Here’s my original HSA article from last year: Health Savings Accounts Explained.
Ok it’s annual enrollment time again for those of us in traditional workplaces and I’m here to tell you exactly how much a HSA can benefit you. Most large companies are starting to offer HSA’s to their employees for one main reason: it saves them a ton of money. Although employees generally pay a premium per paycheck for their healthcare, there is also a larger portion paid by your employer. To find out the exact portion, you’ll need to review your total compensation packet that should be available through your company, but I bet the results will surprise you.
Since HSA’s are paired with HDHP’s(High Deductible Health Plan) they have much lower monthly premiums. At my workplace, the employee pays just 20% of the $300+ monthly premium for the basic healthcare plan(non-HSA). So it’s in the best interest of the company to get as many employees on HSA/HDHP combo plans as possible. Generally, they offer a monetary incentive to switch in order to accomplish this. Let’s say a company saves $1,000 per employee on premiums; they pass on some of those savings to the employee in the form of a $500 contribution to your HSA account.
I Never Get Sick vs I Sometimes Get Sick
If you’re someone who rarely gets sick or has accidents that require medical care, the HSA should be a no brainer for you. Whether you are a 25 year old extremely health-conscious adult, or you’re a 55 year old chain-smoking obese adult, you both pay the same premium. That doesn’t seem fair to the healthy individual because they surely won’t be going to see the doctor as much as their counterpart right? The HSA attempts to even the score by putting the onus on the individual. In addition to the company contribution, you can contribute additional money up to $3,250 total for 2013(employer + employee contribution).
HSA’s probably don’t make sense for anyone who anticipates high medical expenses like pregnancy or orthopedic surgery. But how do you know if it makes sense for the average person? I think HSA’s are a great tool for the average person to save on medical expenses for many reasons, but I’ll limit the discussion to the financial aspects only for now. Here’s a real life example of how my HSA actually makes money for me.
My Employer’s HSA
I started contributing and maxing out my HSA when I first started working over 3 years ago. As of today, I have over $10,000 tucked away building tax free earnings in a TIPS fund(no state taxes on earnings). As long as I use this money any time in the future for medical expenses, it will be completely tax free.
In fact, I take the HSA one step further and pay for my expenses with after tax-dollars(instead of with my HSA) and save the receipts. That way, I can withdraw this money at any time in the future for any reason tax free. Just another reason I love the HSA!
Let’s take a look at my situation. Since I max out the contribution every year, let’s see exactly how much a $3,250 contribution is really costing me:
- The basic healthplan (PPO/HMO) costs $38.50 per paycheck(26 paychecks in one year). Annual cost is $1,001.
- The HSA/HDHP option costs $25.50 per paycheck. Annual cost is $663.
- Employer contribution to a HSA is $500.
- My 2012 federal tax rate is 28%, SS tax will be 6.2%, Medicare is 1.45% and CA Dis/EE is 1% for a total of 36.65% in taxes.(I’ll ignore state taxes in this example, since in some states HSA’s are tax exempt and in others they are not.)
The most obvious contribution is the $500 from my employer. But since a high deductible plan has lower premiums, that’s pre-tax money that can now be contributed to my HSA for free. And finally, whatever contributions I add won’t be taxed since it goes straight into the HSA. So let’s see how these three components add up:
- Employer contribution is $500
- Premium difference is $1,001 – $663 = $338
- Assuming a $2,412 ($3,250 – $500 – $338) contribution on my part, the tax savings would be $2,412 x 36.65% = $883
- $500 + $338 + $883 = $1,721
Even though my yearly contribution reaches $3,250($500-Employer, $2,750-Employee), I have saved $1,721 by choosing the HSA option. Every single year that I enroll in a HSA, I will be getting over $1,700 for free. Now the one caveat is this analysis assumes that the other portion of my contribution will eventually be used for medical care. If I only took the employer contribution of $500, my annual salary would be $2,750 higher, but I would have to pay taxes on that portion. Essentially, I’m trading a little extra money in my paycheck for free money as long as it’s spent on medical expenses.
Track All Your Accounts With Personal Capital
Personal Capital lets you see all of your accounts in one convenient place. Sign up now for free.I am very happy with how my HSA has worked out so far. I’ve been fortunate not to have any large medical expenses but it’s all about being prepared. HSA’s force you to plan ahead and figure out where the nearest high quality urgent care center is should an accident happen. One trip to the ER will cost me my entire deductible so I plan on avoiding that place at all costs(unless it’s life threatening of course).
I have an HSA at work too and it saves me a ton of money. I don’t max it out yet because my retirement plans aren’t maxed out yet and I rarely ever go to the doctor. Definitely a great way to save for retirement health care expenses!
That’s awesome. I think it’s a good idea to max out your HSA after you hit your company match in 401k since a HSA is treated just like a 401k when you hit 65. That way, if you do have medical expenses in the future you can use your HSA account to pay for them tax free. Otherwise, you can just withdraw the funds from the HSA like a traditional IRA/401k with nothing lost.
My employer offers a veeeeeeery nice incentive to choose the HSA/HDHP. In 2012 they contributed $2000 to my HSA (up from $1000 in 2011). Choosing the HSA/HDHP is a no-brainer. We have our 2013 benefits session in a couple weeks, and I’m really hoping they keep the incentive there. I have a feeling a lot will be changing in our benefits package this year, so I’m keeping my fingers crossed that I won’t lose any benefits.
Holy Crap! $2,000! You are one lucky employee, haha. A $2,000 contribution plus the reduction in premiums that you get is probably almost enough to cover the deductible right there. I have a $3,500 deductible btw..
My deductible is $3500 as well. I’ve had a lot of medical expenses this year, but when I get frustrated about them I just remember that I’m not actually the one paying for them. 🙂
Seriously, that’s awesome. I’m jealous. I guess that shows you how much your company is saving by switching you to a HSA. They are giving you $2k and still probably saving a decent amount of money.
My company has a lot of 20-somethings, so our premiums are pretty cheap. The company covers up to a certain amount in premiums each month, but for us young-uns, even the most expensive, cadillac plan is covered 100%. So without an incentive, the majority of the company would choose the most expensive health plan.
My employer also offers a CDHP (consumer-driven health plan) which is a far better deal with how expensive my birth control pills have been. Thankfully, with the start of my next plan year, there will be no deductible or coinsurance on them, so I may try out the HDHP/HSA combo.
The CDHP has a slightly lower deductible than the HDHP, making it a better deal when the premiums and employer contribution are the same and I know I’m going to go over the lower of the two deductibles.
Do you have fees on your HSA? Does your employer’s HSA account offer good investment choices? I would probably actually use my HSA to cover expenses, which is what I do with my FSA now (put enough in it to cover expected expenses and save a bit on taxes).
Interesting, I’d never heard of a CDHP until you mentioned it, but it sounds pretty similar. My HSA used to have fees at $12/quarter to maintain the account and trading fees were pretty reasonable at $8 a trade I think. The investment choices were ok but I don’t consider my HSA as part of my overall AA. I invest it in TIPS(little safer) like I said since living in CA, the earnings on my HSA will be taxed. But if I invest in a TIPS fund, I don’t have to pay taxes on my earnings and the ER is pretty low.
Luckily, we’re getting a new HSA provider and they don’t charge any fees. I hope they offer similar investing options.
But I will have to figure out what to do with my old account, since I obviously don’t want to keep it there since they charge me $12/quarter. I’ll probably move it over to my new provider and pay a transfer fee or it might be cheaper to transfer it to someone like HSA Bank.
Can you roll your existing HSA into one with the new provider? $12/quarter seems pretty steep to me!
I really like the CDHP with how high my health costs are, but if they were lower, it would be annoying because the employer contribution rolls over indefinitely, but you lose it when you leave the company. I have a feeling I’ll pick the HDHP one next year! I don’t know if our provider has any fees though, information was pretty low on what the account actually looked like.
I can roll my existing HSA into one with my new provider but I know there will be some type of transfer fee. I’ll have to do some research and see if it’s cheaper to roll it over or go and set up a separate account with a different HSA provider.
I think your CDHP is similar to our HRA. Our HRA pays the same premiums as the basic healthcare plan(non-HSA) but they give you $1,000 to pay for all your doctor visits. Whatever you don’t use will roll over to the next year, but you can not take it when you leave the company. I don’t think this plan is worth it at my company b/c you would save $338 in premiums by switching from HRA to HSA, so if you spend less than $838 a year, it’s worth it to go with the HSA since you can keep it when you leave the company. Our HRA is actually going away at the end of 2013 so it makes even less sense now.
I think we’re just using different names because my CDHP comes with a HRA 🙂
The monthly premium difference between the HRA plan and the HMO basically equals the deductible. I wonder if they will change our premiums for the next plan year so that the HDHP one is cheaper than the HRA one. Right now, the HRA and the HDHP plans both have the same premium and same “incentive” – the only difference was in the deductibles and HSA versus not.
We had a HSA at my old employer and it was a nice benefit to have, as they also put $1500 into it. Now that we’re self-employed we’re looking to start a new one for ourselves as they can be a great way to take advantage of tax savings.
Yea usually they are a great idea for people who are self-employed or contractors(who usually don’t receive health benefits. Especially for families, the monthly premium reduction will often come very close to the deductible. If that’s the case, then it’s a no brainer!
The HSA sounds like a good idea, but a few years ago I very unexpectedly had to have an emergency surgery. Also, being somewhat active, I feel like a broken bone or lacerations that require stitches are always just around the corner.
The past 3 years or so I’ve been relatively healthy, but if I’m skiing, hiking, surfing, playing sports, etc, is it really a good idea to let go of the security of a standard health plan?
If you can go 3 years between accidents you will still come out ~$1,600 ahead in this instance, since each year you are getting $1700 for free if you max out your contribution. Since the deductible is $3,500(also the out of pocket max), it only takes two years before you reach the break even point. This is assuming you have a major accident every two years which I think is pretty unlikely.
You also have to take into account the deductible for the basic(non-HSA) plan. In this case, the deductible for that plan is $750, so a major accident would get you to at least that much plus you still have the out of pocket maximum(in this case it’s $2100!
If you compare out of pocket maximums, you actually come out ahead with a HSA.