Another Health Savings Account post? Yes. Another one.
Many people I’ve spoken with who are hesitant about HSA’s are not really hesitant about HSA’s. There is no reason to be scared of HSA’s because they provide tax free money for healthcare services AND you can keep the money forever. People love signing up for Flexible Spending Accounts, and you can only use those funds within a year, so those are a little more scary.
No, people don’t have problems with HSA’s themselves, but have second thoughts about signing up for High Deductible Health Plans (HDHP’s), which you have to be enrolled in to be eligible for an HSA.
And they should have second thoughts. HDHP’s are a big difference from the traditional health plans we’re used to. You’ll have to pay out of pocket and in full for a lot of things you never had to pay directly for.
A visit to the local urgent care place? Full price. Have to pick up some medications? No coverage yet. A $1,000 visit to the ER? Pay the full $1,000. It’s almost like not having health insurance at all! (It really isn’t though just keep reading.)
For a family plan in 2016, the minimum deductible needed to be considered an HDHP is $2,600. That means that insurance will not cover anything until you have spent $2,600 on healthcare expenses for the year. That sounds preposterous for some people, but it just requires you to plan a little better.
Are HDHP’s for you?
There are two questions you have to ask yourself to see if a HDHP is right for you.
First, are you pretty healthy? That is, do you or any family member need to go to the doctor often or take a lot of medications. If the answer is yes, then a HDHP is probably not for you.
But it still may be. You just have to run the numbers. It’s almost impossible to predict what your healthcare costs will be in the upcoming year, but looking at how much you spent in previous years can give you a good idea.
HDHP’s have lower monthly premiums than traditional health plans. That’s one of their big selling points. If you think you will end up spending enough on healthcare that it will negate those lower premiums, then you should probably go with a traditional plan.
The second question to ask yourself is do you plan to have a surgery or major procedure anytime soon? If you do and you can do it early in the year, then an HDHP will DEFINITELY be the right choice as you will meet the deductible requirement early in the year and will have almost everything covered for the remainder of the year.
Not all companies accept will let certain elective procedures, like LASIK, be applied to the deductible so make sure to verify what will apply and what won’t. If it can apply towards the deductible, an HDHP is a no-brainer.
Based on these two questions, I think most people will benefit from going with an HDHP. So you get much lower premiums, great coverage once you meet the deductible and the biggest benefit of them all…the HSA!
Healthy, Wealthy and Wise
The minimum deductible for an HDHP family plan is $2,600. The maximum amount you can contribute to an HSA for 2016 is $6,750. That means if you max out your HSA contributions for the year (which you should most definitely try to do) and get the pre tax contributions out of your paycheck, you will be able to fully cover the deductible in a little less than 5 months. Doesn’t get much easier than that.
Remember HSA’s have a triple tax advantage: they are taken out pre tax, they grow tax deferred, and they can be withdrawn tax free for healthcare expenses. After age 65, you can withdraw funds for any reason and you’ll owe income tax but no penalty. Since HDHP’s cost much less for employers, many will sweeten the deal by contributing a certain amount into your HSA.
There is just too much good stuff going on here.
And let’s not forget arguably the biggest benefit: the ability for the account to grow tax free. The default setting for most accounts is to have your HSA money in some type of money market account that earns 1% or less of interest.
That’s cute, but it’s not for me. Nearly all HSA plans have investment options, and some of them have very good ones. HSA’s stay with you for life, so if you can invest your funds appropriately you can stand to make a lot of money down the road.
Many would say that’s risky since the money is for healthcare expenses and not necessarily for retirement. Fine. What you can do (and this is what I do), is to find out what the out of pocket maximum of your health plan is. This is the max amount you would have to pay for the year until all of your healthcare expenses are completely covered.
For most HDHP’s, this number is around $6,500 or $7,000. Whatever the exact amount is, put that much in the interest bearing portion of your HSA. Put the rest into investments. That way, even if everything goes to hell, you will have enough to cover your health care expenses for the year while still having some great tax advantaged growth in the background.
Bottom line, if you’re healthy and single, you have absolutely no reason NOT to be in a HDHP. If you have a family there is more to consider, but an HDHP will most likely work. If you have a family and multiple members see doctors and take medications regularly, it may not be right for you.
I don’t know what more I can say about the topic, but I’m sure I’ll revisit it again soon. In the meantime, max out that HSA contribution!