDHP deductible if you do certain healthy activities, like go get your annual checkups or run a 5k. It’s the best of best worlds.
I really wish more companies and health insurance company has provided incentives to stay healthy. Such a no brainer. Who wouldn’t want to work out more if they could save thousands of dollars right? It’s a win-win-win.
It’s really a shame we don’t encourage prevention more than cure.
I’ve been maxing out my HSA for nearly 6 years now and I think it’s definitely the way to go for the future. I am a bit concerned, though, about how Medicare for All will affect the funds I’ve set aside. The numbers behind M4All show it’ll be a net positive for the economy/population as a whole and I’m definitely in favor of M4All but what happens to the money set aside in HSAs? I would hope there would be an “amnesty” program for the funds in HSAs where funds could be taken out with no penalty (although taxes could apply for non-medical expenses).
Great write up, Sam! I’m a long time reader and really appreciate this post. I absolutely agree with the requirements on who should take up an HDHP/HSA. I thought it was obvious that one should really be able to afford the deductible and the maximum out of pocket costs on the HDHP plan they’re in. After dealing with infertility expenses while on a no deductible plan with 50% infertility coverage (no IVF), I realized I had spent more than then max OOP so I looked into the HDHP/HSA plan during open enrollment to plan for the worst-case scenario of needing IVF. We could comfortably afford the deductible and max OOP. We could also afford to contribute the maximum to the HSA. Switching to a HDHP plan allowed me and my husband to have an IVF cycle at a cost of $3,000 including medications. In my experience, infertility expenses and prescriptions did not count toward a no deductible plan’s max OOP. If you’re dealing with injectable medications, you know how crazy prescription expenses can get. I feel like I can now write an ebook about all the things I learned throughout this process. That said, it definitely takes a lot of research to make it work. I called my insurance plan many times to confirm coverages. I read my evidence of coverage. I became familiar with CPT codes. Lol. It was worth it in the end for us given the exorbitant cost of IVF but tracking all your bills and payments does take time and can get frustrating.
That’s great your plan covers IVF. So many plans don’t, and it is so expensive as you know.
I hope the fertility treatments work out!
I ran the numbers, and in a worst case health scenario, I pay less on my employers HDHP with HSA than their no deductible plan. I find it shocking how many of my coworkers still choose to pay for the no deductible plan. Option 1, pay $16k in the worst case, but rollover money tax free in a non worst case. Option 2, pay $17k with no option to rollover any money. They choose option 2 for fear they can’t pay the deductible. But if you can afford the crazy premium, you can afford the deductible! People have trouble with the math I think.
I’m surprised that the threshold is only $1350. My deductible is $1500, but to get an HSA, I would have to get the $6500 deductible option of the 2 health plans my employer offers.
While the $6500 deductible plan costs half as much as a weekly payroll deduction, I discovered that the lower deductible plan is actually cheaper. By the time I would hit my deductible under the HDHP, I will have spent $580 more than under the lower deductible plan. If I hit the out of pocket maximum of the lower plan, I’ve saved $3000 over the the higher plan. At the point of the out of pocket max of the HDHP, it has cost and extra $8500.
Granted, these numbers don’t take into account the tax benefits of an HSA, but the tax savings arent going to get that high.
I follow every post, Sam. Love your work. This one is just missing the mark regarding the analysis needed to make an optimal choice.
Thanks. Feel free to elaborate why to help me and others make an optimal choice. Be the change you want to see, otherwise, nothing gets accomplished.
Fact is, in individual plans, most plans deductible exceeds the federal limits to qualify for HSA. Picked a plan with the lower $6000 deductible to qualify for HSA and the same Plan is $180 more a month in premiums. Not much of a tax savings benefit.
Wait, if your deductible is greater than a certain amount, you are no longer eligible for an HSA? If so, what is that cap?
There are known knowns, known unknowns and presumptions. In retirement the known known is you are going to have to pay for medicare. If you are married you will pay for 2 medicares. If you are making a lot of money in retirement the cost of medicare is progressive. If you make 85K/yr your medicare is 135/mo. If you make between 160K and 500K the bill is 433/mo (oh no we don’t soak the rich it’s just their fair share!), 2 peeps = 866/mo This does not include the supplemental which is about 100 to 150 more depending on the plan and coverage. It turns out HSA can be used to pay for medicare parts A and B and the money comes out tax free for those expenses. Known unknown is you are going to die and death can often be expensive and lengthy. Alzheimer’s average length from diagnosis to death is 12 years and you can imagine at least some of those years will require nursing home, not covered by medicare. If there are 2 of you there are 2 chances at pulling the gold ring. If you get it and use up all the dough what’s your wife going to do? My solution is to fund a Roth with 1M at age 65 and let it grow unmolested. After 20 years if you haven’t used it you can molest it, by then plenty will be available. The Roth is independent of the WR money and the HSA. I funded the HSA to about 75K which should take us a couple decades to exhaust paying for medicare cost. I don’t trust funding HSA as a retirement account beyond this as all it takes is a law means testing the amount and it could be made quite taxable, the old “anything over 100K gets taxed at marginal rates” or something. A Roth is safer since that money is already taxed. In addition if you have TIRA and big medical expense you can pull TIRA money and write off the expense so you have some tax maneuverability.
The point is to get to 70K in the HSA is only 7 years of funding @ 6% return. After that you can just let it grow without further funding. You don’t have to sign on for decades of HSA funding to get a pretty good tax advantaged benefit late in life. If you had 70K in an HSA by age 50 and let it fly to 65 untouched when you become medicare eligible you would pay all your Medicare cost for you and your wife tax free forever and still have money left, depending on the rate of medical inflation. Even if it got you 20 years into retirement before running out of money it’s a good deal. Nothing works like tax free compounding.
I have a high deductible plan for our family and I am self employed. In our case, it really is the math that works out. My HDHP has a deductible of $6000 before the insurance company picks up any expenses. After the $6000, they will pick up ALL expenses. In our case, the difference in the premiums of the our HDHP and the no deductible or low deductible plans is between $400 – $600 a month.
A premium is a fixed cost while you may or may not use the deductible. Therefore, in our case, getting a HDHP has made financial sense. The tax savings from funding the HSA are just icing on the cake and give a sense of comfort to deal with increased medical costs in our old age.
I made a decision at age 23 to get a HDHP with an HSA and max it out every year until I started a family. I was young, healthy, and my thought was that if I could build the balance high enough before I had kids, the interest I was earning on the balance would more than cover my deductible in future years. It would sustain itself (provided I stayed employed, and paid expenses in the meantime out of non-HSA money). I’m 34 now, just had a kid, and that’s basically what happened. Our family now has a triple-tax-advantaged bucket of health care cash that we will continue to not touch, but is there for us just in case. As long as we have the ability to pay our higher deductible out of regular income, we will continue to do so and get the free money provided by my employer. We know we may not have the luxury of doing that forever, so why not take free money and get tax advantaged growth while you can? The way our plan options were structured, it’s basically a wash on paying more for a lower deductible versus getting the HDHP with free $, even with a baby, so we plan on keeping it as long as that’s the case. As mentioned by others, insurance will be a hassle no matter what plan you’re on, but (and I work in insurance), the hassles aren’t usually much worse on a HDHP than they are with a lower deductible.
I have a high deductible plan with an HSA because the medium and high end plans per year cost the same as the deductible + small contribution in the HSA. But that changes year over year with my employer. I know people maxing out the HSA because it is tax advantaged however i worry about two things: 1) colorado passing a universal health care law and there not being a guarantee the money in peoples HSA wont be taken advantage of and 2) already the cost of the plans change each year, last year the HSA didnt make sense at this employer so nobody had it.
I have a unique motivation to select an HDHP with HSA option. I have a daughter with a chronic disease that requires extremely expensive medication. Fortunately, the pharmaceutical company that produces the drug discounts the price paid by consumer. This, in combination with benefits provided by my state for her condition, completely covers the cost of the medication.
My job offers only 2 insurance plans to choose from, an HDHP and a more traditional high premium, low deductible plan. The HDHP lumps prescription drug costs into the same deductible and out-of-pocket-max pools as medical care. Since the medication is charged to insurance, but covered other ways, I hit my out-of-pocket max for ALL medical care in January every year with nothing really paid out-of-pocket. The more traditional insurance plan separates prescription drug coverage from medical coverage.
This creates an extremely fortunate loophole where I’m allowed to save using an HSA with very little risk of high medical expenses (critical care before medication billing in January or insurance claim denials being the two big risks) and with no very low premiums!
I really think this loophole is just another demonstration of how broken the medical industry is from a cost and billing perspective. However, it does show that you should carefully compare the fine details of insurance plans before choosing.
Husband and wife early 50 and have had a HDHP for over 10 years.
Rates are lower and the insurer puts $125 a month into my HSA. We have the $ and fund the HSA up to the maximum amount each year – $6,900 this year I think.
We have about $65,000 in our HSA and it’s invested 100% in stocks. I used to take $ out when I had expenses but stopped doing that a few years ago.
HSA $ are triple tax free – tax deductible when you put them in, they grow tax free and they are tax free when you take them out for medical expenses.
Preventitive medical and dental exams are free.
I have no complaints with my HDHP.
Nice article. The conventional wisdom in the PF space seems to be “get an HSA cause it’s the best retirement savings plan ever!!”. That logic never made much sense to me since you’ll likely need to spend some or all of your HSA for, you know, healthcare costs. But for the MMM crowd, you’ll be fine as long as you ride your bike everywhere and eat your lentils. And the conservative trope that a high deductible plan somehow makes people better shoppers for healthcare value is also BS. There’s no good way for the lay person to effectively shop for healthcare, and thats even assuming you’re not in an emergency situation. What’s more likely to happen is what you mentioned in your article; people just don’t go to the doctor even when they should.
Anyway… I actually do have a HDHP because my employer makes it the overall most appealing (lowest cost) option. We do have a kid, but double cover him with both my insurance and my wife’s low deductible plan (overall we determined this made the most sense). I max out the contribution each year and don’t even consider that money as part of my net worth (so I have no hesitation about spending it on any medical stuff). My plan gives me a debit card tied to that account which I view in the same way as the insurance card itself- I hand it over for medical treatment when necessary.
One point you mentioned in favor of getting a low deductible plan, however, didn’t make sense to me though: “You put a premium on peace of mind and want to minimize the stress of dealing with health insurance providers who may refuse payments.”
An insurance company is no more likely to approve/refuse coverage whether you have a high or low deductible plan. They’ll play games both ways. Despite the names that the marketplace uses such as “Gold” and “Platinum”, it’s not like they offer better customer service (or even networks) if you pay more. It’s just a matter of pay now or pay later. Atleast health insurance companies offer fair treatment in their long hold times and poor service for everyone!
Also look at it from the healthcare providers point of view. The better your plan, the more they might want to fitchew in their schedule and return your calls. At least that’s been my experience.
Ever since switching to my no deductible plan maybe five years ago, I feel like they’ve rolled out the red carpet.
Well- that’s surprising. I’ve had low/no deductible plans in the past and my wife’s plan is currently low ($500), but I’ve always received poor customer service and runarounds/random denials regardless of provider or plan.
Which provider/plan do you have if you don’t mind me asking?
This is a great topic Sam. As a long time reader since ’10, I appreciate you pumping out fresh content on a regular basis.
My wife and I are expecting our first child this year and actually opted for the high deductible health plan. At my work, the regular plan and high-deductible plan have the same out of pocket max @ $7000 so it actually made more sense to go with the high-deductible plan and pay for the child-related costs out of our HSA with pre-tax money. It was very counter-intuitive but ultimately should work out well for us. Our household combined income is >$400k and we save about 85%+ of our take home pay. I’ve been funding my individual HSA the last few years prior to marriage and so have the $7000 ready for the out of pocket max when the baby arrives in the fall.
Best of luck to you! Your baby will change your life for the better. There’s nothing more you will love greater than your baby. Just make sure to give each other a lot of forgiveness passes, because if you plan to spend a lot of time taking care of your baby, your energy and patience will wear very thin.
I usually don’t comment but thought this might help someone in a similar position. We have a HDHP and I have a chronic disease. I have tens of thousands of medication and health care every year and spend hardly anything out of pocket. How? My $7k (every other month) medication goes against my $2500 deductible but the medication has an amazing co-pay program that pays all but $5 of my OOP expenses. All it takes is one dose of medication right after the new year and all of my medical expenses are 100% covered by insurance for the rest of the year. It’s been an amazing program for us. So a HDHP is not only for healthy people.
Thanks for sharing. Yes, It makes sense that if you have chronically high expenses and except paying the deductible, then going with a high deductible health plan with lower monthly premiums works out.
What is your maximum out-of-pocket expense a year under your plan?
Generally the wise choice with every kind of insurance is to only insure what can you can’t afford to cash flow. So if you can afford to write off your car in an accident it is smarter to drop collision coverage. If you have enough assets invested to take care of your family then term life is wasted money and if the deductibles and max out of pocket for a high deductible HSA qualified plan are insignificant amounts in your world then gold and platinum plans are, on average, a bad overpriced luxury. The insurance companies know a lot more about what it actually costs to cover you than you do. They will not sell you insurance that will make you money unless forced to do so by the regulators. Of course I have two sets of insurance that violate this concept, term life and long term care. Why, because my wife wants them. And her peace of mind is priceless.
Sam, You are so right when you state that you don’t know how healthy your child is until about age ten. Most folks think that once their child is past the early toddler years most typical childhood illnesses are behind them.
Our middle child was a very healthy kid ( less frequent doctor visits for usual stuff ) compared to his two brothers. Then out of the blue he got sick at the age of 10 and was diagnosed with Crohns Disease. Thank goodness we had great insurance. You never know.
Can you tell me more about how Crohns Disease affects your boy? I have a student with the same disease, and I want to be respectful of his condition and help out where I can.
Long time reader, first comment. This is a good overview, but I think you’re missing the best part about HSAs for people who have to buy insurance through the federal exchange. HSA contributions lower your MAGI, which is used to calculate insurance subsidies. If you’re in a place where you make just a bit too much for the subsidies, getting a HSA compatible plan can allow you to lower your MAGI by the HSA contribution limit. The subsidies are very generous for families. This alone makes the HSA plans worth it if you don’t expect to use a lot of non-preventative healthcare since the subsidy will cover most of the HSA contribution. Even if you already qualify for subsidies, the HSA contribution will qualify you for more, plus you’ll get the tax break.
You’ll enjoy my upcoming post!
The question is: do you think there’s a quality difference between the plans if those Americans who qualify for ACA because they earn under 4X the poverty level limit?
What exactly do you mean? None of the on-exchange plans are very good. Even the gold level plans have a 10k+ out of pocket max for families. There are no low deductible plans on the exchange. As to whether or not the ACA has lowered the quality of healthcare, I’m not sure. It certainly hasn’t made insurance affordable though. Are off exchange plans of better quality?
I just wanted to add about the attainability of the ACA subsidies for families and how a HSA can push you into them. It’s not often talked about when discussing the price of healthcare.
I think most of the ACA plans have extraordinarily high deductibles and massive out of pocket expenses.
It is disaster insurance at its finest. But the out-of-pocket expense limits are so high, I don’t understand how people who make less than four times the poverty limit can’t afford it if they actually get sick.
I used to love HDHP. That all changed when I had a health scare and then later got involved in 2 car accidents in 3 months. Just one big incident can wipe out your HSA savings. Easy to say HDHP makes sense when you’re healthy and have no obvious risk factors but do I like to bet on never getting hit with an unexpected disaster? I don’t think so.
So happy you brought this topic today. We just immigrated to the US, we’re 40, respectively 50, with a 5 year old daughter. All in excellent health so far. What would you guys advise us to look for right now, as we still live off our savings. Husband will get a job these days, but the salary will come in weeks from now, I make some money from my newly established web design business, but it’s still small, just like any startup. We’re probably gonna get Medicaid (I think) for a while, as others told us, since we still don’t have serious income here, but we’ll probably need to look for some health plans ourselves. What would you guys recommend?
I am with you 100%… we pay for the top tier PPO for my husband and my son because I am worried about my son’s medical needs. (I’m on my own top tier PPO at my job). For myself and my son, we would always have a PPO. If my job subsidized dependents, I would get him on my insurance and then encourage my husband to do the high-deductible plan because he is in excellent health and rarely gets sick. But since my job only subsidizes my health insurance, my husband must cover my son on his health insurance plan and they both go for the good PPO. Kids get sick with random stuff, they fall and break bones, the get serious cuts that require stitches, etc. etc. Plus, if your child becomes diagnosed with a lifelong condition (like my boss’s son was diagnosed with Chrohn’s Disease and I have plenty of friends who developed Type 1 diabetes as children), good luck with a high deductible plan!
Although I haven’t had to experience too many expensive medical visits yet with my 3-year-old, I know the moment we switch to an HSA plan, I’d eat through the family deductible within months.
The only time I recommend high deductible plans is for young people first getting a job. If they can start maxing out their HSA with their first job and they rarely use that money, maybe then, and only then, if they have kids in their 30s, they can keep with the high deductible plan because they’d have 10+ years of money in the bank to cover any health needs that may arise. But if you’re not in that type of situation and you’re having kiddos, I’d stay far far away from any high deductible plan.
Fun fact– my son was in the NICU for 2.5 weeks (born at 34 weeks after I was in the hospital for 5 weeks with leaking amniotic fluid (high infection risk)). After 13 months of arguing, the health insurance agreed to pay $55,000. I know for a FACT, that my health insurance was BILLED initially nearly $500,000 for that 2.5 week NICU stay. A NICU stay can happen to any child without rhyme or reason! (there was no explanation for my problem). Unless you are prepared to pay your max deductible on your child’s birth (because anything can happen), consider upping your health insurance when you have children. And unless you can guarantee that EVERYTHING is in the network (the freaking anesthesiologist tried to bill me separately for the birth!!!), stick with the quality health plan.
Thanks for sharing!
Oh man, the STRESS of dealing with health insurance carriers is really the main reason why I don’t want to mess around. I know the stress will still happen, but I hope with our current platinum plan with no deductible, the necessity to deal with insurance company goes way down.
Seriously, it is stressful enough to have a premature baby. Better than have to worry about massive medical bills and stuff? Come on now.
I hope your boy is doing well!
How the heck do you even get access to a platinum plan as a self-employed person? And what does it cost you?!?!
We have a corporation. $1,750/month for three. Muy expensivo.
Are self employed people not allowed to get platinum plans or no deductible plans?
One of my friends pays an extra $20,000 a year to get concierge service. When you have medical concerns, there’s nothing better than having a medical professional provide you immediate consultation.
Gotcha. I had a vague understanding that paying for a platinum level plan out of your own pocket (as a SE person) is prohibitively expensive. So, well, $1,750 is not prohibitive but it sure is a lot!
The average healthcare annual premium is about $19,500, it’s just that employees don’t pay that b/c the employer subsidizes most of it.
I invest the funds in my HSA plan and just keep track of my medical expenses. The great thing is that you can withdraw that money from the plan at anytime for the medical expense. So if I spend $100 in 2019, in 20 years I can take that $100 out tax free. So as long as you can pay for your health care bills now it works well.
My employer also kicks in $500 a year to the plan. I also believe that since the money toward my HSA is being taken out of my paycheck you don’t pay FICA. So you save on that as well, as apposed to putting in the money yourself into your HSA.
One of things I don’t want to do is keep track of medical expenses, and have to open another account and then shift money to pay for these expenses and so forth.
I think people who don’t have time to do this or don’t want to do this or also some of the people with low deductible or no deductible health plans.
For example, I cannot be bothered to do balance transfer reward credit cards since I was about 24 years old. But when I just got out of college, spending the time and tracking everything was more meaningful. Now it is absolutely not.
I hate dealing with health insurance providers. I would rather have them rip me off a little bit more to never have to deal with them.
Every month, I just go through my receipts and in a spreadsheet, date/list out the medical expense, then scan the receipts. I do it monthly so its not so cumbersome at year end. It doesn’t take long and then I know my amount. So at a future date if I want to withdraw from the HSA there is no guessing and issues with the IRS.
“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?”
The whole point of income limits on IRAs/child tax credits is that it’s harder for lower-income households to afford to raise children than it is for upper income households. $20,000 in daycare expenses is a much bigger chunk of $50,000 income than it is of $250,000 income. Another way to phrase your question: Why should the taxpayers subsidize high-income earners’ childcare?
Put yourself in Big brother’s shoes. Do you want children who come from more stable families, with at least one parent who is able to stay home and take care of them and teach them how to be good kids? Or do you want more children from broken homes with absentee parents that result in kids who don’t do well in school, pay less taxes, and become a greater and greater burden to society?
Incentivizing the poor is also cruel. Children cost Waymore than the stupid child tax credit can help.
I’m surprised at the mostly negative reaction to the HSA. This community promotes putting the max $18K into your 401K, partly to save on taxes, and it’s the same with putting the max $7K into the HSA.
I had the choice of a platinum plan and HDHP, and chose the HSA eligible plan. I hate the guessing game of use it or lose it with the FSA, and even the high end plans have growing deductibles.
If I have a bad year, the max HSA contribution covers my out of pocket max. If I have a good year, I build for the future and feel more insulated against rising costs. You can use it in the future on a low-deductible plans if you switch (just can’t contribute). And it really covers a lot…I consider it 30% off health expenses with the tax savings.
Actually, I think you have it backwards. Check out the first paragraph in this article. The community raves about the HSA Due to the triple tax benefits. This article goes on to explain the alternatives and why.
It’s so incredibly worth it, in my case. My company pays the entire deductible into my HSA every year, so even if we max out (which I just assume), we’re much better off. I just pay a copay (which I would anyway) and have a microscopic premium payment. I also have some room to max out the HSA with the premium savings.
Thus, the attractiveness depends upon your employer’s generosity. Mine wanted us off the expensive low-deductible plan ASAP, so they were very willing to contribute. If the employer doesn’t contribute, that’s a very different story.
Also, as you know, the HSA is triple tax free. I don’t use it for healthcare–just letting it compound until retirement.
Sam,
I have an HSA and love it and I’m surprised other FS readers aren’t doing the same thing I am. Here are my circumstances: my wife and I both work and have a baby girl, our combined w2 income is 400-500k. We crunched the numbers and it was better for my wife to put our daughter on her plantinum plan and for me to opt for the high deductible HSA. I have the disposable income to pay for my occasional doctor visits and I get to sock away $2,500-3,500/year in the HSA. I keep $2000 in cash in the HSA and the rest goes into index funds. When I reach retirement I should have a large chunk of cash that I can use to pay for medical expenses for myself or dependents or after age 60 I can use those funds for ANYTHING and won’t be penalized. Let me know your thoughts.
Whatever works best for you. You have crunched the numbers.
I’ve been out of the workforce for so long, I’m curious why don’t more couples just get on each other’s plans? Or example, why doesn’t one partner get on the other partners better plan? I guess it all depends again.
It’s usually a lot more cost effective for spouses to be on separate plans. Most companies today who pay a portion of their employee’s health premiums are willing to do that for the employee but not the spouse. For instance, the monthly premium for my health plan is around $450/month but I only pay $60 of that. If I wanted to get on an employee plus spouse plan, my employer pays very little of the additional cost if any.
I’ve never qualified for an HSA plan. When I was at my old employer they usually offered 3 or 4 plans to choose from. For years they payed 100% of the premiums. That was a luxury. Over time they started having employees pay a percentage. By that point I was doing well salary wise so I never elected to have a high deductible plan. Great insights in the post Sam. Thanks!
You need to evaluate the cost of a high deductible plan against the cost of other plans in your market. Insurance costs vary across the nation. My wife and I are retired and under 60 and don’t qualify for an Obamacare subsidy, so we pay 100% of our health insurance costs. We’ve had a high deducible plan with HSA for 4 years. In NH, I found that the premiums for the Gold coverage (minimal deductible) plan was almost equal to the cost of the high deducible plan plus the max out of pocket amount. We had 1 out of the previous 4 years when we almost hit the max out of pocket amount. For the other 3 years, we’ve had a net savings, plus we’ve been able to contribute to our HSAs. I don’t see the sense in paying the max premium amount every year, unless you have a chronic condition. Do the math yourself!
I think it really depends on what is covered by your low-deductible vs. high-deductible plan. I used to have the low-deductible plan but then I found I still was bearing a large burden with respect to things like mental health (separate deductible) and dental (not covered by health plan) that aren’t covered by the low-deductible plan. Now I have the high-deductible plan and the mental health costs for weekly counseling sessions and orthodontics (which were previously paid out of pocket with pre-tax money are now paid with post-tax dollars). And with the mental health especially I’m reaching my deductible for other medical expenses faster (whereas before it had its own separate deductible).
Anyways, you really just have to do the math on what type of expenses you expect (like if you plan to get Invisalign next year or you plan to use counseling that has low coverage).
I have an HDHP for our family of four (kids age 4 and 7), and I think it’s a good option for us. I don’t think you are considering and comparing the costs in a complete manner. First thing to remember is that under all health plans (including HDHPs), preventive care is free, including all kids’ scheduled visits and vaccines. So most of the kids’ health cost is free to us. Second, yes we pay for doctor visits and other stuff, but it’s at the insurance company’s negotiated rate. (With HDHPs the insurer wants to keep your costs low so you don’t reach the deductible and they don’t have to pay anything.) Mostly I pay out of pocket and fully fund he HSA, but if there were a big cost (like maybe braces) I will use this tax advantaged money to pay for it.
Finally, the right way to compare health plans is to look at the monthly premium and deductible, yes, but also look at the catastrophic maximum payout, after which the health plan pays 100%. For most plans including HDHPs this is in the range of $25k, but a really serious situation or chronic disease will easily surpass this amount and in the case of chronic disease you’d have to pay it every year going forward. Since everyone eventually gets sick or hurt, health insurance is really bankruptcy insurance, and this catastrophic max is really where the most important protection appears. In the meantime we are saving money every year, building a non-taxable asset for use in medical emergency situations or for retirement, and still getting the kids’ medical checkups for free. By the way I agree not to use the HDHP if you are pregnant — that’s one moment where you can predict a big cost. We switched after our 4 y/o was born.
Great point on all preventative care being free, which hopefully for more people/children, this is enough for the majority of their lives.
Now the question becomes: Is it OK for some folks to be able to participate in an HSA while other folks can’t? If so, why?
Personally I think it’s fair, yes. Obviously it’d be great for everything to be tax free, but that isn’t workable obviously. If you don’t have an HDHP, your larger health care premiums are tax deductible to you as an individual. If you use an HDHP, your deductible premium payments go down. It is fair to give such people a special tax break that at least makes them whole compared to people on platinum plans. The current break is probably larger than necessary to make us whole, and that is either unfair, or is simply the incentive to choose a market-based health model instead of a smorgasbord. Which one is a matter of opinion only, but even if the amount of the available tax break is unfairly large, the existence of it is not.
Non-HSA people will often have access to a healthcare FSA. An HSA is superior to an FSA in many ways, but an FSA does still provide tax savings for predictable healthcare expenses.
Great point. Just not as efficient since it is use it or lose it.
I have a high deductible health plan and max out my HSA every year. I figure it will come in handy in my golden years where medical costs are going to be exorbitant and I won’t have my doctor income to cash flow things like I do now.
I actually think people who make 6+ figures would be better off with the HSA (contradictory to what is in article) because these are the people that typically have a lot less tax advantaged vehicles available to them (traditional and ROTH IRA for example) but with this there is no income phase out. Plus the high earners are more likely to be able to handle a big deductible hit and cash flow it.
I cash flow everything now even though I could pull it from the HSA because I want that as my Stealth IRA vehicle.
Interesting points.
One thing I want to emphasize, which I think is underemphasized is that once you reach a certain income or net worth level, you really don’t care so much about the tax benefits. What you really care about is peace of mind and not having to deal with BS and paperwork and calling the insurance company to ask, “WTF am I being charged 10X what I thought I was going to be charged?” etc.
I think many of us have gone through these “WTF” moments that have stressed us out when it came to dealing with health insurance providers.
I will happily pay up to reduce these moments, or better yet, never have to deal with them again.
Unfortunately I find myself dealing with the BS either way. If you ever go inpatient, have a procedure, or visit the ER, you’re liable to get 10 different bills from specialists and lab techs. The low-deductible plans that do not provide FULL coverage still expose you to this racket.
Maybe. I went to the emergency room last year for my boy, and everything was covered. We received no hassles from the provider or the insurance company. Just that the doctor had terrible bedside manners.
Going to the ER and having a major illness are two separate categories. I have a co-worker whose daughter needed a heart transplant. Co-worker commented he needed an assistant to manage/sort through all the bills.
True, at a certain wealth level there is a point where convenience outweighs savings. I’m probably not at that level of wealth yet (although I have conceded that I rather spend a little more money having Amazon ship me something in 2 days rather than go out and hunt for it on my own, so yeah convenience does play a role in that :) ).
I have 2 kids and our family purposely switched to a HDHP and have maxed out the HSA since (to go along with the $9000 I already had in a HSA from when I was younger). We did the math versus the low deductible plan based upon doctors appts we had with our daughter and any potential procedures. Worst case was we broke even with the HSA as compared to the low-deductible if we needed a medical procedure that got us to the deductible limits. My wife’s employer paid for the entire cost of the HDHP, while the low deductible plan had super high premiums (she worked for a hospital system). We have not encountered any of the issues you have mentioned using the HDHP. All funds get invested in the HSABank account through a TD Ameritrade, and we pay all healthcare using taxable funds. To me, the HSA is the first investment option going forward, at least until we have enough in their to reasonably cover retirement healthcare costs in ~25+ years.
I should note that my wife giving birth to two kids, we were on a low-deductible plan, but that was more because my wife was not sold on the HDHP option yet.
“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.”
All annual appointments in our HDHP are 100% covered. I recently got a huge gash and had to got to the emergency room. It cost $800 after the negotiated discounts; much less than the $2000 in the EOB. That $800 would be approx the monthly premium in the low deductible plan.
Each person is going to be different. Do the math and then decide which plan works best. With our options available, the HDCP plus HSA is far superior.
“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”
EXACTLY! I wanted to do my fiscal duty and participate in an HSA but as the premiums increased year over year, it became harder for me to wrap my head around dispensing with “that much money” every month.
As employee #5, I didn’t have the option of getting insurance through my company until recently. But even that premium is high as all get out.
I currently use a short-term policy + a healthshare plan for a total of about $190/month. This is in comparison to the $600-$800 a month that I’d be paying with a private exchange policy (I’m 32 with two 7-year- ).
My emergency funds are there to cover any deductibles or surprises (like my son recently doing and hitting his head on a chair which required an emergency room visit and staples). Meanwhile, the HSA account sits dormant.
Hi Sam,
We have a HDHP through my wife’s employer. We switched from a low deductible plan to a HDHP “AFTER” our son was diagnosed with a major health issue. We had a few incentives to switch: 1) The premiums were lower, 2) The Out of Pocket Maximum was lower with our HDHP (which I think is rather common), and 3) Her employer contributes 1K (now 2K) to the HSA.
So contrary to what you might think an HDHP can actually make sense when you are going to need a lot of healthcare or very little of it. A low deductible plan usually makes sense somewhere in between. At least that has been my experience.
Note: Our son has been given clean bill of health although continues to require testing which put him over his individual Out of Pocket Maximum and we continue to favor the HDHP.
Very interesting! Can you share some actual numbers regarding the monthly premium amounts and deductible amounts for each plan? What are the out of pocket maximums between both plans?
Good thing to note about the out of pocket maximum, which I’ll include in the post. thx.
I can try to add my current plan in (you can match it with my comment below). This is the family plan for me, my wife and 2 kids ages 2 and 3. We selected the HDHP with $1300 deductible plan, since we have a 25% chance we may need to get ear surgery for one kid. We will come out way ahead if we don’t, but slightly behind if we do.
PPO low deductible plan
$7267 in premium, Annual OOPM is $12,000, Total Max OOP is $19,267
HDHP with $1300 deductible ($2k added by company into HSA)
$3352 in premium, Annual OOPM is $6,000, Total Max OOP is $7,852
HDHP with $2700 deductible
$0 in premium, Annual OOPM is $10,000, Total Max OOP is $10,000
“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.”
Preventive health is covered 100% on all plans listed above.
Apologies I was wrong about the Out of Pocket Maximum being less. Out of Pocket Maximums in our case are: $3,500 (Individual) $7,000 for (Family) for the HDHP and $2,625 (Individual) and $6,625 (Family) for the Low Deductible Plan (LDP). However, the cheaper premiums, employer contributions, tax benefits, more than make up the difference. Apologies the premium comparison numbers were not directly available. In addition I believe (not 100%) another difference is that prescription drug costs are subject to deductibles for HDHP, however, they are included as part of Out-Of-Pocket maximums (this is not true for LDP) making a true comparison of the Out-of-Pocket maximum difficult.
OK, thanks for the clarification. That’s an importance difference.
What about the stats on a no-deductible health plan?
To echo Gary, I think this depends on the quality of the high deductible plan. My job offers an excellent HDHP, where I don’t have to pay a deductible – this means that even though I utilize a lot of healthcare for my age (I often do dumb things and I am injury prone) the HDHP is a much better deal than the regular PPO.
For example, last year I had to get PT for a sports injury. after meeting my $1500 deductible (only took 10 visits or so) I had no copays for the following 40 visits. If I had the PPO, the 50 PT visits would have cost me 50*25=1250. In effect, if you go the doctor often, the copay savings pay for the deductible. this is not counting the HSA tax savings or about $1000 and the premium savings of about $700.
I am very fortunate to have such a good plan, but like a lot of people above say, do the math yourself – the more expensive plan is not always the better one.
I think everybody would agree that if you don’t have to pay your own deductible for a high deductible plan, that’s a no brainer.
If I didn’t have to pay more taxes and still get everything for free, I may vote to raise other peoples’ taxes as well.
Hi Sam, I think I did not communicate this correctly. I paid 100% of my deductible out of pocket. The point I was making is that on every HDHP there is a breakeven point where the out of pocket costs on the alternative plan (copays and such) exceed the out of pocket deductible on the HDHP.
For me this breakeven was 55 visits to the doctor within the calendar year – this is not taking into account the tax advantages and the premium savings. Everyone should make an educated guess on the amount of healthcare they are likely to utilize in the coming year, and do the math accordingly.
As someone mentioned above the HDHP makes the most sense in two situations – where you only do preventative care or where you utilize a lot of healthcare.
I previously made a spreadsheet that came to that same conclusion: if I used a little or a lot of health care, the HDHP + HSA would be cheaper. This was true even though the HDHP my employer offered actually had slightly higher premiums than the more traditional plan. In more common cases, where the HDHP is cheaper and/or the employer contributes to the HSA, it’s possible for it to be cheaper in all circumstances.
One key reason is exactly as svi says: with an HDHP, the out of pocket max is the max you will pay out of pocket. With traditional plans, you still have to pay co-pays on things like doctors visits and prescriptions, and there is no maximum.
We don’t have an HSA either. I don’t think it’s a big deal. Sure, I would like to take advantage of it, but HDHP isn’t the right fit for us. We’re getting older and we all have some minor health issue. I prefer a low deductible health plan.
Besides, when we get Medicare for All, the HSA wouldn’t be that useful anymore. :)
There are other reasons to consider when evaluating whether a high deductible plan makes sense such as what else the company offers, if it contributes enough to the HSA to offset some unexpected illness costs, or whether other coverage can be secured. We chose the high deductible as a family with small children because it was all my husband’s company offered and they were willing to subsidize 95 percent of the monthly cost for him and the kids. They would not cover me at all because I was eligible for coverage through my employer. This was much cheaper than adding them to my insurance because my employer makes the employee pay 100 percent of the difference between employee only and family coverage. We had this for almost two years until he changed jobs to a company that doesn’t offer a high deductible plan.
We found little difference in our total annual paid between employee paid premiums, deductibles and co-pays. Yes we paid less in monthly premiums but more in deductible for sick kid and ER charges before hitting the maximum amounts. Now we have a PPO and pay more in premiums but less in deductibles and copays in an average year. We did learn that employers also subsidize the costs of the HSA administration so they can charge monthly fees to you after you leave the company. The letter said $10 per month. This is not mentioned enough in the articles talking about how great a HSA is for long term savings. One benefit often not mentioned is that all family members can use the HSA for medical expenses even if they are not personally on the high deductible plan.
I also learned that the best way to keep health care costs down is to have insurance through a big well known company that can negotiate hospital costs, such as the 87 percent discount they negotiated on an MRI I had last fall, working with your doctor to bunch expensive testing into a year you already met your deductible or out of pocket maximum, and adopting a wait and see approach before expensive testing when reasonable. I find many doctors prefer to order expensive tests at the start of symptoms. They say it is to rule things out or to be sure but often it seems to avoid being sued later for missing something obscure or avoid another office visit. I have also had great luck asking my doctor to recommend an alternative medication when it wasn’t covered by my plan or had an unreasonably high copay.
Thank you for including the benefit ” One benefit often not mentioned is that all family members can use the HSA for medical expenses even if they are not personally on the high deductible plan” in your comment. This is really useful and often not very well known.
I tried to get HDHP but the quotes I got (for individual policy) were about the same for for our non-HDHP group rates. We both work for smaller employers and both employers do not offer HDHP. No incentive but still chaps my hide as I would love to use HSA for retirement purposes at 65.
My company only offers a high deductible plan. Thus, there is no other choice but to go with a high deductible plan.
You do tend to double think if you need to go the doctor, or if you really need that prescription; since you pay for everything upfront. I thought about this even when I had a PPO plan, but now I think about it more than ever.
Good thing my husband and I are both in our 20s and are relatively healthy.
Not wanting to get any medical treatment because you have a deductible or a high deductible could cause serious problems long term. It’s like not fixing a small leak in a roof. Over time, that small leak could tear the house down.
Preventative medicine is so important. Getting ourselves educated by doctors about what to do and what to stop doing is huge.
Data scientists have already analyzed millions of datapoints to figure out at what level deductible can we prevent patients from getting treatment to extract a maximum return.
Preventative office visits are often covered without deductible but we had that exact uncomfortable cost concern and I hated that it was even a thought.
For us it was my 4 year old child just fell down the stairs and is crying hysterically. Do I a) take her immediately to ER knowing it will cost $1K minimum on our high deductible plan b) take her to urgent care to pay $500 with possiblity they send us to ER anyway c) wait 20 minutes to see if she calms down and call pediatrician for advice (free to $100 office visit with possibility we still go to ER or for outpatient testing). when your after tax take home is $22 per hour that’s a lot of hours to pay for one decision.
Oh gosh… yes, I can see the pain in that decision. And I HATE that we have let money come between us and getting the best healthcare we can in this country.
Disease does not discriminate between the rich and poor. Why should someone who can’t afford treatment suffer more than someone who can. I don’t think that’s right in a country as rich as ours.
A big piece you are missing is in retirment you will have a tax free nest egg instead of spending your taxable 401k (your $1m saved is $700k after taxes). So saving for retirement health premiums is important too. If your house is paid for healthcare will be your largest exp in aging and you may live a long time.
Last Kaiser plans are very popular in CA but not available everywhere else, the hmo option is like taking a cruise where it’s all free but you may not like the food.
I do mention in the article the benefit of having retirement savings for the HSA plan, even though the HSA plan is specifically for health related expenses.
I guess I’m not counting on the HSA for retirement because I’m already retired, and I expect Financial Samurai readers to have plenty of wealth in retirement from their retirement accounts.
If I have to count on my HSA plan in retirement, I will have failed in my retirement planning.
One point on pregnant and baby’s health – even if the baby is born healthy, they count as a new person with a new deductible that has to be satisfied. So if you have high deductible plan, you pay the deductible for the mother, and then pay the deductible again for the new baby too. Hopefully by then you’ve hit the family deductible. We just had kids in 2017 and late 2018, and just getting the bills now.
As far as health insurance horror stories, that was my life in 2009 – 2011 dealing with my wife’s rare condition, before I moved to Florida and then back up north.
My insurance plan counted the baby under my deductible for her first 48 hours of life so this maybe depends on the plan specifics.
Our employer offers 2 type of plans, one with higher and one with lower deductable. The one with lower deductable has a higher premium than the high deductable plan’s premium + the maxed out deductable. So it’s a no brainier for us. Any year we don’t max out the deductable we save money. Plus we are getting all health care services (including my 8K+ aligners) by paying with tax free money through the HSA account.
Same here. Under my employer-sponsored plan, if I were to have taken the low deductible route my annual premiums would exceed that of my high deductible plan premiums + family max out of pocket for the year. In addition, to incentivize employees to go the high deductible route (thereby avoiding allowing the company to avoid paying a “Cadillac plan” penalty) they also give you $1500 towards your HSA. You have to do the math, especially if you are a w-2 employee.
Ah… good thing to highlight! And with Marie’s response to you, I guess it DEPENDS!
So folks need to ASK their insurance carrier what’s up. And I’m sure so many folks just make assumptions, don’t ask, and then get surprise bills 2-6 months later in the mail and think WTF.
Too stressful for many.
SAS – You might be right when the mother has an individual health insurance plan. My wife did not have an individual plan when she gave birth (so I am not sure on this point).
When we had our baby, we had a family plan with a single deductible amount for the entire family, so the costs the baby incurred in her almost 2-week NICU stay (about $100,000), were completely covered since my wife’s hospital bills on their own exceeded our family deductible. Our baby was just added onto to our family plan when she was born, so she didn’t cause any changes to our deductible.
Under our policy, the family plan was cheaper in terms of premiums and lower deductible versus what the combined premiums and deductibles would have been if my wife and I both had individual plans.
I’m not sure what the difference would be if my wife had an individual policy, but paying our premiums for the year and the entire high deductible amount was still about $12,000 — babies are expensive before you even get to take them home!
I am grateful we had an HSA to help offset some of this. But even then, the savings are not much ($6750 max contribution * 20% effective tax rate = $1,350 — I’ll take it, but by no means a game changer).
My policy is through my employer with whole family covered. However, once an INDIVIDUAL meets their deductible, that person then only pays co-insurance. A second person has to either meet the individual deductible or the family deductible, whichever is first, before co-insurance is only owed
I’ve considered a HDHP for a while now to make use of the HSA account. But I’ve been hesitant since I do lots of higher-risk outdoor sports like climbing and cycling and thus have a higher injury risk than most people. Overall I’m super healthy, so thee HDHP’s should work for me. But I go snowboarding a lot and the bottom line is that brings risk. I once broke a rib while boarding, and have friends who have done much worse.
Recently I was rock climbing and had a small mishap while rappelling. My finger got a pretty deep cut, nothing too serious and I even debated going to see if it needed stitches. I used my better judgement and thought it best to go to an urgent care to see what a doctor thought. Bottom line, the doctor was great, she literally used some kind of “wound glue” which is like super-glue as she thought it was too small for stitches, and I was done. I was there maybe an hour.
The cost? $525
I have an HMO now and only pay a $35 copay so no problem for me, but if I had a HDHP I would pay all of that. And with my HMO plan that’s about a full three months of my cost.
Bottom line for me, I like the idea of HSA’s, but I’m too active and have too much injury risk to be comfortable with a HDHP. The ones I saw at my employer have annual deductibles at about $8,000 until coverage kicks in. That’s huge
You likely would NOT have had to pay for that entire bill as the cost for treatment is run through your health insurer who can negotiate a reduction of the final bill. That’s the beauty of having the insurance in any event. The tax savings will cover the cost and you still end up with a nice amount set aside for retirement. I love HSA’s and it’s been totally worth it for my wife and me.
Interesting… that’s not what I was told when I talked to one of the HPHP representatives who came to my agency last open season. She said the deductible works like an auto insurance deductible, you pay everything up until the limit. Perhaps all of the HDHP’s are not the same, so I’ll have to look into it again
Thanks!
Yes, you do pay for the “negotiated amount” of all claims a.k.a. “You may be responsible to Pay” portion of the bill up to the annual deductible amount of your policy.
Having said that, be sure to run all medical services through your insurance provider and wait to be billed. The insurance company has negotiated rates that in MOST cases will be lower than what you would pay out-of-pocket if you had no insurance at all. So, you are still saving money on medical expenses even while you pay your deductibles. We’ve had a Blue Cross/ Blue Shield HDHP for many years now and it has always worked that way.
I believe there are more factors than just deductibles that affect whether or not you can have an HSA…at least that is my understanding. We have a high deductible plan (through the marketplace since my employer does not offer insurance) but it is not designated as one that allows an HSA. Our deductibles are well in excess of the limits you offered above.
Am I mistaken that we are not eligible?
Yes, you are correct, even with a deductible over $1350, not all insurance plans on the marketplace allow an HSA. I ended up in the same situation with a deductible over $1350 on a plan that wasn’t HSA eligible. The insurance plan must specifically state that it allows an HSA (usually referenced in the plan’s name on the marketplace).
When you are next up for renewal, search the marketplace to compare the HSA vs non-HSA healthcare plans. The deductible on the HSA-eligible plan likely will not differ much from your current deductible, however, other particulars of the plan may or may not suit your situation.
Your health plan must state that it is HSA eligible. This is more of the inconsistent rules you get when government gets involved with private sector business.