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November is a lot of things. It’s when we turn back the clocks. It’s Thanksgiving.
It’s also open enrollment. A time to compare premiums and deductibles and copays, guess about your health care needs for the coming year, and gamble on which health insurance will be the best bet for you, financially.
Nick Enz has been wondering about that, specifically about whether a high deductible health plan with a health savings account would be the smart move, financially, for his family.
“I’ve heard from people who are more sophisticated with personal finance than myself that health savings accounts are the way to go,” Enz wrote to “Marketplace” in an email. “However, I don’t quite understand how they work and what the benefits would be for my family. My vague notion is that if you have a high deductible health plan then you should utilize health savings accounts and they can allow you to save lots of money over time for health issues later in life. But the implications of what it means, in terms of risks, to have a high deductible plan aren’t totally clear to me. I would be scared that if one of my kids has a serious health issue I would have very high health expenses.”
If, like Nick, you’re debating a high deductible health plan with an HSA, versus a more traditional health plan, here are some things to consider.
What is an HSA?
A health savings account, or HSA, is a savings account that you — or you and your employer, if you have an employer-sponsored plan — can put money into, tax-free, that you can use for qualified medical expenses.
Many employers offer HSA-eligible plans, and you can also set one up on your own, if you buy health insurance on HealthCare.gov or your state’s exchange. In both cases, though, you can only contribute to an HSA if you’re enrolled in a qualified high deductible health plan.
“One thing to keep in mind is that not every high deductible plan is HSA-eligible,” said Tara Straw, a senior health policy analyst at the Center on Budget and Policy Priorities. “So you have to make sure your insurance is HSA eligible first.” (More on that below.)
As long as it is, you can put money into an HSA, pretax, that you can then use to pay for things like copays and other medical expenses. Any money you don’t use for medical expenses can sit in the account and grow, tax-free. HSAs are also portable, so that money is yours for life, even if you switch employers or health plans.
“The HSA is really a savings vehicle,” Straw said. “So if you have some large expense in the future, you’ll have an accumulation of dollars in that account to pay for it.”
(Side note: HSAs are not the same as flexible spending accounts, FSAs, which you can also put money into tax-free, to use for qualified medical expenses. You can only get an FSA through an employer, you can’t set one up on your own, and any money you put into an FSA is use-it-or-lose it — the maximum you can roll over from one year to the next is $500.)
What makes a high deductible plan HSA-eligible?
For a plan to be HSA-eligible, it has to fall into something of a Goldilocks zone, where it has a high enough deductible but a low enough out-of-pocket maximum.
That zone, for the coming year, is: a deductible of at least $1,400 for an individual or $2,800 for a family, and an out-of-pocket maximum of $6,900 for an individual or $13,800 for a family.
About 26% of companies that offer health benefits offer some kind of HSA-eligible high deductible health plan, according to a 2019 survey by the Kaiser Family Foundation. On the open market — HealthCare.gov and the state exchanges — plans that fall in that zone exist, but can be hard to find, said Karen Pollitz, an expert on private insurance at the Kaiser Family Foundation.
For 2020, the out-of-pocket limit for a lot of marketplace plans is $8,200 for an individual or $16,400 for a family — too high to be HSA-eligible.
What are the benefits of a high deductible health plan with an HSA?
For one, the premiums on these plans are generally lower. So if you’re squeezed, financially, and trying to lower your monthly costs, they can be tempting.
If you’re young and healthy and “not anticipating having to meet a high deductible anyway,” Straw said, high deductible plans with HSAs can be a good financial move. Especially if your employer contributes a chunk of money to your HSA every year.
The real benefits of HSAs “accrue to people who are very wealthy, who get the greatest tax bang for their buck. And for people who feel confident that they will not need to take money out,” said Pollitz. “Or for people who feel like, you know, they’re young, they’re healthy, I never go to the doctor. What the hell, right? I’ll roll the dice.”
What are the drawbacks?
The main drawback for most people with these kinds of plans is that you’re responsible for all of your (nonpreventative) costs until you hit your (high) deductible. So if you get sick, or your kid gets sick, medical bills can pile up pretty fast.
And while you can use the money you’ve put into your HSA, pretax, to pay those medical bills, “because of the contribution limits, you can’t put as much money in, in any given year, as you would need to cover the whole out-of-pocket,” Pollitz said.
Another, more minor drawback to be aware of, is that “there can be fees for these HSAs,” Pollitz said. “There may be a fee to set up the account, there may be a fee to put money into it, and there may be a fee to take money out of it. So you need to find out about that.”
Bottom line, who are they good for, and who are they not good for?
Above all, “these are advantageous for wealthy people,” said Pollitz. “If you’re not wealthy, and you’re in a lower tax bracket, you’re not getting that much of a tax break, No.1. No. 2, since you’re not wealthy, chances are you don’t have a couple thousand dollars lying around that you don’t need for anything else. So it’s harder for people to put money into the HSA.”
HSA-eligible plans can also be a good choice for young, healthy people — people who are willing and able to gamble that they’re not actually going to need to pay that high deductible or out-of-pocket maximum.
People who make that gamble and end up being right — they don’t get sick, they’re able to just bank their employer contribution to their HSA, and let it grow over the course of a few years — can end up coming out on top. They can end up with a good chunk of money in their HSA that they can use later in life, when maybe they do end up having higher medical expenses.
“Even if you move into a better health plan, you can still take it out,” Pollitz said. “You don’t lose it, it’s yours. So you could save it up, and down the road your kid needs braces and that’s not covered, you can use your HSA for that, even if you’ve moved into a low deductible health plan.”
High deductible plans with HSAs are not a great choice “if you have, for instance, a chronic condition, and you know that you’re going to be spending a lot through the year,” Straw said. Or if you have kids who wind up at the doctor a lot. Or if you’re older and more likely to have health issues.
“I think those people tend to find that … lower deductible insurance is a better deal for them.”
Even if it comes with a higher monthly premium.
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