It’s annual enrollment time, and my employer is offering a health insurance plan with a $3,500 deductible and otherwise similar benefits as an alternative to our conventional HMO health plan. I’m a bit nervous about coming up with this money, but the new plan will reduce my annual premiums by $2,000, and my employer will contribute $1,000 to my HSA account. What do you recommend I do?
Sincerely,
Medical Insurance Is Killing Me
Dear Medical Insurance Is Killing Me,
The transition from a conventional health insurance plan to a health savings account (HSA) and high deductible health plan is an eye-opening experience. One of every 10 patients in the United States consumes 69 percent of the health-care costs. The other nine would benefit from an HSA, and you might be one of them.
I applaud your employers for contributing some of their cost savings from the high deductible insurance to add to your HSA. This is how it works: An HSA is a tax-free savings account that you can use for qualified health-care-related expenses. You can use this money to make co-pays, buy aspirin or pay a doctor’s bill. And like any other bank account, HSAs come complete with debit cards and/or checks. To qualify for an HSA, you must be enrolled in a high deductible health plan (HDHP). An HDHP covers preventive health care – such as immunizations for the kids and annual checkups – but all other expenses are subject to the high deductible.
I only recommend that you make the change if you have the discipline to put at least the $2,000 in annual premium savings into your HSA account. Including your employer’s contribution, you will then have $3,000 in your HSA. The first year of using an HSA and HDHP is the most challenging. You can solve the potential cash flow problem if you are able to fund the HSA up to the amount of your deductible in the beginning of the year. That way you’ll know you have the money to cover any large expenses. In following years, studies show that two-thirds of accounts have funds left over, which will help cover any gaps.
I would not recommend making the switch if you aware of any large upcoming health expenses. The breakeven point in your situation is approximately $3,000. Spend less than this, and you’re better off with the HSA. If you have been putting off any major medical procedures, get those done before you make the switch. As you can see, HSAs are a big benefit for those who lead healthy lifestyles and stay out of the emergency room.
Even better, think of your HSA as a retirement savings vehicle, and plan to save the maximum deductible. Health-care costs as a percentage of a retiree’s income are expanding rapidly. You’ll be happy to have a pot of tax-free money to cover those costs. Additionally, an individual can get a federal tax deduction for HSA contributions up to $6,150 in 2010. In your case, you are only eligible to deduct a total of $5,150 because your employer will be contributing $1,000 to your account.
HSAs and HDHPs create a financial incentive to spend your health-care dollars wisely. My wife and I saved thousands by shopping around for a cost-effective imaging center to perform an ultrasound during her pregnancy. And because HDHP participants are more likely to track their expenditures, these plans historically have lower cost and inflation adjustments year over year. So you can expect that your monthly premiums will rise more slowly than those who are the conventional health plans.
If you have a money question that is nagging at you, send an email to: questions at emarotta dot com.
Matthew Illian is a wealth manager in the Richmond office of Marotta Wealth Management, Inc., providing fee-only financial planning and wealth management at www.emarotta.com.
Isn’t it true that Obama Care outlaws HSAs and high deductable medical insurance policies, though? If so, how long wil this option be available?
My favorite subject. The wonderful HSA. Fortunately or unfortunately, depending on how you look at it, there is a lot more to it that that. I don’t buy the “if you are healthy” argument. Here is why.
Lets assume you have no regular costs, nor any upcoming procedures. Go with the HSA, you just saved yourself $3,000. And assuming the same plan is available the following year, you just completely closed the gap on any potential out of pockets costs for yourself. No contest.
Lets assume you pick up 3 prescriptions per month. 2 Generics and 1 brand name. On that traditional plan that you are paying an additional $2,000 in premium for, you are now also paying an addition $10, $10, and $30 per month. Totaling another $600 of post tax cost. On the HSA plan, those drugs may cost $14, $28, and $120 each per month. Totaling $1944 per year of PRE-TAX expense. Assuming you are putting your premium savings in you HSA, you are still ahead of the Traditional plan by $1656 and you have closed your deductible down to about $1500. The traditional plan most likely still has an “out of Pocket max” of $3,000 that is sitting out there because drug card expenses don’t go towards that.
OK, so here is the sick guy. He is picking up 5 or 6 prescriptions, a few brand name and one specialty medication. He also spends a few days in the hospital for a kidney transplant. On the traditional plan he is probably spending around $300+ on drug co-pays per month, lets round up to the drug card out of pocket max that is traditionally $3,000. Then he is having a major surgery that, through co-payments of 20% of the bill, he is going to hit his out of pocket max of $3,000. All of these costs are post tax of course. So now when we look at the HSA option, we have $8000 of charges we could incur before the HSA option does not look so good. Well I am going to jump to a conclusion that the HSA plan in question is a $3,500 100% plan, which means that out of pocket max is $3,500. Kidney transplant guy just saved $4,500 and that is not including the tax benefit.
I live and breathe this stuff. If anyone ever has any HSA or insurance type questions, I will gladly take my time to answer them. I am sick and tired of the misconceptions that are rolled up in the HSA adaptation process.
Bruce Anderson,
Absolutely not. It is and will remain to be the absolute best option employers have to offer to their employees to help everyone save money on their healthcare expenses. The only immediate effect Obamacare has on HSA’s is Pelosi’s wonderful idea to increase the non-qualified distribution from a 10% to 20% penalty. Effective January 1st, 2011.
I agree that the HDHP/HSA approach is a sound fiscal decision for most. It does take some time to sit down, do the real math for you and your family situation, to understand how it truly impacts you.
One thing to bear in mind is that the new Obama Care law does change what is considered an allowable medical expense. And there is a BIG change in that OTC (over the counter) drugs will NO LONGER be considered an allowable medical expense without a prescription from a physician. This is a major shift and one that many are not aware of which could influence the level of savings you might experience in an HDHP/HSA plan.
I’m young and healthy and on group insurance through work which is extremely expensive. Nearly everyone else in the company is much older and I feel like I am subsidizing their costs. Can I get an HSA if my employer has group insurance? I was told I couldn’t opt out.
Why should the young and poor subsidize the elderly rich who can afford to pay more?
That’s what bothers me the most about Obamacare. It hurts the young and helps the baby boom generation who paid out of pocket when they were young and hung their parents out to dry and now what our generation to subsidize them. They never seem to be willing to pay their own way and take responsibility for their own lives!
All Readers,
I’m glad to see that this question is getting feedback. I’m looking for additional reader questions – if you have a money question – please email me at questions at emarotta dot com.
Susan Cummings,
I am feel fairly confident that if your health insurance is not 100% covered by your employer, you can opt out during your open enrollment. In that case, you could compare the costs of a HDHP with your current subsidized group plan.
In our firm, we have all purchased individual HDHP coverage so that no one is unfairly bearing the burden of others. In Virginia, our pricing is based on the pool of applicants that are our age. Additionally, these policies are independent of our employer and completely portable – so no more worries about waiting periods – etc.
HSAs are just another small bandage for a terminally ill health care system.
http://www.pnhp.org/facts/singlepayer_vs_hsa_exchange.php
We need to keep the pressure on for single payer.
http://singlepayeraction.org/index.php
Well I’d like to switch my HSA savings account to something here in Richmond but try to find that! I don’t need the insurance, I already have that, I simply want to move my money from my current HSA savings to another one and continue contributions. I HAVE MONEY AND WILL G-I-V-E IT TO YOU! Please contact me if you have any interest at all. One thing though, I will not text, tweet, or twerp. I expect face-to-face contact.