As “consumer-driven health care” (CDHC) becomes increasingly
popular, you may soon face the decision of whether to switch to a high-deductible
health care plan with a health savings account (HSA) if you don’t have one
already.
The basic idea is that your health insurance premiums are lower but
you have to pay more out-of-pocket (the deductible) before the insurance kicks
in. To help you cover those higher out-of-pocket costs, you and your employer
can contribute pre-tax to a health savings account, which allows you to use the
money tax-free for qualified medical expenses like a medical FSA.
But unlike an FSA, any money you don’t withdraw can be
carried over indefinitely and used for any purpose without penalty after age
65. In fact, you might even want to pay your medical expenses out-of-pocket if
you can and let your HSA grow to be used tax-free for health care
expenses in retirement. Some HSAs allow you to invest in mutual funds for that
reason. (This the health
insurance plans we have at Financial Finesse.)
The general rule of thumb is that these high-deductible plans
are best for the “healthy and the wealthy.
” In other words, the less health
care you use, the more you can afford to put away in your HSA, and the higher
your tax bracket, the more likely the high-deductible plan will make more
financial sense for you. On the other hand, if you have a lot of health care
expenses or are in a low tax bracket, a more traditional low-deductible health
insurance plan may be better for you.
I recently spoke to someone on our Financial Helpline who
seemed to fit the latter profile. He estimated that he would use the entire
$2,400 deductible for the high-deductible plan and he’s only in the 15% tax
bracket so he wasn’t sure that the HSA would be very beneficial. To make sure,
we decided to crunch the numbers, assuming he spent $2,400 in health care
expenses. (After that, both plans would have the same co-insurance covering 80%
of his remaining costs.)
If he chose the low-deductible plan, he would pay $4,692 in
premiums, $800 as his deductible, and $320 in co-insurance (20% of the expenses
after the deductible) for a total of $5,812.
If he chose the high-deductible
plan, he would pay only $3,384 in premiums but $1,600 towards his deductible
(his employer would contribute $800 to his HSA) for a total of $4,984. In
addition, if he contributed that $1,600 of out-of-pocket expenses to his HSA,
he’d get an additional $240 in tax savings. If he spends less than $2,400, the
high-deductible plan becomes even more favorable .
So even though it appeared that he was a better fit for the
low-deductible plan, the high-deductible plan ended up saving him more money
even without contributing to the HSA. Adding the tax savings from the HSA and
the possible savings of potentially spending less than $2,400 on health care
was gravy on top.
Here are some things you want to make sure you factor in
before making your own decision:
1) What’s the difference in
premiums, deductibles, and co-insurance between the plans?
2) Will your employer
contribute to your HSA?
3) How much can you save in
taxes by contributing to your HSA?
A wrong decision can cost you hundreds or thousands of
dollars each year so don’t just jump to conclusions. Instead, answer those
questions and run the numbers. The result may surprise you.
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