Everywhere I go, I hear the benefits of the Health Savings Account, or HSA for short. People say an HSA is one of the best ways to save for retirement. It obviously is a great way to pay for inevitable medical expenses given the tax benefits.
But is it worth having a high deductible plan to be eligible for a health savings account? I'm not so sure.
Not wanting to miss out on an obvious financial benefit, I asked my wife! She is, after all, the CFO and COO of our online business. As such, she is also in charge of our healthcare plan.
She told me we aren't eligible for Health Savings Accounts because we don't have a High Deductible Health Plan. Hmrph. Well that doesn't seem right. Based on what I heard, everybody is eligible, otherwise, that would be discrimination!
Government Decides Who Benefits And Loses
But then I realized the government consistently discriminates against some of us all the time. For example, if you make over a certain income threshold, you cannot contribute to a traditional IRA or Roth IRA. What's up with that? We should all be allowed to save for our financial future.
In the past, if you made over $75,000 as a single filer or $110,000 as a joint filer, you couldn't receive a child tax credit. Children are already expensive and stressful enough. Why was the government incentivizing lower-income households to have more children and disincentivizing higher income households to have fewer children?
Maybe they were looking to increase the divorce rate due to powerful lobbyists in the legal community.
Luckily, the child tax credit income threshold is now a more reasonable and logical $200,000 for single filers and $400,000 for joint filers in 2024. Why the government thought 1+1=1.5 in the past made no sense. Same thing with the marriage penalty tax. It has since been abolished for 99% of Americans due to the passage of the Tax Cut And Jobs Act.
Slowly, we are heading towards equal treatment of all American citizens. But not yet when it comes to healthcare.
Things To Know About The Health Savings Account Plan
People who say the Health Savings Plan is the best thing ever and is available to everyone really need to stop being so insensitive. There are real people out there who do not qualify, whether by choice or by circumstance.
In order to qualify for an HSA, you must be covered by a High Deductible Health Plan (HDHP). An HDHP generally costs less than what traditional healthcare coverage costs. Therefore, the money that you save on insurance, can therefore, be put into the Health Savings Account.
To qualify to contribute to an HSA in 2024, you must have a health insurance policy with a deductible of at least $1,600 for single coverage or $3,200 for family coverage. Some feel uncomfortable paying such a high deductible each year.
If you happen to have a rockstar Gold or Platinum healthcare plan with a lower deductible or no deductible, you are not eligible.
How Much Can You Contribute To A Health Savings Account?
The annual inflation-adjusted limit on HSA contributions for self-only coverage is $4,150 for 2024. This is up from $3,850 in 2023 and $3,650 in 2022.
The HSA contribution limit for family coverage for 2024 is $8,300. It has also risen from $7,750 in 2023 and $7,300 in 2022.
The adjustments represent approximately a 7.8% rise in 2024 from the 2023 limits. This is notably higher than the 5.5 percent increase in 2023 and 1.4 percent in 2022.
- Married couples with HSA-eligible family coverage will share one family HSA contribution limit of $8,300 in 2024. If both spouses have eligible self-only coverage, each spouse may contribute up to $4,150 in separate accounts.
- If both spouses with family coverage are age 55 or older, they must have two HSA accounts in separate names if they each want to contribute an additional $1,000 catch-up contribution.
- If only one spouse is 55 or older but the younger spouse contributes the full family contribution limit to the HSA in his or her name, the older spouse must open a separate account to make the additional $1,000 catch-up contribution.
- Account holders who exceed the contribution limit are subject to an annual 6 percent excise penalty tax on the excess amount unless it is withdrawn from the HSA before the tax deadline for that year.
What Can HSA Funds Be Used For?
HSA funds can pay for any “qualified medical expense,” even if the expense is not covered by your HDHP. If the money from the HSA is used for qualified medical expenses, including dental and vision, then the money spent is tax-free.
If the money is used for other than qualified medical expenses, the expenditure will be taxed and, for individuals who are not disabled or over age 65, subject to a 10% tax penalty.
The unused balance in a Health Savings Account automatically rolls over year after year. You won’t lose your money if you don’t spend it within the year. Further, the money in your HSA can be invested and earn compound gains tax-free.
When Is It Worth Getting A High Deductible Health Plan?
Healthcare might be the biggest ripoff in America. Most people get little-to-no medical usage while still having to pay on average ~$24,000 a year in healthcare premiums as of 2024.
The reason why there isn't a bigger uproar is because most of an employee's healthcare costs are subsidized by the employer. The same goes for paying higher taxes.
Once you become a business owner, you feel the pain of paying all the various taxes much more acutely. Therefore, you tend to stop voting incessantly to raise more taxes to pay for more wasteful government spending.
The only reasons I can think of for people to get a High Deductible Health Plan are:
- You rarely get sick or injured. Folks in their 20s and 30s may be prime targets.
- You can afford to pay your deductible without having to go into debt.
- You're willing to pay your deductible to get medical treatment.
- You have enough money to fund an HSA each month.
- You don't have little ones or sick dependents.
- Tax optimization moves
- You want another financial way to support your retirement.
- The Out Of Pocket Maximum is affordable.
- Using a HSA as a retirement savings vehicle
The conundrum is, if you are getting an HDHP because you can't comfortably afford higher monthly premiums, how is it then possible for you to make significant contributions to an HSA each month?
Such logic seems contradictory.
Related post: The Health Affordability Ratio
Who Should Get A Low Or No-Deductible Health Plan
In general, low-deductible or no-deductible plans have higher premiums. Despite the higher premiums, however, it makes healthcare expenses easier to estimate.
A low- or no-deductible plan might be right for you if:
- You are pregnant, planning to become pregnant, or have small children.
- You have a chronic condition or need to see a doctor frequently.
- You’re considering or anticipating a big surgery.
- You take several expensive prescription medications.
- You or your children like to partake in high-risk activities such as mountain climbing, scuba diving, sky diving, skiing/snowboarding, and the like.
- You're not a good budgeter and like more certainty.
- You put a premium on peace of mind and want to minimize the stress of dealing with health insurance providers who may refuse payments.
Before our son was born we decided to get a no-deductible platinum healthcare plan. The cost of giving birth sometimes runs in the tens of thousands of dollars. Further, we were unsure about our baby's health. You really don't know how healthy your little one will be until s/he is around 10 years old or so.
With a no-deductible healthcare plan, we made our healthcare costs predictable so we could focus our time being first-time parents. Focus is one of the main reasons why we sold our SF rental house right after he was born as well.
Health Insurance Horror Stories
Some insurance companies always seem to find a way not to pay out a claim, despite years of receiving premiums. I've heard so many stories about patients getting screwed by the insurance company or their health provider because of a low-quality health plan or some type of mix up.
Even having a gold or platinum health insurance plan with a reputable carrier doesn't mean you won't get stuck with big bills. We found out the hard way it's super expensive to call for an ambulance even with insurance. We spent many months trying to dispute a surprise ambulance bill that was over three thousand dollars.
Here are some headlines from Vox, which has done a great job uncovering individual health insurance horror stories here in SF.
- A $20,243 Bike Crash: Zuckerberg Hospital’s Aggressive Tactics Leave Patients With Big Bills
- Hit by a city bus — and hit with a $27,660 city hospital bill
- She tried to go to an in-network emergency room. She ended up with a $28,254 bill anyway.
The Importance Of Healthcare For Young Children
As new parents, we don't have time to deal with this BS, nor did we want to risk the potential extra stress of dealing with difficult insurance providers or health providers.
I have friends who are doctors and they tell me straight up the worst part about their job is dealing with insurance companies followed by increasing bureaucracy.
A couple of doctors have admitted to me that if their patient has a “more difficult” health insurance plan, they are more reluctant to return calls or e-mails or fit them into their schedules.
Doctors, too, are economically motivated, particularly given the amount of time and money required to become a doctor. If they can join a healthcare network whose patients have higher quality health plans, they will.
It's not hard to believe more money attracts better doctors.
And yes, one would hope that just because one has a high deductible doesn't mean once the deductible is reached, the quality of care is any less. But some people just aren't willing to take that chance.
Related: The EMS System in the US is Broken and Costly
Loading ...Income Threshold Consideration For A Health Plan
In terms of deciding what type of healthcare plan to get based on income, an easy rule of thumb is to go with the high deductible health plan if you earn less than $100,000 a year and are relatively healthy.
Once you earn over $100,000 per person in your household, you might as well pay up for the highest quality health plan possible. Again, having young children is a big X factor in terms of how much healthcare your family will need.
You may initially feel like you're missing out on the HSA party. But you won't feel bad for long because your income is high enough to where you can comfortably max out your 401(k). Further, you still save additional after-tax money for retirement.
Further, you might receive more healthcare benefits that could save you money in the future. You will be logically more inclined to proactively seek medical treatment since your costs are more fixed.
HSA Has Qualifications
The next time you hear someone say an HSA is the best retirement savings vehicle on Earth, you now know what they're sacrificing. There is no free lunch.
The good thing about a HDHP or a low or no-deductible health plan is that so long as we have one, we are insured from disaster. Make sure you know what your maximum out of pocket expense is for each plan. Once you've run some calculations with various scenarios, choose the plan that's right for you.
Related: The Difference Between A POS And PPO Health Insurance Plan
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Readers, do you think it's right that only folks with HDHPs are eligible for a Health Savings Account? Why does the government discriminate so much? Personally, I still don't think having a health savings account is worth it.
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One thing most people neglect is the $7k contribution is for the primary and spouse. If you have children covered, then they each can contribute $7K to their own HSA. So a family of 4 could contribute up to $7+$7+$7=$21K/Yr. (assuming the children have some income) This far offsets the High deductible amount for all 4 covered (possible $12K)
Does that work? I read that spouses can both have an HSA but share the same family contribution limit, and dependents can’t open their own accounts at all.
I’ve been doing it for Years. The rules are
1) The children are on your HSDP insurance and
2) The children have their own earned income (Not passive)
Its setup so each covered person has the ability to pay their own deductable. So the IRS allows all covered to contribute to an HSA account.
This is not true for spouses, they can only have one account ($7k) or divide the contribution if they have two accounts from different employers (you can select any contribution as long as it adds up to $7k)
That’s interesting. My understanding was that this window of opportunity was only for adult children that are NOT tax dependents (deductions from the 1040), but still covered under the family or parent HDHP.
Are you suggesting this can apply to minor children or adult children that are still dependents (college kid)?
https://americanfidelity.com/blog/reimburse/hsa-mistakes-dependents
According to IRS Publication 969, to be eligible to contribute to an HSA “If another taxpayer is entitled to claim you as a dependent, you can’t claim a deduction for an HSA contribution. This is true even if the other person doesn’t receive an exemption deduction for you because the exemption amount is zero for tax years 2018 through 2025.”
Ah — while the deduction cannot be claimed, can the HSA contribution still be made for the dependent? This is my question or Kevan. My interpretation from his post is that contributions can be made for children period, but what I’m reading is that the children cannot be claimed as dependents on the 1040 while still under the parents’ HDHP.
Sorry, no, on the same page of pub 969 it says a dependent does not qualify for a contribution, deductible or otherwise.
Hi,
The child cannot be your dependent. They have to have their own income and take the deduction from their earnings. (ie file their own takes) You cannot make the contribution on behalf of the dependent.
Easiest way is you or some entity to pay your children $7K+ salary and they take the deduction on their 1040.
Here is a huge article on this benefit (loophole?) giving multiple different scenarios and whether the children do or don’t qualify for their own HSA.
kitces.com/blog/health-savings-accounts-hsa-dependents-children-age-26-hdhp-taxes-contribution-limits/
I would assume your child’s living expenses are more than $14,001, so merely paying them $7k salary would not be enough for them to not be your dependent.
I am surprised to learn that you are mostly right and I am mostly wrong. Per this article:
https://www.kitces.com/blog/health-savings-accounts-hsa-dependents-children-age-26-hdhp-taxes-contribution-limits/
But the “their own earned income” is not correct. I was correct that the child cannot be a dependent which means they must not just earn some income, they must provide more than 50% of their own support (living expenses, including things like college tuition). I guess your reference to “their own earned income” is because the contribution is only deductible from earned income? Without that current tax deduction, an HSA becomes like a Roth IRA but with more restrictions.
A high deductible health plan can be an excellent value even for someone who is chronically ill, as many plans have a reasonable out of pocket max, after which everything is free. Its easy for me to compare health plans, as unless the out of pocket max is super high, I’m guaranteed to meet it just with my guaranteed medical needs (prescriptions and doctor copays). So I only need to look at premiums + out of pocket max.
I max out an HSA every year and pretend its a retirement account. ie. I pay all medical bills out of pocket, and let the HSA grow (most have investment options available for balances over $1,000-3,000. If you use it for medical expenses in retirement (age 65+), its even better than a 401k, IRA, Roth 401k, or Roth IRA, as you never pay taxes on the contributions or withdrawals.
I find the HSA as another bucket of retirement money. Once you make over a certain amount of money and max out your 401K, safe harbor contributions and back door Roth you start running out of tax sheltered retirement/investment vehicles. Here is where the HSA comes into play. As a family we can contribute $7,000/year (I am 41). So far we have over $50,000 in this account and growing. I understand through various polls that a couple in retirement will average about $275,000 in health care costs. Isn’t it better to have a bucket of cash that grows tax deferred (tax free for medical expenses) over the years to offset some of these costs? The only exposure you have is your MOOP (maximum out of pocket expenses) which is defined in many Health Care Plans. In our case that is $12,500. Therefore, I keep an extra $12,500 in my emergency fund just in case this happens. Luckily we Never hit that max, although having kids isn’t cheap. Again this is not for everyone, but I rather have $12,500 in exposure a year and have this extra bucket in retirement for health costs. At 40 I also added a Long Term Care plan to my portfolio through Lincoln Financial which is pretty interesting. Everyone’s financial situation is different, but if you have extra disposable income then instead of that fancy car or watch invest in your retirement! Good luck.
Wow — 1%er problems.
I often enjoy your posts, Sam, but you are a bit out of the loop with HSAs. I ‘get’ that you are upset your wealth and choice of “platinum’ healthcare plan precludes you from opting into a HSA, but the plan wasn’t designed for your privilege. You didn’t go into the history of the HSA, which Congress wrote to supplant the MSA plans — shifting the concept of personal responsibility of finances on to the individual rather than the employer. Right or wrong, HSA plans save employers a ton of money, and most Americans of a certain income bracket would benefit from using a HSA over their ‘normal’ or your ‘platinum’ plans. Encouraged savings is one of your mantras, and one of your stances I most respect. Yet, you clearly didn’t do much homework for this post — and have NO experience with the plans. It shows.
Another HUGH benefit of HDHP options: HSA contributions are tax-deductible. You mentioned they behave very similarly to a Roth for tax-free earnings but maybe without sufficient detail. They benefit from withdrawals being tax-free for expenses on qualified medical expenses (dr visits, prescriptions, optical and dental visits, along with the more ‘worst-case’ stuff we all fear medically. If one is >65, HSA funds can be used for those medical categories+Medicare premiums _AND_ anything else with non-qualified spending only taxed as ordinary income). Yes, most of American with paychecks under $100k/yr worry about those dimes. $7k (or $8k >55) are a lot of dimes.
When you dig into most employer plans (I can reference an economic sector not normally represented in these board — the retail worker), you might find that an HSA plan will be 52% of the paycheck deduction from the ‘best’ option available to the worker. Someone making $10 or $15/hr spends $44/paycheck and gets very reasonable coverage instead of $85 from the available ‘optimal coverage’ plan. What’s the maximum out-of-pocket for both plans (serviced by BCBS-Al)? In-Network Family=$12,000, out-of-network=$26,200.
So one says, ‘but wow, that $12,000 annual catastrophic would easily consume all of my HSA contributions for two full years of maximum deposits (not counting savings interest or investment compounding gains). Yep — it would. The poor soul that had the optimal coverage plan would be out the same amount of money (without the legal option of having a savings plan to soften the blow the savvy HSA participant had). Yes, that’s worse-case. Life would suck.
What about reality for most folks who just have wellness visits, vaccinations (for those of you with children) or ordinary life events like the rare wrenched back or sprained ankle? There might be a small donut hole where the various co-pays has the HSA participant at a disadvantage by several hundred or a $1k issue, but it’s not huge. My recent tweaked L4-L5 forced a Dr. office visit, a steroid shot, and a X-ray to insure the disc and nerve bundle didn’t need more attention. My copay was $35 under HSA, it would have been $0 under the optimal plan. More fun facts: My X-ray was billed at $240. Submitted to insurance, who offered to pay $130, that was accepted by the radiologist, and my bill was $0. Yes, you read that correctly — different pricing for different payers. Almost like they just make it up — unless you’re the hapless Joe-public without any insurance, and now you’re that deeper in debt. (Just having a plan changes the cost of care — perhaps THAT is the unfairness of the system you should explore.) If you’d like more cost comparisons given a birth, or diabetes treatment, or such between the two plans I’ve touched upon, I’d be happy to share ACTUAL costs.
What about gains? Someone investing in HSAs at $7k/yr with 7% investment gains, compounded over 25 or 35 years is worth how much more? Heck, even at 2.5% savings, the poor soul has a ton more cash than otherwise. The mostly unused ‘optimal plan’ would have been 50% more out of their paycheck that whole stretch, no tax deductions, and no savings to show for it. Financial stewardship indeed.
Real-world situations make having an HSA fiscally more rewarding for most situations than the default ‘optimal plan’ most employees blindly choose with their employer. I live in a different fiscal world than most of the readership here. As a financial ‘expert’, a more fact-filled piece offers greater value than this opinion post with limited real-world exposure.
I’m not upset. I just want to highlight the downside to having a high deductible health plan and HSA because that’s what most people say is the way to go.
What more facts do you want in terms of data and charts? And how much do you pay for your healthcare so we know where you’re coming from.
Sorry — I took the snarky tone of the post to think you held the plans in disdain. The lengthy lead-in before the meat of the blogpost, and a poll seemed to reinforce a negativity toward HSAs:
“Is it worth having a high deductible health plan to be eligible for an HSA?
Yes, it’s worth having a HDHP to be eligible for an HSA. I like to roll the dice to try and save money in the short run.
No, I’d rather have a low or no-deductible health insurance plan that also has better coverage. Who cares about the tiny HSA. I put a premium on peace of mind.”
Where in fact, the HDHP offerings have very similar coverage to the ‘best’ plans offered by one retail employer, and offers nearly all of the same peace of mind considering costs. HSAs aren’t perfect: I suspect there is a donut hole for costs for someone with unique medical needs, but I haven’t seen it yet. And no, I haven’t yet run a monte carlo on that scenario, just a gut feeling. You likely meant some of the original post tongue-in-cheek while I was in Serious Sunday mode. I should stay off the Internet before the first coffee cup is done.
Gut feelings don’t help anyone here, so let’s sling data. I happen to have some. One retail employer in the Fortune 50 group offers four separate healthcare plans, two each of similar format. These plans are available as voluntary opt-in programs for part-time and full-time staff upon hire, or once-a-year choices for existing staff that may wish to join or change. Premiums are deducted from each biweekly paycheck. Two of the plans are non-HSA ‘normal’ plans, and two are HDHP HSA-types. They vary by the cost, deductibles, and co-pays for various covered services, with the pricier/paycheck plans covering more early on. Note that ALL plans have the SAME Out-Of-Pocket Maximums, as I mentioned before. ALL plans have some level of service coverage before the deductible is met (in-network), such as wellness visits/annual physical and preventative care/childhood vaccinations for most school-required items
To keep my verbosity down, let’s compare only the Family plans, between the ‘Best’ fullest coverage option with the ‘Least’ HSA choice — leaving alone the two in between. For most of these items, I’ll choose in-network rates/costs as the primary care is assumed to be in-network. Most out-of-network expenses are the same for ALL plans, and generally ranging from a little to a lot heftier cost until the OOP max is reached.
Best Least (HSA)
Per Paycheck cost $300 $175
Deductible, in-net $3000 $3500
Deductible, out-net $6000 $7000
Out-of-pocket max, in-net $12000 $12000
Out-of-pocket max, out-net $26200 $26200
Need referral for specialist? no no
Primary care wellness visit (in) $0 $0
Primary care wellness visit (out)50% coinsurance 60% coinsurance
Primary sick/injury visit (in) $30 copay/visit 50% coinsurance
Specialist visit $50 copay/visit 60% coinsurance
Diagnostics 30% coinsuranc 50% coinsurance
Drugs $10-$340 copay/script 50% coinsurance
Outpatient surg/ER/Hospital $250-30% coinsurance 50% coinsurance
Childbirth 30% coinsurance 50% coinsurance
and so forth. Individual plans have deductibles 1/2 of the family plans.
So a different comparison, I’ll use Employee-only costs from a couple of the plan examples. There’s a diabetic and a birth example, that includes limits and exclusion costs. These are those nebulous items that any carrier seems to be able to deny at will — but at least they are the same denials for both plans.
Jack’s Type 2 Diabetes Best Least (HSA)
Per Paycheck cost $85 $44
Deductible, in-net $1000 $1750
Out-of-pocket max, in-net $6000 $6000
Out-of-pocket max, out-net $13100 $13100
Specialist copay/ins $50 copay/visit 60% coinsurance
Jack needs primary care visits, diagnostic blood work, script meds and a glucometer.
Total ‘retail’ cost $7400 $7400
Deductibles $1000 $1750
Copayments $100 $0
Coinsurance $120 $190
Limits/exclusions not paid by plan $420 $420
Total Jack pays out that year: $1640 $2360
Jill’s having a baby Best Least (HSA)
Per Paycheck cost $85 $44
Deductible, in-net $1000 $1750
Out-of-pocket max, in-net $6000 $6000
Out-of-pocket max, out-net $13100 $13100
Specialist copay/ins $50 copay/visit 60% coinsurance
Jill needs ob/gyn prenatal care, delivery services/facitily, diagnotic blood work and ultrasound and we’ll throw in an Epi for anesthesia specialist visit.
Total ‘retail’ cost $12800 $12800
Deductibles $1000 $1750
Copayments $0 $0
Coinsurance $3480 (30%) $4250 (50%)
Limits/exclusions not paid by plan $60 $60
Total Jill pays out that year: $4540 $6060
Now, Jack and Jill aren’t rich. They work retail, above average sales specialists in their departments, maybe making $20/hr if they’ve been with the company for 5 years and they aren’t yet in management. Assuming Jack and Jill are putting in the differential between what they could pay for the Employee-only Best program, and what they would pay for the Least HSA annually, that’s $1066/yr into a HSA savings compounding at 2.5%, or dump it into VTI for ~7%. And if they are particularly wise, they max out the accounts annually at $3500. (We’ll keep them <55yo) Jack could let the investment ride, or he could use his HSA savings to pay off the bill. Jill's probably not producing babies annually, so at two years, she's invested in more than she paid out for her child's entry into our world.
Remember, they work retail. @$40k/yr, they pay out an average tax rate of ~18% in California, so their taxes are ~$7170/yr. But the HSA contribution lowers their taxable income by ~$630/yr. So Jack has $630+$3500-$2360, or $1770/yr that can be earning tax-free interest or investment gains per year, disallowing the compounding. Of course, he had to come up with the difference between what he saved and what he contributed to max the HSA account, so $3500-$1066=$2434/yr out of his take-home pay. Or Jack can pay out $85*26=$2210/yr for the Best plan, plus $1640 for his Best plan treatment, to be out $3850 a year. To put it back into your poll:
Jack 'rolls the dice' and has $1770 additional wealth annually with tax-free earnings for life after investing $2434 of his own cash (for a net loss of $664). [With consistent investing, the compounding will overcome the accumulated net losses in time while also building a fiscal safety net.]
– or –
Jack's put a 'premium on peace of mind', and pays OUT $3850. No savings, no safety net.
———————————————-
To answer your question, I purchase the $175/pchk HSA family plan outlined above. A healthy family of four with the occasional active lifestyle needs for the medical profession, our HSA eclipsed our Roth years ago. It's one of many tools toward our personal wealth building.
Sam, you're an incredibly bright fellow, and you are in an enviable position of being too wealthy to reach down to the HSA level. The people who can qualify for a HSA plan — they'd LOVE to trade places with you. I hope you see that the original blog post does them a huge disservice by actively dissing these plans. People who aspire to have 1/1000th of your wealth — they might look up to you here. The HSA plan is a solid wealth-building opportunity even on their meager rations. One of my favorite lines of yours is, 'Money matters are too important to be left up to pontification.' That's a good statement.
Arrgggg… the astute reader will see I wrote
‘But the HSA contribution lowers their taxable income by ~$630/yr.’
and that should have been
‘But the HSA contribution lowers their income taxes by ~$630/yr.
Where’s the coffee…
I didn’t have time to read all of the comments this time so my apologies if someone already mentioned this but one other great thing about an HSA that I didn’t see in Sam’s post is that if you can afford to, you don’t have to pay for your medical expenses out of your HSA. You can continue to leave that money in there to grow tax-deferred. So in theory you could contribute $7,000 a year to the HSA and never take any of it out.
Now you have 2 options.
1) You can wait until age 59 1/2 and begin taking withdraws from the HSA as retirement income. You will pay taxes on the withdraws like a 401K, but no penalties. OR,
2) What many people don’t know is there is no expiration date on when you can withdraw the money for qualified expenses. So in theory during retirement, at whatever age that is, you can effectively treat your HSA as a Roth IRA and withdraw amounts from the HSA each year as long as you have eligible expenses and pay no penalty and no taxes and you don’t have to be age 65.
The trick is to keep meticulous records for all qualified medical expenses you incur after you open your HSA. I would suggest scanning them and keeping back-ups on a flash drive or external hard drive. If you open an HSA when you’re 25, keep 20 years of records, and retire at 45, you can begin to withdraw tax-free, penalty-free money as you want to as long as you’ve accumulated enough qualified medical expenses that have not been previously reimbursed from your HSA.
Personally I am following option 2 because you can’t beat putting in pre-tax contributions, having tax-free growth, and getting tax-free withdrawals in retirement. If you are already maxxing out your 401K, I would put your next $7,000 into a HSA before you put a dollar into a taxable brokerage account.
You have to do the math on these programs. After analyzing the plan for my family at my employer (state university) which contributes each month into my HSA ($125 per month) the plan works out as follows for different scenarios:
a) If you are rarely goes to the doctor, the lower price for the high deductible plan and the money the employer gives you makes it the best alternative.
b) If you are using doctors some four five visits a year, the co-pay premium plan is best.
c) If have high medical expenses the maximum out of pocket cost for both the high deductible and the premium plans are almost the same so it makes sense going with the high deductible plan.
Since we have a son with an autoimmune disorder with a very expensive treatment we are maxing out every year and save about $4,000 going with the high deductible plan.
So the regular co-pay (low deductible plans) only have a “sweet spot” when they are the best deal.
I’ve checked out the math, and the HDHP + HSA combination turned out to be a better deal for me and my family, compared to a health plan with a low deductible or no deductible, even before considering the tax advantages of the HSA. However, I should provide additional information that is specific to my situation: My employer will pay 80% of the premium for either health plan (no deductible or high deductible), leaving me to pay the other 20%. And my employer contributes $1,200 per year to my HSA, if I choose the HDHP + HSA option.
Paying for health expenses up to our deductible was a bit difficult during the first half of the first year that we had the HDHP, because we hadn’t yet built up much money in our HSA. But now that we have had this plan for a few years, we always have enough money in our HSA to pay for any medical bills, even though our expenses exceed our $2,700 deductible every year (and we even reached our $6,000 out-of-pocket maximum one year). The HSA has been a great way to save for orthodontic expenses (braces) for our kids too.
I’m not really sure what is so bad about a deductible. I assume that most people have deductibles on their home and auto insurance, but I don’t hear too much complaining that home or auto insurance is a bad deal because of the deductibles.
I have a high deductible plan and choose “other” for your second question of “Is it worth having a high deductible health plan to be eligible for an HSA?”
I picked it because of the way I came to having a HDHP plan. My employer has a marketplace for choice health care similar to the ACA marketplaces. In 2007, I had the “platinum plan” with blue cross blue shield and paid the Platinum premium over the HDHP option. I went into the doctors for my regular physical/regular tests that should have only cost me the $20 co-pay. Instead I got a bill for $300 from my in network provider. Apparently the week before Blue Cross had decided that all tests must go to lab corp instead of quest to be considered in network, mine went to the wrong lab. I switched to the HDHP the next open season. I figured if I was going to be stuck with charges that should be covered but aren’t for some reason, I might as well have a lower premium and have an HSA that rolls over if I don’t use it.
Crunching the numbers is actually fairly easy. In my case, once my wife’s plan allowed for a High Deductible health plan paired w/ HSA, we jumped all over it. The spread between premiums for the low deductible plan and the “worst case” scenario with the out of pocket max on the high deductible plan made the High Deductible plan SLIGHTLY less costly in a worst case scenario. Then I love the HSA. I’m 50, wife is 48 and we plan on maxing out the $7,000 contribution (which hopefully goes up over time) until we’re in our early 60s when we fully retire. Tax deduction to go in, grows tax deferred and tax free if used for the inevitable health care costs later in life. Or even to pay for COBRA or Medicare premiums. We have plenty of cash flow and emergency accounts to pay for the out of pocket expenses in the meantime. In our case, the HDHCP and HSA works beautifully.
Self employed person living abroad where I have free health insurance. For me, since I have free insurance through the country I live in (yes it’s one of the Nordics), and I didn’t pay for health insurance in the states, then I am not eligible to contribute to an HSA. For me, it wasn’t worth paying out of pocket for another HDHP and letting the “HSA tail” wag the dog.
Fortunately, I have never met my deductible since I have been an adult (> 8 years). I have saved 20k in an HSA and have it all invested in stock. Even if I switch to a low deductible plan I can continue investing that money and use it at age 65 for any medical expenses, including LTC premiums (should that be necessary). Perhaps the crossover point is having children? I think that you are better off with HDHP, even if every now and again you have to pay the full deductible. On the other hand, if you are a power user of the medical system maybe that math wouldn’t make sense. Like most financial planning topics there is the quantitative aspects (i.e. the mathematically correct choice based on the variables) and the qualitative aspects (behavioral finance).
Local gov’t worker here.
Have had HDHP w/HSA for 8 yrs now and love it.
For one, my employer kicks in the entire deductible amount every year, into our HSA.
$3k deductible with $6k max out of pocket. Work puts $3k every year on Jan 1 into the HSA.
Took me a while to realize that some day I can use this money to pay for Medicare.
Some employers also contribute to their employees’ HSAs. My employer contributes about $50 per paycheck to my HSA on top of paying for my HDHP. I’m healthy (never spent more than a couple hundred per year on doctors in my adult life and have an intense distrust of conventional doctors from some bad childhood experiences), no children yet, and a high earner. The tax shield is great for reducing the amount of income that gets taxed at over 30% federally. I will definitely switch to a zero deductible plan once I get married though.
My husband goes with his employer health plan (HDHP) and maxes out on his HSA. My kids and I go with my employer health plan (low deductible) and generally use an FSA. This is the best combination for us. I do have an old HSA account from prior years.
My employer just held a learning session on HDHP with HSA since they will be offering it next year in addition to our existing no deductible plan with FSA. Of course, we can only choose one plan. I may have missed something, but it was my understanding that if your spouse has an HDHP and HSA and you have a low deductible plan through your own employer that you could not use the FSA benefit. Can someone please clarify?
My company covers the HDHP deductible if you do certain healthy activities, like go get your annual checkups or run a 5k. It’s the best of best worlds.
I really wish more companies and health insurance company has provided incentives to stay healthy. Such a no brainer. Who wouldn’t want to work out more if they could save thousands of dollars right? It’s a win-win-win.
It’s really a shame we don’t encourage prevention more than cure.
I’ve been maxing out my HSA for nearly 6 years now and I think it’s definitely the way to go for the future. I am a bit concerned, though, about how Medicare for All will affect the funds I’ve set aside. The numbers behind M4All show it’ll be a net positive for the economy/population as a whole and I’m definitely in favor of M4All but what happens to the money set aside in HSAs? I would hope there would be an “amnesty” program for the funds in HSAs where funds could be taken out with no penalty (although taxes could apply for non-medical expenses).
Great write up, Sam! I’m a long time reader and really appreciate this post. I absolutely agree with the requirements on who should take up an HDHP/HSA. I thought it was obvious that one should really be able to afford the deductible and the maximum out of pocket costs on the HDHP plan they’re in. After dealing with infertility expenses while on a no deductible plan with 50% infertility coverage (no IVF), I realized I had spent more than then max OOP so I looked into the HDHP/HSA plan during open enrollment to plan for the worst-case scenario of needing IVF. We could comfortably afford the deductible and max OOP. We could also afford to contribute the maximum to the HSA. Switching to a HDHP plan allowed me and my husband to have an IVF cycle at a cost of $3,000 including medications. In my experience, infertility expenses and prescriptions did not count toward a no deductible plan’s max OOP. If you’re dealing with injectable medications, you know how crazy prescription expenses can get. I feel like I can now write an ebook about all the things I learned throughout this process. That said, it definitely takes a lot of research to make it work. I called my insurance plan many times to confirm coverages. I read my evidence of coverage. I became familiar with CPT codes. Lol. It was worth it in the end for us given the exorbitant cost of IVF but tracking all your bills and payments does take time and can get frustrating.
That’s great your plan covers IVF. So many plans don’t, and it is so expensive as you know.
I hope the fertility treatments work out!
I ran the numbers, and in a worst case health scenario, I pay less on my employers HDHP with HSA than their no deductible plan. I find it shocking how many of my coworkers still choose to pay for the no deductible plan. Option 1, pay $16k in the worst case, but rollover money tax free in a non worst case. Option 2, pay $17k with no option to rollover any money. They choose option 2 for fear they can’t pay the deductible. But if you can afford the crazy premium, you can afford the deductible! People have trouble with the math I think.
I’m surprised that the threshold is only $1350. My deductible is $1500, but to get an HSA, I would have to get the $6500 deductible option of the 2 health plans my employer offers.
While the $6500 deductible plan costs half as much as a weekly payroll deduction, I discovered that the lower deductible plan is actually cheaper. By the time I would hit my deductible under the HDHP, I will have spent $580 more than under the lower deductible plan. If I hit the out of pocket maximum of the lower plan, I’ve saved $3000 over the the higher plan. At the point of the out of pocket max of the HDHP, it has cost and extra $8500.
Granted, these numbers don’t take into account the tax benefits of an HSA, but the tax savings arent going to get that high.
I follow every post, Sam. Love your work. This one is just missing the mark regarding the analysis needed to make an optimal choice.
Thanks. Feel free to elaborate why to help me and others make an optimal choice. Be the change you want to see, otherwise, nothing gets accomplished.
Fact is, in individual plans, most plans deductible exceeds the federal limits to qualify for HSA. Picked a plan with the lower $6000 deductible to qualify for HSA and the same Plan is $180 more a month in premiums. Not much of a tax savings benefit.
Wait, if your deductible is greater than a certain amount, you are no longer eligible for an HSA? If so, what is that cap?
There are known knowns, known unknowns and presumptions. In retirement the known known is you are going to have to pay for medicare. If you are married you will pay for 2 medicares. If you are making a lot of money in retirement the cost of medicare is progressive. If you make 85K/yr your medicare is 135/mo. If you make between 160K and 500K the bill is 433/mo (oh no we don’t soak the rich it’s just their fair share!), 2 peeps = 866/mo This does not include the supplemental which is about 100 to 150 more depending on the plan and coverage. It turns out HSA can be used to pay for medicare parts A and B and the money comes out tax free for those expenses. Known unknown is you are going to die and death can often be expensive and lengthy. Alzheimer’s average length from diagnosis to death is 12 years and you can imagine at least some of those years will require nursing home, not covered by medicare. If there are 2 of you there are 2 chances at pulling the gold ring. If you get it and use up all the dough what’s your wife going to do? My solution is to fund a Roth with 1M at age 65 and let it grow unmolested. After 20 years if you haven’t used it you can molest it, by then plenty will be available. The Roth is independent of the WR money and the HSA. I funded the HSA to about 75K which should take us a couple decades to exhaust paying for medicare cost. I don’t trust funding HSA as a retirement account beyond this as all it takes is a law means testing the amount and it could be made quite taxable, the old “anything over 100K gets taxed at marginal rates” or something. A Roth is safer since that money is already taxed. In addition if you have TIRA and big medical expense you can pull TIRA money and write off the expense so you have some tax maneuverability.
The point is to get to 70K in the HSA is only 7 years of funding @ 6% return. After that you can just let it grow without further funding. You don’t have to sign on for decades of HSA funding to get a pretty good tax advantaged benefit late in life. If you had 70K in an HSA by age 50 and let it fly to 65 untouched when you become medicare eligible you would pay all your Medicare cost for you and your wife tax free forever and still have money left, depending on the rate of medical inflation. Even if it got you 20 years into retirement before running out of money it’s a good deal. Nothing works like tax free compounding.
I have a high deductible plan for our family and I am self employed. In our case, it really is the math that works out. My HDHP has a deductible of $6000 before the insurance company picks up any expenses. After the $6000, they will pick up ALL expenses. In our case, the difference in the premiums of the our HDHP and the no deductible or low deductible plans is between $400 – $600 a month.
A premium is a fixed cost while you may or may not use the deductible. Therefore, in our case, getting a HDHP has made financial sense. The tax savings from funding the HSA are just icing on the cake and give a sense of comfort to deal with increased medical costs in our old age.
I made a decision at age 23 to get a HDHP with an HSA and max it out every year until I started a family. I was young, healthy, and my thought was that if I could build the balance high enough before I had kids, the interest I was earning on the balance would more than cover my deductible in future years. It would sustain itself (provided I stayed employed, and paid expenses in the meantime out of non-HSA money). I’m 34 now, just had a kid, and that’s basically what happened. Our family now has a triple-tax-advantaged bucket of health care cash that we will continue to not touch, but is there for us just in case. As long as we have the ability to pay our higher deductible out of regular income, we will continue to do so and get the free money provided by my employer. We know we may not have the luxury of doing that forever, so why not take free money and get tax advantaged growth while you can? The way our plan options were structured, it’s basically a wash on paying more for a lower deductible versus getting the HDHP with free $, even with a baby, so we plan on keeping it as long as that’s the case. As mentioned by others, insurance will be a hassle no matter what plan you’re on, but (and I work in insurance), the hassles aren’t usually much worse on a HDHP than they are with a lower deductible.
I have a high deductible plan with an HSA because the medium and high end plans per year cost the same as the deductible + small contribution in the HSA. But that changes year over year with my employer. I know people maxing out the HSA because it is tax advantaged however i worry about two things: 1) colorado passing a universal health care law and there not being a guarantee the money in peoples HSA wont be taken advantage of and 2) already the cost of the plans change each year, last year the HSA didnt make sense at this employer so nobody had it.