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.
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).