Health Savings Accounts – The Good and The Bad
On January 1, 2019 I started my first health savings account (HSA). I've never been a fan of high deductible health plans with HSAs. They are plans designed for the rich but are marketed to the poor.
High deductible plans have a low monthly premium but have a high deductible that you must first reach in order to have the insurance coverage kick in. High deductible plans are also coupled with HSA.
An HSA is basically a specialized savings account that can be used for qualified medical expenses. HSAs have significant tax advantages: 1) contributions are pre-tax, 2) the account can be invested (like a 401(K)) and earnings are tax-free, and 3) if funds are used for qualified medical expenses, they are not taxed on withdrawal. Additionally, HSA accounts are portable - meaning they can move with you as you change jobs or insurance providers. To top it off, any unspent amounts carry over year-to-year.
Both your employer and you can contribute to the HSA. In 2019, the HSA contribution limits are $3,500 for single people and $7,000 for a family.
The HSA is designed to be used as a tax advantage. If you have an HSA, your plan should be to not use it until you are old and most likely to have a lot of medical expenses. (News flash - Medicare does not pay for everything! And Medicare does not pay for any long-term care.) Instead, the HSA should be left alone and grow over time and ideally you would pay for the deductible and all other expenses out of pocket.
Now this all sounds well and good if you are relatively healthy with limited medical costs and have the money to pay your high deductible.
In reality, saving the HSA to use later in life is not an option for many people. Often times people need to use the HSA funds immediately to help pay for the high deductible. Or the high deductible deters low-income individuals away from the doctor, which can lead to more costly medical conditions and treatment down the road.
Mr. FIREat40 and I did the math and at the time, it made more sense for us to split up our health insurance. He has his own and I have mine. My employer only offers an HSA - I have no other health insurance option. My premium is $81.92 per month and my annual deductible is $2,000. I have contributed the maximum to my HSA. My company will contribute $500 in the HSA and I will contribute $3,000 over the course of the year. (This amount comes directly out of my paycheck.) I am fortunate enough to be in good health. My only medical condition is a hypothyroid problem that has me on medication every day for the rest of my life. Currently that medication costs about $23 per month.
My employer contribution has already been allocated to the account and my pay check contribution is in. When I reach $2,100 in the account, I will be able to start investing the funds, just like a 401(k) plan.
Our plan is not to touch my HSA until we are older. And it will likely come in very handy if we are fortunate enough to retire early and need to pay for health care.
On separate note, I am looking forward to really tracking our health care expenses. When it comes time to pick a health plan, you often have to think about what your past health care visits were and what could be coming down the road. We can't predict the future, but tracking our past will help us determine the best health plan for our family going forward.