Don’t be afraid of the big bad HSA plan!
What could you buy with $7,680 in your pocket? Would you buy Cubs or Sox tickets? How about taking a much-needed vacation? That amount of money could pay for 100 rounds of golf! Would you invest the money? Unbelievably, an insurance agent asked a new client of ours to instead spend that much money on her health insurance premiums over the next twelve months.
Jill, who has couple of kids, wanted to replace her current health insurance (through COBRA) with an individual health plan. The COBRA rate was just over $1,100 per month, and was a huge strain on her finances. She asked a local insurance agent in her home town for help, and he recommended she apply for a $500 deductible PPO plan with $20 copayments for doctor office visits from a well- respected insurance company. This copayment plan provided a savings, but still cost $955 per month. After talking to her friends about this, Jill just did not feel comfortable signing up for this plan, and she was referred to our office.
After reviewing her situation, we looked at an individual plan that would qualify for a Health Savings Account, frequently called an HSA plan. Jill was initially hesitant because of the conflicting advice she was being given. The high deductible made her nervous. The HSA plan we recommended for Jill had a $5,000 single deductible, but a monthly premium of only $315 per month. The savings over the $500 deductible plan was $640 per month, or $7,680 annually!
Jill was stunned, hopeful, and frustrated all at the same time! However, she eventually realized that over the next twelve months even if she reached her family deductible of $5,000, she would still have $2,680 “left over” to invest or spend on the kids. She also knew that her family normally spends less than $1,000 per year for medical costs. Why hadn’t anyone told her about this type of plan before?
Many people are afraid of HSA health plans simply because of the high deductible. The concept is a bit confusing. They are new, and somewhat different from what people are used to, when thinking of health insurance. However, HSAs are fast becoming a very popular health plan because the savings in premium can be significant. HSAs can also provide tax savings.
What is an HSA plan?
In order to be considered an “HSA eligible” plan, an insurance plan must have a single deductible of no less than $1,200 per year, or $2,400 per family. These types of plans are available through most major insurance companies. Since claims are submitted to the insurance company first, a PPO discount is usually applied before a member pays his or her bill if it is below the deductible. If there are two or more family members on the plan, then everyone’s claims would apply to the deductible.
The maximum out-of-pocket an HSA plan can have in 2011 is $5,950 for a single person and $11,900 for a family. Generally speaking, HSA plans do not include copayments for office visits or prescription drugs. In other words, all medical expenses apply to the deductible. If a plan meets the HSA plan requirements, the government allows for contributions to a Health Savings Account.
What is a Health Savings Account?
A Health Savings Account is simply a checking account at a bank with a specific purpose. When a contribution is made to this account, the government allows that individual to deduct that contribution on his or her tax return, similar to a deduction for an IRA. Unlike an IRA, the funds can be used immediately to pay for qualified medical expenses.
In 2011, the maximum HSA contribution for an individual is $3,050; the maximum contribution for a family is $6,150. If you are over the age of 55, then the government allows you to contribute an extra $1,000.
The funds in the HSA account grow tax-deferred and the interest is spent tax-free as long as it is used for a qualified medical expense. The account can grow and increase from year to year. This account is unique in that it can help pay premiums for a long-term-care policy or a Medicare supplement plan after age 65. Please note: If the funds are withdrawn for a non-medical expense, then taxes and a 20% penalty could apply.
This is just a general overview of HSA plans. However, you should have enough information to start asking questions. If you don’t see the doctor often and are looking for a way to save money on your health insurance, this type of plan could be right for you! If your agent hasn’t already talked to you about HSAs, then find someone else who understands how they work. Put money in your pocket; don’t just give it to the insurance company!
Jill made the right call and enrolled her family in an HSA eligible plan. She now feels a lot better about her financial situation. She has a solid health insurance plan, much lower premiums, and is planning a trip to Disneyland with her kids with the money that she is saving!!
Written by John Gotschall, Coaching Financial Concepts