I recently talked to a co-worker who wasn’t very happy about our health insurance plan. I was surprised because I love it.
It turns out that she just didn’t understand how it worked. We have a high-deductible plan with a health savings account (HSA), a relatively new type of plan that’s likely to become more common as traditional insurance premiums continue increasing.
In our case, our company pays lower premiums because we have to spend $2k each year before the insurance will cover us. That doesn’t sound like a great deal for us employees though, huh? That’s what my co-worker thought too.
But the other side is that our employer uses the savings to put $2k each year into a health savings account for each of us that we can then use to pay that $2,000 deductible. As a result, we don’t really pay anything out of pocket.
The best part is that we pay no taxes on this money and unlike FSAs (flexible spending accounts), we get to keep whatever we don’t spend in our account. That doesn’t mean I can take the money and splurge it on a big screen TV (at least not without paying taxes plus a 20 percent penalty on it). But it does mean I can invest that money in my HSA tax-deferred until age 65, when I can then spend it on my retirement without penalty, use it tax-free for medical expenses (which Fidelity estimates will be about $230,000 over the remaining lifetime of a 65-year-old couple without retiree health insurance), or just let it continue to grow tax-deferred.
The interesting thing is that it changes your whole view on health spending.
Normally, you just go to the doctor and don’t think about costs since someone else (the insurance company directly and your employer indirectly through higher premiums) is paying. Think about how you’d spend if other areas of your life worked that way (as someone who loves to eat out, I wish my company provided us food insurance)?
Instead, when the dentist asks when was the last time I had my x-rays done, I make sure I know the answer before paying for x-rays I don’t need. I get my (albeit very uncomplicated) annual physicals done by a very competent nurse practitioner instead of by a more expensive physician. I only update my contact lens prescriptions when they expire or need updating, not every time I happen to be in the optometrist office for a routine checkup (it cost extra for the prescription).
I didn’t use to do any of these things before I had an HSA. You can also use your HSA for medical expenses (as well as on your spouse and dependents) even though they’re not covered by your health insurance.
Another thing I love about HSAs is that I can also add about $1k to it each year since the limit is $3,050 per year for a single person. If I have the deposits deducted from my paycheck, I also don’t have to pay the 7.5 percent payroll tax on it. Not even 401(k) contributions let you do that.
When you consider that HSAs offer your both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your 401(k) (after you have maxed the match) or IRA.
So what’s not to love? Apparently not much. Once I explained this to my co-worker, she agreed.
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.
