Open enrollment for benefits starts next week at Intel, and I plan on switching from my Cigna Open Access Copayment Plan to a Health Savings Account (HSA) at that time. I figure some of my friends might be in the same boat, so I thought I would share some of my research on the HSA/HDHP and my thought process for choosing the plan that I chose. HSAs are probably one of the least known health accounts out there, which is a shame, since they can be an extremely powerful tax-advantaged investment account. Hopefully this post will shed a little light on HSAs. Let me know if you have anything to add!
To participate in a Health Savings Account (HSA), you must be enrolled in a qualified High Deductible Health Plan (HDHP). Currently, there are two different HDHPs available to Intel employees: the Cigna High Deductible Health Plan and the Anthem High Deductible Health Plan. I’ve outlined the 2010 IRS limits on HSA-compatible HDHPs below, along with the featuresof the HDHPs at Intel.
IRS limits for HSA-compatible HDHPs for 2010:
- The minimum deductible is $1,200 for single coverage and $2,400 for family coverage.
- The maximum contribution that can be made to an HSA for employees will be $3,050 for single coverage and $6,150 for family coverage.
- The maximum out-of-pocket expense, including deductibles, that employees will be required to pay next year will be $5,950 for single coverage and $11,900 for family coverage.
Intel HDHP features for 2010:
- $0 Annual Fee
- $1200 deductible for single coverage, $2400 for family coverage
- 10% coinsurance after deductible is met
- $2100 out of pocket maximum for single coverage, $4200 for family coverage
- $3050 max annual contribution to HSA for single coverage, $6150 for family coverage
- No limit on rollover amounts
- 100% preventative care coverage
Note that the maximum out-of-pocket is $2100 for Intel employees with individual coverage and $4200 for those with family coverage in 2010. For me, this means I can contribute $950 more than my out of pocket maximum in my HSA next year, either to be rolled over for future medical expenses or invested in an HSA investment account.
Premiums for an HSA plan are normally lower than other traditional plans. Intel employees enrolled in HDHPs pay $0 in premiums for both single and family coverage (meaning Intel does not take anything out of your paycheck). Based on the annual paycheck deductions from the Cigna Copayment plan, enrolling in an HDHP will save me $924 in premiums in 2010.
Contributions to an HSA can be made pre-tax, if your employer has the option available, or post-tax and then deducted from your tax return. In general, you are responsible for all out-of-pocket expenses until you meet the deductible, and then there usually is a co-insurance portion. For me, the first $1200 in medical expenses will come straight out of my pocket (i.e no co-pays, I pay the entire bill). Between $1200 and $2100 out of pocket, I pay 10% and the plan pays 90%. So for me to reach the out of pocket maximum, my total medical expenses would have to exceed $1200 + $9000 = $10200. After I hit $2100 out of pocket, the plan pays 100%.
Benefits of an HSA Plan:
- Tax savings: You can contribute to the HSA through pre-tax payroll deductions, or contribute on your own for an “above-the-line” tax deduction on your income tax return. Your pre-tax contributions are not subject to federal income tax, FICA (Social Security and Medicare) tax and for most states, state income tax. For me, if I contribute the maximum amount of $3050 to my HSA, I can save $995.83 in federal and Fica taxes.
- FICA (Social Security and Medicare) tax savings: It seems to be a lesser known fact, but “frontloading” your HSA with post-tax money at the beginning of the year costs you the FICA taxes on that money, even though you can get the above-the-line deduction on your tax return. Say someone with family coverage contributed the full $6150 to their HSA on January 1, 2009. Had they waited to contribute over the year pre-tax, that’s $470.48 (7.65%) of FICA taxes they could have saved from payroll deductions. You don’t even get this FICA tax break when contributing to your 401k with pre-tax dollars. Thus pre-tax payroll deductions are better for most people. If you are over the social security AGI cap (currently $106,800), then you only save on medicare taxes (1.45%) by contributing pre-tax versus post-tax.
- Another tax benefit for contributing to an HSA is that it will reduce your federal AGI by up to $3,050 (for self-only coverage) or $6,150 (family coverage). If you are on the border of qualifying for an income-based tax credit/deduction (economic stimulus check, child tax credits, first time home buyer tax credit, etc), contributing to an HSA could help you qualify.
- Interest and dividends earned on HSA balances grow tax-free and don’t count toward contribution limits.
- HSA distributions are tax-free if they are used for qualified medical expenses. Similar to an IRA, if you use the funds for non-medical expenses, you pay a 10% penalty plus income tax. However, once you reach 65, the 10% penalty does not apply and you only pay income tax on non-medical expenses. At this point, your HSA basically becomes a tax-deferred account for non-medical expenses (similar to a 401K) and a tax free account for medical expenses (similar to a Roth).
- There is no time limit for when you can reimburse prior years’ expenses as long as they were incurred on or after the date the HSA was established. If you incur $5500 in out of pocket expenses this year, you could still request that money, tax and penalty free, any year in the future, even 2020 if you so choose. This means you could pay all your medical expenses out of pocket now, then save all your receipts and take the reimbursement out of your account when you retire tax free. Need proof? Go here.
- There’s no need to look in your crystal ball and forecast your health care spending for next year as you would with an FSA “use it or lose it” account. If you spend less money than expected, any remaining money in your HSA rolls over.
- With an HSA, it doesn’t matter if the money is there first or not. You can always reimburse yourself later, even from next year’s contributions if you have spent over the limit this year.
- Preventative care is covered 100% by the Intel HDHPs. Preventative care items include things like annual physicals, immunizations for children, and annual well woman checks.
- Debit card and checks can be used to pay for eligible medical expenses directly from your HSA account.
- The HSA works like a bank account, where you earn interest on the cash in your account. (The interest varies based on your plan and the bank they use). After reaching a certain dollar amount contribution, usually $2000, you can link your account to a mutual fund or brokerage account and invest your money in a variety of funds.
- Portability: If you leave your employer, change medical coverage, become unemployed, move to another state, or change your marital status, your HSA goes with you.
- You can use the money in your HSA plan to pay COBRA or Medicare premiums, if necessary.
- The list of HSA eligible items is generally much broader than those covered under a traditional health plan. You may use HSA dollars to pay for dental, vision, orthodontia, over-the-counter medication, qualified long-term care insurance premiums and more. You can reference section 213 of the IRS publication 502 to see a list of qualified expenses. This is a good reference for qualified expenses.
- Using coupons can lower your out of pocket maximum (OOP max). Say you need to fill prescription X that costs $300 before you’ve met your deductible, and you have a coupon from the drug manufacturer for $50 off the full price. You end up paying $250 out of pocket. Insurance still “sees” that you paid $300 for that prescription, so you just lowered your OOP max by $50 more than you actually paid. Also, many of the CVS and Walgreens free after rebate deals are HSA eligible and can help lower your OOP max.
- There are no salary restrictions on HSA contributions. This is unlike a Roth IRA, for example, which begins to phase out at a MAGI of $105,000 for 2009.
Disadvantages of an HSA Plan:
- Many people feel that if you have to pay all expenses out of pocket, that you will be less likely to go to the doctor when something is wrong, and that a serious medical problem could go undiagnosed.
- You could have a lot of out-of-pocket expenses before there is any money in your HSA to cover them. For example, you could have a big claim in January and end up spending the OOP max ($2100 for individuals, $4200 for families) all at once (instead of distributed throughout the year in the form of premiums, like traditional plans). A lot of people don’t have this kind of money immediately available.
- Recordkeeping: If you choose to leave your money in your HSA to grow tax-free and pull out your reimbursements at a later date for retirement, then you have to keep good records. There’s always a chance you could get audited by the IRS when you pull out that lump sum, so records are a must.
- This plan may not be suitable for patients who prefer to not be in charge of every detail. I’m somewhat of a control freak, so this is no problem for me
- HSAs were set up as a federal program, and some states choose not to comply with federal guidelines concerning tax treatment of HSAs. For example, in California, contributions are not deductible and dividends and interest are taxed at the state level.
- HSAs may be more expensive for maternity coverage. The math is still fuzzy on this one for me. If you plan on getting pregnant in the next year, evaluate all your health coverage options.
- HSA accounts seem to have high enrollment fees and monthly maintenance fees. As HSAs catch on, there will be more competition which may lower fees for everyone, similar to IRAs.
Comparison of Intel HSA (HDHP) and HRA (CDHP)
Because we’re all engineers, we need to see the numbers. Here is a graph that my lovely boyfriend put together, which compares the out-of-pocket costs of the HSA and HRA plan offered by Anthem for 2010 (single coverage only) with total medical expenses. This assumes $3050 contribution to HSA, 25% federal income tax rate, 7.65% FICA tax, and disregards any gains on the HSA money. As you can see from the graph, it seems like HSA is a no-brainer for single, healthy Intel employees with enough disposable income to max out the HSA. At the upper end of the spectrum, the difference in OOP expenses is marginal, but again, this graph doesn’t take into account any tax-free gains on your HSA investment – which could really add up over time.
I think an HDHP makes sense for me, personally, because I have the fortunate ability to sock away the max contribution into an HSA account, and I am diligent with my record keeping. I can scan in receipts and keep track of medical expenses in an Excel spreadsheet for future reimbursements, similar to how I currently keep track of rebates. I’m not afraid of getting a tax audit, because I’ll be able to pull out the hard copy of all my receipts and a spreadsheet of all expenses.
I love the idea of being able to invest my medical emergency fund and pull money out anytime tax-free should I have a medical emergency. I’m also a huge proponent of consumer-driven health care. It puts the responsibility back on patients to make their own health care decisions and negotiate better prices. If everyone participated in this type of plan, then free market competition would help drive down health care costs.
Luckily, I live in Arizona, where HSA contributions are deductible on both federal and state income tax, and earnings are not taxed by the state (this is not true for California). Also, there are many HSA eligible items that I’ll be able to pay with pre-tax dollars that aren’t fully covered by insurance like eyeglasses, contact exams, and contact supplies.
Now I’m off to go research the two different HDHPs and various HSA investment options. I will write a future post on what I find!