Whether starting a new job or making selections in your employer’s annual benefits enrollment, you may have the opportunity to select a Health Savings Account. Health Savings Accounts (HSAs) are rapidly growing in popularity across the country for both employers and individuals and it’s important, particularly for young professionals, to understand what HSAs are and why you should consider them.
HSAs are relatively new as they were established and signed into federal law in 2003. The purpose of an HSA is to help reduce healthcare costs and to incentivize individuals to save for healthcare costs both now and for the future. Think of an HSA as a Healthcare 401k and Checking Combo Account. HSA’s have considerable benefits; it can reduce your tax liability, reduce your overall healthcare costs and increase your investable assets. Before choosing an HSA, we recommend a few qualifications to consider:
- Are you relatively healthy (doctor visits for wellness visits/routine checkups)?
- Do you have cash savings in an emergency fund of at least $2000?
If you answered yes to both of those questions, you may want to consider an HSA. One of the biggest differences between a traditional HMO/PPO plan and an HSA is the deductible (the specified amount the insured individual pays for a claim prior to the insurance company payment). In a traditional health insurance plan, the insurance company picks up most of the tab for healthcare expenses, even for routine visits or basic general care. Since HMOs are essentially paying out first-dollar for smaller health claims, they charge much higher insurance premiums. The HSA on the other hand changes that relationship by pairing with a High Deductible Health Plan (HDHP), which shifts the responsibility of smaller health claims from the insurer to the consumer (us) and picks up larger expenses after the deductible is reached.
Let’s use an example to hash that out:
Leslie has an HMO plan. She gets the flu and visits the doctor. A few weeks after that visit she receives a bill. The visit was billed at $400 and insurance network discount brought it to $200 and the insurance company paid $150, leaving the patient responsibility of $50.
If Leslie had an HSA plan and visited the same doctor, she would receive the same bill of $400, the same discount to $200, but this time, the patient responsibility would be $200, not $50.
So now you’re saying, wait a second, I don’t want to pay $200 if I get sick, that’s nuts!That’s where we need to step back and understand the bigger picture and five reasons to consider HSAs.
Lower Health Insurance Premiums
Health Insurance premiums are much lower with High Deductible Health Plans. Health insurance can cost thousands of dollars per year, so cutting your insurance premiums can lead to significant savings. If you obtain insurance through your employer, your insurance premium is paid to directly to the health insurance company, typically deducted directly from your paycheck. Those premiums are paid regardless of whether you have health expenses or not. So if you’re healthy, paying high insurance premiums can be an inefficient use of your hard-earned dollars.
Pretax Savings Account
The savings from the reduced premiums can go to your HSA pre-tax. Just like a 401(k) you can contribute a set amount (pre-tax) to be withdrawn from your paycheck and transferred to your Health Savings Account to cover the expenses when you do visit the doctor. HSAs have an outstanding benefit that you cansave money with pre-tax dollars and spend on healthcare expenses with pre-tax dollars, which gives you more spending power with your savings. In the HMO example above, Leslie paid $50, but with after-tax dollars. It would be more like $62.50 (assuming a 25% tax rate)
Invest Your Savings
Not only can you reduce your insurance premium and save in a tax-sheltered account, but HSA’s also give the ability to invest your savings in the stock market just like a 401(k). The 2016 IRS annual contribution limits for HSAs are $3,350 for individuals and $6,750 for families. These savings can be invested for long-term growth using the power of compound interest. Over several years, one can build significant healthcare savings that grow tax-free.
Employers pay a large portion of the cost of healthcare for employees. Shifting from an HMO/PPO to an HSA with a High Deductible Health Plan saves employers significant costs. Often times they will share a portion of those savings with employees and help you fund your HSA’s. Many companies will give $500-$1000 annually to help with the high deductible. That is literally a tax-free bonus every year.
The HSA belongs to you, the money in the savings account belongs to you. It stays in your account year after year, so there are no ‘use it or lose it’ provisions. In fact, if you set this up with an employer, the account will stay with you even if you leave your employer.
Health Savings Accounts can be intimidating, particularly with the uncertainty of a high deductible. Health plans have an out-of-pocket maximum, which is an upper limit on the amount individuals will have to pay for covered health expenses in a given year. Evaluate whether the combination of employer contributions, individual contributions, and emergency savings can reach that upper limit. If you are relatively healthy and have a strong emergency fund, an HSA can be a very beneficial additional savings and investment vehicle.
Be sure to speak to HR or your benefits representative to understand the specifics of your plan.