To HSA Or Not To HSA?

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So a decision to be made for a couple of my peeps on whether to abandon the old way of doing health insurance or to climb on to the HSA bandwagon and here we are, archiving the process so the rest of us commoners can partake in it. A rundown on two different plans…

The first plan…this is what you usually see on one of the pages in your employer benefits package. And we’ll look at it from the perspective of an Employee + family option and compare the HSA plan (column 1) with the non-HSA plan (column 2) below.

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The red box shows the biweekly paycheck deductions depending upon the option you choose. So annually, the cost to your family is –

  • HSA plan: $81 x 26 paychecks = $2,106
  • Regular plan: $99 x 26 paychecks = $2,574
  • Savings by picking the HSA plan = $468

But there is a risk. The risk is that you have to pay for that visit to the doctor and that will hurt because that $250 is coming straight out of your pocket. And that is every time you use any healthcare services until you reach that limit of $2,600 (small blue box). The insurance then kicks in and the bleeding stops. There is no cost for annual physicals though so that’s good. The cost tally then is –

  • HSA plan: $2,106 + $2,600 = $4,706
  • Regular plan: $2,574
  • Savings by picking the HSA plan = $2,132

But there is a benefit to the employer if more folks on the payroll participate in the HSA plan in the form of lower insurance costs and hence the employer incentivizes you through contributions to your HSA plan (small yellow box). The cost tally then –

  • HSA plan: $2,106 + $2,600 – $1,500 = $3,206
  • Regular plan: $2,574
  • Savings by picking the HSA plan = -$632

This is now starting to look not that bad. But then there is co-insurance. So after you run out of that $2,600 annual deduction and you fall sick and go to that doctor with that visit costing you $250, 90% of that tab or $225 will be picked up by the insurance company and the remaining 10% or $25 will be your responsibility. That is for something minor. But if it involves a major surgery costing say $25,000, 10% of that is $2,500 and that is again your responsibility with the remaining 90% covered by the insurance company. There’s nothing like that with the regular insurance (plan pays 100%) but then there are still out of pocket expenses like co-pays, urgent care and emergency room visits. But there is an out of pocket maximum amount that you will bear in a given year with both plans and once that amount is reached, there are no more out of pocket expenses for you that year. So if we factor that in, the cost tally then is –

  • HSA plan: $2,106 + $5,200 – $1,500 = $5,806
  • Regular plan: $2,574 + $6,000 = $8,574
  • Savings by picking the HSA plan = $2,768

But wait, there’s more. Contributions to an HSA plan go in pre-tax with the 2017 annual limit being $6,850 (includes employer contributions) so if you intend to contribute to the maximum, you can put in an additional $6,850 – $1,500 = $5,350. And if you are in the 30% federal + state income tax bracket (that’s like scrapping by in the valley but not to digress), you save even more through the reduced tax burden by going the HSA route. The final cost tally then –

  • HSA plan: $2,106 + $5,200 – $1,500 – (0.3 x $5,350) = $4,201
  • Regular plan: $2,574 + $6,000 = $8,574
  • Savings by picking the HSA plan = $4,373

So that’s for the first plan. Doing the same math for another plan we tackled in the last few weeks. To make the comparison easier, we’ll use the two Kaiser plans (last 2 columns) for the analysis.

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The paycheck deductions first…

  • HSA plan: $30 x 26 paychecks = $780
  • Regular plan: $109.85 x 26 paychecks = $2,856
  • Savings by picking the HSA plan = $2,076

Annual employer match to HSA = $3,000…the tally then…

  • HSA plan: $780 -$3,000 = -$2,220
  • Regular plan: $2,856
  • Savings by picking the HSA plan = $5,076

Maximum out of pocket risk i.e., the maximum potential cost to your family…

  • HSA plan: $780 -$3,000 + $6,850 = $4,630
  • Regular plan: $2,856 + $3,000 = $5,856
  • Savings by picking the HSA plan = $1,226

If you max contribute to the 2017 HSA plan limit of $6,850, you have $6,850 – $3,000 (employer match) = $3,850 more to contribute in the plan. So the final cost to your family including that tax break –

  • HSA plan: $780 -$3,000 + $6,850 – (0.3 x $3,850) = $3,475
  • Regular plan: $2,856 + $3,000 = $5,856
  • Savings by picking the HSA plan = $2,381

So for both these plans, the HSA route is a clear winner. Plus the money in this account grows tax-free and can be withdrawn tax-free for healthcare expenses down the road. Pre-tax contributions + tax-free growth + tax-free withdrawal = the only money that never gets taxed in our system. And we advise most folks to not touch this account during your working years and leave the money invested (yes, you can invest like you do in your 401ks) if you can afford to. Because you know spending on healthcare is almost a certainty in your later years and this account will be a godsend to cover all those expenses.

And hence another perk we offer folks in our extended family where we help you decide, invest and manage this account at no cost to you. So let us know the next time open-enrollment rolls around.

Until later…

Image credit – Gratisography