Health Savings Accounts

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Health Savings Accounts

Health Savings Accounts (HSA’s) are a “tax hack” that’s connected with health insurance.  In 2003, a finance person came up with the HSA; and it is an idea for people who like to spreadsheet their finances and try to “maximize” their money/tax savings.  That said, if that’s not your money personality (we all have a “money personality”), maybe just pass on the HSA because it’s not that huge a benefit if you don’t enjoy doing that sort of thing (unless you’re in the highest possible tax bracket).

A Health Savings Account (HSA) is just a regular checking account, that can also act like an IRA (individual retirement account), that you can ALSO withdraw money from without penalty if used for medical spending (i.e. copays, deductibles, etc).  That’s pretty awesome! You put money into the account tax free (no federal income or FICA taxes), then can invest that money into various funds and investments, and withdraw it without paying taxes IF used for medical expenses!  It’s super easy to use, you contact your bank and ask them to open a health savings checking account, you fill out the forms, then you get what looks and feels like a regular checking account (you’ll usually receive a debit card & blank checks). You ask your employer to make HSA contributions out of your paycheck into that account, and viola… all set! Use your debit card or write checks to pay for medical expenses, tax free!

BUT, here’s the catch.  You can only open / deposit money into a HSA if and only if you have a HIGH DEDUCTIBLE health insurance plan.  The plan will usually have “HSA” in its name. This means that the health insurance you take, is pretty “bad” in that you’ll pay full price for everything, until you’ve satisfied the high deductible.  So consider that you’ll be getting some tax savings, but will those tax savings OFFSET the fact that you’ll have to pay the high full price of medical procedures BEFORE the insurance kicks in and will cover some of the costs.

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.

Let’s use the 2022 IBC rates:

Let’s compare the PPO Bronze Plan (HSA eligible) and the HMO Silver Proactive plan (NOT HSA eligible).  Let’s say you are 40 years old, the PPO Bronze would cost $345 per month, and the HMO Silver would cost $375 per month.  That’s a difference of $360 per year, not much.

IF you have a year with zero medical expenses… AND you have enough extra income to deposit into the HSA plan, then you’re ahead!  The maximum contribution you can make into a HSA in 2022 is $3750.  Let’s say you put the maximum in the HSA, and lets estimate your tax savings (federal income & FICA) at 30%; so that’s a $1125 tax savings, plus $360 less in annual premiums. Not bad!  However, are you maxing out your 401K and IRA already?  Could you have these tax savings elsewhere without the health plan trade off?

Let’s now imagine 2022 wasn’t a year with zero medical expenses… in fact, you broke your foot and had to go to the emergency room, have a surgery there, and had to have several follow up x-rays and doctors visits!  Let’s run some numbers on that scenario.

For the HSA plan, let’s guesstimate that the ER visit cost $1200, the surgery was $1500, and the follow up x-rays and doctor visits were $800.  That’s $3500 you’ve spent and you haven’t even met the deductible! But at least you paid that $3500 with tax free money out of your HSA account… so it’s the equivalent of $2450 in medical bills if paid with after tax money.

What would the year look like if you were enrolled in the HMO Silver Proactive?  The ER visit would have been a $550 copay.  Let’s say you were a savvy shopper and went to a tier 1 provider for the outpatient surgery and it cost $250.  The x-rays and doctor visits were simple co-pays so that only added up to $300.  The total cost would have been $1100!  Not bad.  But let’s consider this is paid with after tax money. (NOTE: it is VERY hard to know what medical procedures cost.  You can try tools like these: but they are wildly inaccurate because prices vary INCREDIBLY from one provider to the next).

In this scenario, it was $2450 spent vs $1100 spent in medical bills (adjusting for taxes).  But the PPO Bronze also saved $360 in annual insurance premiums, so the difference was actually less than $1000 for the year.

If you’ve followed this far, you get an idea of how this bet / gamble works.  You can also imagine a REALLY bad year and reaching the out of pocket maximum of $7050.

Of course if you’re in the top tax bracket and self employed, the tax savings on the HSA could be 50%!  So break out that spreadsheet!  The healthier you are and the more taxable money you make, the better the HSA is for you.

OPENING A Health Savings Account

Let’s say you’ve made the plunge and opted into an H.S.A. eligible health plan.  Great, now you have to open up an actual health savings account.  It’s just a checking account.  FULL STOP. There’s nothing special about it. It will look and feel like a checking account.  You can open one up with a number of banks (not all banks offer them)… ranging from Bank of America, PNC Bank, HSA Bank, Health Equity, Health Savings Administrators, Fidelity, etc.  Some of these vendors will allow you to move money from the HSA checking account, into a HSA brokerage account where you can buy and sell securities (i.e. stocks, ETF’s,  mutual funds, bonds, etc.), and you can electronically move money back & forth between the HSA checking & HSA brokerage account.

You’ll receive some checks, a debit card, online access to your HSA checking account and will move money in and out just like any other checking account.  No one is a cop here.  It is up to you to self regulate and spend money from the HSA on ONLY medical procedures listed in IRS publication 502 (Google: IRS Publication 502 and you’ll find it).  After you open it up, tell your employer to deposit $X per payroll into the new routing number & account number, you’re all set!  It’ll look and feel like any other checking account.