Most of my posts are investment market related but I’m also an advisor who helps my clients with their financial planning. This post is more in that arena. With the annual “get screwed by health insurance season” right around the corner, I thought it would be useful to talk about HSA’s and whether or not it makes sense for you. I just received a letter in the mail from my health insurance provider with an update on what my plan will cost next year and I am the lucky recipient of a 160% increase in premium… so I’ll now be utilizing an HSA plan moving forward.
HSA plans can be extremely effective but they’re not right for everyone. It’s really a numbers game where you’re betting on your own health. For those that an HSA plan is a good fit, you really can’t beat it from a financial perspective. Personally, I wish the government would’ve done more to educate and push HSA plans 6 years ago instead of going down the road of Obamacare but what can you do. My intention for this post is to be an intro to HSA plans for anyone that may not be aware of them. This is not an exhaustive explanation so I encourage to do more research on your own if you think it’s right for your health/financial situation.
The Details of HSA’s
An HSA is a high deductible health plan (HDHP) with a savings account (HSA) tied to it. It typically costs less in terms of the annual premium but a higher deductible that needs to be met before insurance steps in to cover costs. However, you’re supposed to contribute the money saved from lower premiums to the savings account to build a little nest egg which allows you to self-insure over time. It’s designed to incentive you to take care of your health and not go to the doctor every time you sneeze.
The biggest benefit is that contributions to the savings account are triple tax-advantaged! Contributions are tax-deductible, growth is tax-deferred and if the money is used for qualifying healthcare expenses, the money comes out tax-free! Because of this, a lot of people are now using HSA’s as another vehicle for retirement savings given that healthcare tends to be one of the largest expenses as we age. What better way to save for it than in a tax-free account?
Summary of details:
- HSA contribution limits for 2018: Individual: $3,450; Family: $6,900
- Additional catch-up contribution if you’re 55 or older: $1,000
- High Deductible Health Plan maximum out-of-pocket amount: Individual: $6,650; Family: $13,300
- Deadline: you can contribute to an HSA for a calendar year until April 15th of the following year
- You cannot contribute to an HSA once you enroll in Medicare (age 65) but you can keep an existing savings account and allow it to grow
- No Required Minimum Distributions (RMD’s) once you reach age 70 1/2
- The list of qualified medical expenses is quite extensive. You can find the IRS sheet here.
- Money in the account can be invested for longer term growth. Most providers offer a list of available funds in which you can invest – kind of like a retirement plan (e.g. 401(k)’s, etc.).
- You can take the money out of an HSA for non-medical expenses but you will owe taxes
Who an HSA plan may be a good fit for
Before switching to an HSA plan, make sure you would be able to cover any healthcare costs that may arise in the next year since it is a higher deductible plan. You’ll also need to be able, and have the discipline, to contribute the money saved in lower premiums to the savings account. If you don’t utilize the savings account, a HDHP is a large risk.
In general, HSA’s are a good fit for people who typically have lower healthcare expenses and no chronic conditions that require care year after year. You’re basically betting on your own health that you’ll be able to build the savings account before needing the money for any large healthcare bills. For me personally, I’m fortunately in good health and try to live a healthy lifestyle. I’m the type of person that won’t go to the doctor for years so health insurance is an “emergency only” thing.
Summary of who should consider an HSA plan:
- Relatively healthy. Good history of low healthcare expenses and not expecting any large healthcare expenses in the near future
- Able to save money in the savings account each year (hopefully max contributions)
- Looking for an additional way to save money for retirement in a tax-friendly manner
Who an HSA plan is probably not a good fit for
An HSA is most likely not a good fit for you if you tend to have high or recurring healthcare bills each year. The higher out-of-pocket max and higher deductible will most likely outweigh the tax-saving benefits. You also won’t be able to accumulate a buffer in the account since the annual contribution is less than the annual deductible and thus won’t receive the long-term benefits of tax-free growth. Technically, you can make contributions to the savings account each year and pay any healthcare bills from other monies in order to build the account. This would be effective if you’re looking for longer-term growth and think that the healthcare expense is rare and unlikely to occur again in the future. But one should assess whether that’s doable financially to make the contribution and potentially cover the annual deductible.
Summary of when it might not makes sense:
- Tend to have recurring healthcare expenses (i.e. chronic conditions, etc.)
- Expecting large healthcare bills in the near future
- Not able to save extra money in the savings account or couldn’t afford a higher deductible right now should large healthcare expenses arise
Hopefully this was helpful for anyone that was unfamiliar with HSA plans. They can be an extremely effective means of saving money for healthcare expenses down the road. With the cost of healthcare rising so much each year, we all need to be as smart as we can with our planning and money. If your employer offers an HSA and you think it makes sense, you can even talk with them about funding the contributions with the money they’ll save from the lower premium.
-Nick