Insurance is complicated! We know. It’s scary and confusing and all those terms don’t make sense. At a lot of companies, you may no longer have a choice in health plans, but if you do and you haven’t taken a close look at the high-deductible health plan option we hope sharing some details about our experience may help you reduce the fear factor.
High-Deductible Health Plan. Consumer Driven Health Plan. Same thing. It’s basically a health plan with a higher deductible component and pairing it with a Health Savings Account (HSA) or Health Reimbursement Account (HRA) to make sure you have a savings vehicle for out of pocket expenses. A Health Savings Account can be a very powerful tool for you to set aside pretax money for your future self to supplement your other retirement savings. Think about this as a way to boost your 401(k) savings if you have one of those!
HSA, the rules (if you already know how these work, skip down to ‘Early Adopters’)
Not just anyone can contribute to a Health Savings Account. First off, you have to have a High-Deductible Health Plan. You may think your current plan has a ‘high deductible’ but it has to be over the thresholds set by the government. In 2016, the deductible has to be at least $1,300 or more for individual coverage and $2,600 or more for family coverage. The plan offered at your company may have higher deductibles, these are just the absolute minimums allowed.
Second, you cannot contribute to an HSA if any of the following apply to you:
- You can be claimed on someone else’s tax return as a dependent (not spouses)
- You are enrolled in Medicare
- You have any other first dollar health coverage (this applies to TRICARE, coverage you may have through your spouse, or a traditional flexible spending account currently in its plan year or grace period)
Next, consider how much you can contribute to the Health Savings Account if you meet all the other criteria. In 2016, you (or a combination of you and your employer) may contribute up to $3,350 if you are single or up to $6,750 if you are a family (2 or more covered family members). Additionally, just like with a 401(k) you could add catch-up contributions if you are 55 or older. The catch-up contribution limit is $1,000. In 2017, the limits will be identical except a single person can contribute $3,400. (thank you Uncle Sam for that extra $50!)
The Triple Tax Savings
So why are HSAs such an awesome way to save? They enjoy triple tax savings. That’s three times the charm.
- You get to deduct the amount of your contributions from your taxable earnings before income tax is applied
- The earnings and interest can grow tax free
- When you take the money out whether for current or future expenses, as long as it’s used for qualifying healthcare expenses – you do not pay taxes on the withdrawals
From this perspective, these savings are superior to a traditional 401(k) or similar retirement fund because if used correctly, you never pay taxes on the funds. We like the sound of that! For this reason, using an HSA should be part of your overall retirement saving strategy if you have one available to you.
What else is awesome about HSAs?
- You are not subject to the use-it-or-lose-it rules like a traditional flexible spending account. You can rollover your unused money into future years
- If you work for a generous employer, they may make contributions into the account for you. Any funds you receive from your employer reduce the amount of money you can contribute
- You can invest the money once you reach a certain minimum (check with your administrator on amount required and investment choices)
With a high-deductible health plan, you have to pay more out of pocket for doctor’s office visits, prescription drugs, and any major expenses like surgeries and diagnostic testing until you satisfy the deductible (which is higher than other plan options) and until you reach what’s called the out-of-pocket-maximum. Once you reach this maximum, the plan should pay 100% for most or all of your expenses. So there is some risk that the first couple times you use your coverage you will be shocked at the total costs you have to pay before you meet the deductible. If you are used to paying $20 for example for a doctor’s office sick visit and all of a sudden you are charged $110, you start to think you made a mistake. Think about it like your car insurance. You are trading higher premiums for a higher deductible. If you are willing to accept a higher deductible, your premiums will be much lower.
Early Adopters – Our Real Life Example
Lucky for us, Mr. Need2Save’s company was an early adopter of the High-Deductible/Health Savings Account concept. Back in 2008, we lowered our contributions for health care premiums significantly when we made the switch and funneled the difference (about $2,500 at the time) into our Health Savings Account contributions (pre-tax). In addition, Mr. Need2Save’s company also provided contributions into our account. We continued to participate in this plan and save in his HSA for 5 more years.
Over time, Mr. Need2Save’s employer was acquired by another company. Their healthcare strategy shifted dramatically and they started requiring a much higher premium contribution for the high-deductible plan and also lowered the company’s contribution. Lucky again for us, Mrs. Need2Save’s company introduced their version of a high-deductible health plan and to encourage participation, kept the premiums low and also contributed $2,000 a year for family coverage into the HSA! So in 2014, we switched the whole family over to Mrs. Need2Save’s plan and started contributing to an HSA there instead.
Although we don’t have detailed records for the entire period, the leftover money we have from Mr. Need2Save’s HSA is around $18,000. We have this money invested in a mutual fund through HSA Bank and plan not to touch it for many years. If you think about it from a shear spending vs. leftover HSA funds perspective this is about $3,000 a year over 6 years that we have remaining from our original experience with Health Savings Accounts. This is for a family of four.
This seems scary!
The scariest thing about converting to a high-deductible plan is what happens if someone gets sick or hurt early in the year before you have built up a balance in your HSA, right? Hopefully you sign up for the maximum contribution allowed minus what your employer may contribute if any. Some companies will deposit their funds up front in January, although it is perfectly acceptable for them to do so in other increments such as bi-annually or quarterly.
The other seemingly scary factor is you have no idea how much your family may spend in a year, right? The first thing you need to do is log in to your current administrator’s site and download all the transactions you can. This will tell you how many times your family went to the doctor or filled prescriptions over that period. Hopefully you can get longer history than the current year. You may also want to look through your files if you keep EOBs and bills in a central spot.
Here is a summary of our actual expenses from all of 2015 to give you a reference point for a family of four with average risk for serious illness/injury:
A few notes:
- 9 visits were sick/specialist follow up visits. These did not include our annual checkups which are covered at 100% thanks to ACA. These office visits ranged from $52 to $138 each
- 2 visits to the ER include urgent care for minor injuries (no serious surgeries here, thank goodness)
- Prescriptions costs ranged from most at $5 each, up to a one-time drug that was $319!
- Dental and vision expenses account for over $1,000 in spending (more on this in a minute)
So after a whole year, we had over $3,178 left from the $6,650 both we and Mrs. Need2Save’s employer contributed for the year! That’s about half! If you look at it another way, since $2,000 was funded by Mrs. Need2Saver’s employer, our true out of pocket costs were only $1,178.84. This is before factoring in the tax savings from our contributions.
What about vision and dental?
So what about those dental and vision costs? In this year, we did have both dental and vision insurance. It is acceptable to use HSA money for dental and vision care just like you can for health care and prescription drug costs. I bring this up because we also funded what’s called a Limited Purpose Flexible Spending Account (LPFSA) or Limited Use Flexible Spending Account (LUFSA). Mrs. Need2Save’s employer offers this option to supplement the HSA. It is subject to the same use-it-or-lose-it rules like a traditional FSA. We did also contribute to a LPFSA, but our dental and vision expenses were unusually high this year because Mrs. Need2Save needed both a filling and a crown and we got new glasses for 2 family members plus contacts. We underestimated our dental/vision outlays so we used part of our HSA money for these. If you look solely at healthcare spending, we would have had $4,619 left over from this year alone.
Keep on banking that money ($)
We don’t have full data from 2016 yet, but so far this year, our family of 4 is running about $2,447 in healthcare expenses. This included another urgent care visit for stitches for Mr. Need2Save’s finger. He wishes he could forget that one! Since Mrs. Need2Save’s company contributed $2,000 again in 2016, our true out of pocket costs have been under $500 so far this year. Awesome. I hope we all stay healthy and out of the urgent care center.
So after 2.5 years in Mrs. Need2Save’s High Deductible Plan, we’ve been able to save over $8,500 into our 2nd Health Savings Account. Pretty sweet. This gives us north of $26,000 for medical care savings whenever the need arises. We plan to continue to fund the HSA to the max while we are still working. If we can save an average of $3,000 to $4,000 a year until we stop working, this will be a very comfortable cushion for future healthcare needs. Hopefully, we can retain even more.
We hope that sharing some details about the last 8 years will help alleviate some of your fears. Only you can tell what is right for you based on your past history and risk for future healthcare needs. If you live a healthy lifestyle, eat right, and get your routine preventive care – you should be able to use the HSA as a powerful savings tool while also reducing your current and future tax bills! It’s really not that scary and can be a great opportunity for you. If your company offers a comparison calculator during annual enrollment – do your research first and then use it. You may be surprised at which plan comes out as the winner.