First, I want to touch on the benefits of HSAs (Health Savings Accounts) and how much you can save in taxes and earn in interest as you plan for retirement. Then I’ll review how I selected the best health insurance plan for our family for 2021. I’ll also share a spreadsheet that I used to analyze the different plans my company offers. You’re welcome to check it out and quickly update for your own scenario.
Full disclosure, I’m not a financial advisor. Please reference my calculations and enjoy reading my thoughts, however please do your own research and do what is best for you and your family.
It’s that time of the year. Do you hit renew to avoid the chaos of health insurance policies or do you dive all in with the papers spread across the counter and ponder pulling your hair out? I’ll admit, it’s tempting to hit renew and say it’s done, but this year I wanted to do a deeper analysis on selecting the right plan and understand more about the HSAs available with high deductible health plans.
Health Savings Accounts
If you’re familiar with a FSA (Flexible Spending Account), a HSA (Health Savings Account) is very similar, but with some extra benefits. Note the difference between spending and saving. Both of these accounts allow you to pull money from your paycheck to use towards medical bills with a huge tax benefit, saving you a significant amount of money. However, there are some key differences detailed in the chart below.
|Flexible Spending Account (FSA)||Health Savings Account (HSA)|
|Must be used that year unless allowed to carry some over||Balance rolls over every year|
|Does not earn interest||May be invested to earn interest|
|Does not require a High Deductible plan||Requires a High Deductible Plan|
|Does not include employer contributions||Can include employer contributions|
|Full balance may be available for reimbursement in January||May only be reimbursed up to what has been contributed|
While one of these may better meet your families needs, most people don’t realize the long term benefits of a HSA. Honestly, until recently, I didn’t either. In fact, HSAs have been available since 2004, however the average person in 2018 only had a balance of $2,803. While you can invest the money in a HSA, only 6% of the accounts in 2018 were invested according to Employee Benefit Research Institute. There is still an expectation in people’s minds that you must spend your HSA by the end of the year like a FSA.
This year, I’m considering a high deductible plan, which will allow me to contribute up to $7,200 including company seed money of $600 or $1,100 depending on the family plan I select. For those who are striving for financial independence, you may be saving 70% or more of your income. If you’re already maxing out your 401k contributions, then this will give you an additional opportunity to avoid paying taxes and allow your money to invest and grow. While these dollars are limited to medical use, once you reach 65 you have the flexibility to spend your HSA contributions on other needs without paying a penalty.
Tax Benefits of the HSA
Let’s break it down. If you expect to pay 22% in taxes, then contributing $7,200 to a HSA could result in avoiding over $1,500 in taxes that year. If you invest $7,200 a year for the next 10 years, this could result in earning $27,478 of interest if you realize 7% gains. Your end balance of $99,478 can then be used towards your retirement. In addition to the $27,478 in interest, you’ll have also potentially avoided over $15,840 in taxes ($72,000 x 0.22)
|Pre Tax Dollars||Taxes Paid (Assuming 22%)||Interest Earned (Assuming 7%)||End Balance after 10 yrs|
|No HSA, Don’t Invest, $833/mo After Tax||$128,160||$28,160||$0||$100,000|
|No HSA, Invest $600/mo After Tax||$92,307||$20,307||$27,478||$99,478|
|HSA and Invest $600/mo Tax Free||$72,000||$0||$27,478||$99,478|
The alternative? You could pay taxes now on that income and deposit into your bank account. Even if you still invested the $5,616 after taxes assuming 7% returns, you would end with only $77,593 compared to the $99,478 you could have had. If you wanted to tract the same end goal, then you would need $770 of your pretax dollars in order to invest $600 after tax over the next 10 years. However, in the process you could be spending $20,307 in taxes.
Not a fan of investing? You would need to save over $833 a month of your after tax dollars for the next 10 years to recognize the same $100k. That $833 is actually $1,068 in pretax dollars from your salary compared to the $600 pretax dollars you’d otherwise contribute towards the HSA to reach the annual max of $7,200 for a family.
I don’t know about you, but I would much rather contribute $7,200 of my pretax dollars annually to avoid paying over $28,000 in taxes and gain almost another $28,000 in interest and end up with the same balance in ten years. That’s like giving myself a raise of $5,600 on my annual salary on average over that 10 years!
Choosing the Right Health Plan
So I’ll be honest, I’ve been extremely lucky and never hit my maximum out of pocket , so what works for me may not work for you. Feel free to leverage my thought process, but please do your research and understand your unique scenario when it comes to selecting health insurance.
High Deductible Health Plans (HDHPs) sound intimidating because people see that high deductible and worry about the risk of paying that full amount. For some people, they may need to and if you don’t have money saved up, that could be challenging if that bill shows up in January. The balance of your HSA contributions may not be available until you contribute them, unlike an FSA that may be available at the beginning of the year.
However, if you’re healthy, you have money saved, or have a rollover balance from your HSA, the high deductible plans may be more appealing. Generally with a high deductible plan, your premiums are much lower each month, and you could be eligible for a health savings account that we previously discussed, including seed money from your employer!
To help me understand the balance between my monthly premiums, my expected medical costs, and accounting for the seed money for a HSA, I looked at my total expected costs (premiums + medical bills) across a variety of ranges.
|Plan A||Plan B||Plan C||Plan D|
I’ve simplified this quite a bit, so make sure you review the assumptions if you apply this for your own policies. For example, Plan A offers a copay for a doctors visit, so the medical expenses likely won’t be as high for the same treatment. However, for as much as you’d pay in premiums, paying out of pocket for the first few doctor visits really isn’t as bad as you’d expect. For example, the premium for Plan A is $280 a month, Where as Plan C is only $106. I can easily use savings from the premium costs to cover those doctor visits out of pocket and worry less about needing a copay.
Check out Plan D for an interesting takeaway. If you don’t end up needing your insurance, the contribution your employer makes to your HSA actually offset all of your monthly premiums and you end up money ahead. Personally, I like graphs and visuals, so let’s check out how these plans compare.
If I’m expecting to pay less than $4,000 in medical bills, Plan D is the clear winner because the cheap premiums easily offset needing to pay out of pocket. Meanwhile, if an emergency did come up, you have the benefit of insurance and max out of pocket of $10,000. Assuming you contribute to a HSA, then you take advantage of seed money from your employer and the money you contribute would cover the costs of your medical bills without risk of losing the tax advantaged money at the end of the year.
Plan C is another great option because it’s still taking advantage of the lower premiums, employer HSA contributions, and is actually expected to be the lowest plan even at the higher medical expenses. Again, you have the ability to contribute towards an HSA and benefit from the tax savings and investment opportunity tax free. This is most likely the plan I will sign up for in 2021.
My concerns with Plans A and B are that you pay extremely high premiums regardless of whether you set foot in a doctors office. While the deductibles are lower and you may be offered a copay, the total cost for premiums and medical bills combined can be extremely expensive. Meanwhile, you are limited to using a FSA versus a HSA which forces you to accurately plan your medical bills every year to take full advantage of the tax savings without losing your money at the end of the year.
If you want to take a similar approach, feel free to download my spreadsheet and try it out with your specific plan options. If you don’t want to download to file or don’t have excel, reach out on my contact page and I’ll send you a link to a google document instead.
Questions To Think About
What is your takeaway after doing your own research or reading my post? Comment below or send me a note, I’d love to hear if this was helpful for you or if you have a different opinion. If you found this post helpful, I encourage you to share it with your family and friends!
- Have you tried a high deductible plan before?
- What is your experience with a HSA?
- Do you invest your HSA balance?
- Would you ever contribute to a HSA before maxing out your 401k contributions? (Assuming you already get the company match for your 401k)
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