Health savings accounts and high-deductible health plans- what you need to know
May 15, 2019
Health insurance is a crowded space and it’s often confusing to navigate. It’s also an important part of your financial plan as a solopreneur. You will need to decide: what kind of plan to buy, how much insurance you need and how much you are willing or able to pay out of pocket. Today, we are going to focus on high-deductible health plans and health savings accounts.
Enrollment in high-deductible health plans (HDHP) and the use of health savings accounts (HSA) is growing. With healthcare costs continuing to rise, the cost of a monthly premium in a traditional healthcare plan for an individual or a family can be staggeringly high and consumers are looking for more cost-efficient options.
If you are choking on the thought of paying an outrageous monthly premium for health insurance you are certain you won’t get the full value of, perhaps an HDHP with an HSA is a good choice for you. Plus, HSA’s can offer some interesting tax and financial advantages.
What is a high-deductible health plan?
According to Healthcare.gov, a high-deductible health plan is one with a higher deductible than a traditional one. The IRS sets the threshold for “higher.” In 2019, that threshold is $1,350 for an individual and $2,700 for a family. It’s important to note that your deductible is the amount you have to pay towards your own care before your insurance plan kicks in and starts paying some of your coverage.
Fun facts about HDHP’s
- Monthly premiums in a HDHP are usually lower than traditional plans.
- Some plans will cover preventative care outside of the deductible, meaning your yearly checkup costs, vaccinations, etc. That said, you might also be required to provide a co-pay for these visits. This is often a flat rate. For example, you might pay $30 for general provider and $40 for specialist.
- You’ll also likely have a co-insurance percentage, meaning that you’ll be required to pay a percentage of the care even after you’ve met your deductible. A common co-insurance split is 80/20: 80% paid by insurance, 20% paid by you.
- These plans also have an out-of-pocket maximum. This means that once you have paid a certain amount out-of-pocket for your healthcare, your insurance plan will cover it all. For an individual, that cost can’t exceed $6,750, and for a family it would be $13,500 in 2019.
Premiums and deductibles are inverse of one another- the less you pay in monthly premiums, the higher your deductible. The lower your deductible, the more you pay in monthly premiums. Also, the higher your deductible, the higher your out-of-pocket maximum.
Why choose a high-deductible plan?
The main advantage of an HDHP is that you are more accountable and in-control of your care. In a traditional plan, you are paying a higher premium amount and you may never use some of the insurance you are paying for. In a HDHP, you are potentially taking on more cost up-front for your healthcare in a given year, but if you aren’t constantly at the doctor’s office or getting treated for a condition, you may not end up paying all of that cost.
Regardless, the out-of-pocket maximum limits are still high dollar amounts and it can be scary to take on that risk without a safety net.
“Especially for folks with families, it can be a very emotional process,” says Eric Dowley, Senior Vice President of HSA Product Management at Fidelity. “No one wants to feel like they are going to be exposed [financially] if something happens.”
That’s where health savings accounts kick in. High deductible health plans as defined above (deductibles higher than $1,350 individual/$2,700 family in 2019) are health savings account eligible plans.
What is a health savings account?
HSA’s are pretty nifty. In it’s most basic form, a health savings account is an account where you can save pre-tax money that you can put toward qualified medical expenses.
In any year that you have an HSA-eligible HDHP (say that three times fast), you can contribute up to $3,450 for an individual and $6,900* for a family. The money rolls over from year to year, so whatever you don’t spend in one year can be spent in another or saved for the long-term.
Some things you might not know about HSA’s:
“It is the only triple-tax advantaged account available,” say Eric. That means what money you put in, what money you earn and what money you take out to pay for qualified medical expenses is tax-free.
The money in your HSA account can be invested to potentially help it grow a little faster. Depending on your provider, you may have to have a specific dollar amount in your HSA account in order for you to invest, but other providers like Fidelity have no minimums.
You can reimburse yourself from your HSA if you end up paying for qualified medical expenses out of another account. For example- if you find yourself picking up a prescription and you don’t have your HSA card on you, you can always reimburse yourself from that account later if you need to. Just make sure to keep a record of the transaction as you can technically be audited by the IRS for withdrawals from your HSA.
You don’t have to make regular contributions to an HSA- so if you are having a lean month, you can prioritize other things.
What to do next
If you are already enrolled in a high-deductible health plan but you don’t have an HSA- you should consider opening up an HSA and start contributing to cover what you might expect to spend on your deductible that year. Plus, you’ll gain access to the triple-tax advantages.
If you have a high-deductible health plan and an HSA, you might consider evaluating whether or not you want to put more towards your HSA. This could simply mean increasing your contributions, but it could also mean that come re-enrollment time, you might decrease how much you put toward your monthly premium in favor of contributing more toward your HSA.
Just remember, with healthcare, it all comes down to your personal situation. If you have a chronic health condition, it might not make sense to have a HDHP with an HSA. If you are planning to start a family, you may find that you are cool keeping a HDHP, but you want to prioritize a higher premium and lower deductible, at least for a little while. The good news is: you can always make a switch when it’s time to re-enroll. Just because you go with one plan this year doesn’t mean you have to go with the same plan the next.