What the Tech is an HSA (Health Savings Account)?
Health insurance is super confusing. If you’re lucky, your employer pays 100% and offers you a Cadillac plan with low deductibles and max out of pockets. Most likely though, you’ll face a range of coverage and it is expensive, especially if you are adding a significant other or family member to your plans.
A common fixture when you are provided multiple health plan options is an HDHP (High Deductible Health Plan) with an HSA (Health Savings Account). Without the HSA option, a high deductible health plan is pretty average, but with an HSA, things start to get interesting.
A qualifying high deductible health plan has a deductible that is no less than $1,400 of $2,800 for a family.
An HSA is a very unique account type because they are triple tax-free, which no other account provides!
- Tax deduction on contributions
- Contribution Limits for 2022 are $3,650 (Individual), $7,300 (Family)+ $1,000 if age 55+
- Tax-Free Growth
- Tax-Free Withdrawals (for qualified health expenses)
To be frank, these special tax benefits favor those who are in higher tax brackets. The higher your tax bracket, the greater benefit you’d receive. For example, if a person in the 10% Tax Bracket and a person in the 24% tax bracket each contribute $3,000. The one in the 10% only receives a $300 tax deduction, but the one in the 24% would receive a $640 tax savings. That’s a $340 difference for the same contribution amount!
How does a Qualified High Deductible Health Plan with an HSA compare? Usually, they have lower premiums, higher deductibles, and sometimes higher max out-of-pocket limits.
A better health plan option usually has a lot higher premiums, copays, and lower deductibles.
What a lot of people don’t realize is that the higher deductible and max out of pocket are usually not likely to occur, but the premiums you have to pay out of every paycheck are essentially guaranteed.
This is why I like to break down my analysis into the following categories to gain insight on which plan may be best for my clients:
- Best Case: The premiums you pay and no medical costs (this usually favors the HDHP and HSA)
- Worst Case: Your premiums + your max out of pocket (sometimes the HDHP and HSA still come out on top due to the high premiums of the better insurance coverage and the tax savings of the HSA contributions!)
- Average Case: Your premiums + half of your max out of pocket (This would be a visit to the ER for a broken arm. Again, it’s possible the HDHP and HSA still hold up well.)
It’s important to run these basic calculations so that you can make an informed decision when choosing your health plan instead of doing what most people do and just guess. You also want to take into account any health conditions, medication requirements, and previous health track record before making your final decision.
Another kicker that I see employers offer is are free contributions to your HSA. Be sure to factor that into your analysis!
