Health Savings Accounts (HSAs): a spreadsheet-friendly “tax hack”

Health Savings Accounts (HSAs) are a bit of a “tax hack” tied to health insurance. They were created back in the early 2000s and are very popular with people who like to spreadsheet their finances and try to maximize tax savings. If that’s your money personality, HSAs can be great. If it’s not—and you don’t enjoy tracking things and running “what-if” scenarios—you may want to pass. The benefit isn’t magical unless you actually use it thoughtfully (or you’re in a very high tax bracket).

An HSA is basically a checking account that can also act like an IRA, with one big twist: you can pull money out tax-free for medical expenses (copays, deductibles, prescriptions, etc.). That’s pretty powerful.

You put money into the account pre-tax, you can invest it if you want, and you can withdraw it tax-free when it’s used for qualified medical expenses. To the end user—especially when you’re first starting out—it looks and feels like a regular checking account. You get a debit card. You usually get checks. You log in online. Money goes in, money goes out. Simple.

Most people fund their HSA through payroll (remember, a HSA looks and feels like a regular checking account). You tell your employer how much you want to contribute per paycheck, it goes straight into the account, and you’re off and running. When you have medical expenses, you swipe the debit card or write a check. Done.

The catch: you need a high-deductible health plan

Here’s the trade-off. You can only contribute to an HSA if you’re enrolled in a high-deductible health plan (HDHP). These plans usually have “HSA” in the name.

What that means in practice is that your insurance coverage is lighter up front. You’ll generally pay for most medical services out of pocket until you hit a relatively high deductible. The upside is lower monthly premiums and tax savings. The downside is more exposure if you actually need care.

So the real question is: do the tax savings offset the higher out-of-pocket risk? That’s where the spreadsheet comes in.

If spreadsheets make you happy, keep reading. If not, skipping the HSA is a perfectly reasonable choice.

Well, break out your spreadsheet to see if this works for you!  If that doesn’t sound fun, skip the HSA.  If you love spreadsheets…. let’s continue.

Example: comparing two plans

Let’s use the 2022 IBC rates as an example:
https://diversifiedhumansolutions.com/2022ibc/

Assume you’re 40 years old.

• PPO Bronze (HSA-eligible): $345/month

• HMO Silver Proactive (not HSA-eligible): $375/month

That’s a difference of about $360 per year in premiums—not huge.

Now assume you have no medical expenses that year and you have enough extra cash flow to contribute to the HSA.

The 2022 HSA contribution limit for an individual was $3,750. If you max that out and assume a combined federal income + payroll tax savings of roughly 30%, that’s about $1,125 in tax savings, plus the $360 premium savings.

That’s real money. But pause for a moment:
Are you already maxing out your 401(k)? Your IRA? Could you get similar tax savings elsewhere without taking on a higher deductible? Those are fair questions.

Now let’s look at a bad year

Let’s say 2022 was not a clean year. You broke your foot. You went to the ER, had surgery, and needed follow-up care.

Let’s ballpark:

• ER visit: $1,200

• Surgery: $1,500

• X-rays and follow-ups: $800

That’s $3,500 out of pocket, and depending on the plan, you may not have even hit the deductible yet. You did at least pay that with pre-tax HSA dollars, which means it feels more like $2,450 compared to paying with after-tax money.

Now compare that to the HMO Silver Proactive:

• ER copay: $550

• Tier-1 outpatient surgery: $250

• Follow-ups and imaging: $300

Total: about $1,100, paid with after-tax dollars.

So in this scenario, it’s roughly $2,450 vs. $1,100 in medical spending, after adjusting for taxes. The PPO Bronze still saved you $360 in premiums, so the net difference for the year is under $1,000.

That’s the gamble.

You can also imagine a really bad year where you hit the out-of-pocket maximum (about $7,050 for an individual in 2022). That’s the downside risk you’re taking in exchange for tax savings.

Who HSAs tend to work best for

HSAs generally work better if:

• You’re relatively healthy

• You earn more taxable income

• You like tracking things

• You actually contribute to the HSA

• You’re comfortable with higher short-term risk

If you’re in a high tax bracket—especially if you’re self-employed—the tax savings can be very meaningful. In those cases, the math can strongly favor the HSA.

Opening a Health Savings Account

Once you choose an HSA-eligible health plan, you still need to open the actual HSA.

From the end user’s perspective, this is just opening a checking account.

You pick an HSA provider (Bank of America, PNC, HSA Bank, HealthEquity, Fidelity, etc.), fill out some forms, and you’re set. You’ll get online access, a debit card, and usually checks. Some providers also let you move money into an investment account later if you want to invest HSA dollars.

After it’s open, give your employer the routing and account number so payroll contributions can start. Money goes in every paycheck. You use the card or checks for medical expenses. It looks and feels exactly like a normal checking account.

You’re responsible for using it only for qualified medical expenses (listed in IRS Publication 502), but in day-to-day life, no one is hovering over your shoulder. It’s simple, practical, and very user-controlled.