High Deductible Health Plans (HDHP) and Health Savings Accounts (HSA) are growing more and more popular each year. Considering they have lower premiums and provide the ability to use pre-tax dollars to pay for out-of-pocket costs, what’s not to love?
Well, there’s a flipside of HDHPs and HSAs that includes a higher deductible and added out-of-pocket costs. So how do you know if this is the right plan for you?
Consider the below information in your decision-making.
HSA Bank Fees
Most banks that offer HSAs charge a one-time set-up fee, along with annual bank fees. There may also be fees for checks, debit cards and ATM transactions, bounced checks, and overdrafts.
The good news is there are multiple HSA bank options, meaning you can shop around for the bank with the lowest fees. It’s also possible that your employer has already contracted with a bank to simplify this process. They may even cover the administrative fees, so be sure to ask before shopping for your own bank.
As you may already know, any qualified medical expense can be paid for with your HSA dollars. If you’re not sure what might be considered a medical expense, the IRS has defined it as the cost of “diagnosis, cure, mitigation, treatment, or prevention of disease, and for the purpose of affecting any part or function of the body.” In short, just about anything you can pay for with a flexible spending account (FSA) could also be purchased with HSA money. However, if it’s not part of your medical plan, that expense won’t go towards meeting your deductible.
For example, let’s say you purchase contact lenses with HSA money (an expense likely outside of an HDHP’s list of coverage). If you spend $200 on contact lenses and don’t have an HSA balance from the previous year that has been carried over, you may not have enough pre-tax money in your account to cover a medical expense that is covered on the health plan, should something happen. An ideal scenario would be to save enough money in your HSA to cover up to the full deductible amount before spending money on medical expenses outside of your HDHP.
When using your HSA for qualified medical expenses, remember to save your receipts in the event you need to substantiate the purchase. If you aren’t sure if something is considered a qualified medical expense, ask before swiping your debit card. An unqualified medical expense purchased with HSA funds may be subject to a 20% penalty.
For a quick reference, here’s a classic list of eligible expenses you can pay for with your pre-tax HSA dollars. Since then, the CARES Act has added over-the-counter medicines and feminine hygiene products as eligible expenses. But again, these costs won’t go towards meeting your deductible since they are beyond what’s covered on your HDHP.
HSA as a Retirement Account
Your HSA is the most efficient way to save dollars today to be used in the future. While the annual limits for contribution are relatively small, your HSA dollars are contributed pre-tax (similar to a Traditional 401K), grow tax-deferred, and will always be treated tax-free for their use when paying for qualified medical expenses.
While you may not have many medical expenses now, you will likely have more after reaching the age of retirement. Having access to these tax-free dollars for your medical expenses at that point will free up other retirement assets to be used for your lifestyle needs.
Expert tip: save enough cash in your account to cover at least your deductible and potentially your out-of-pocket maximum prior to investing HSA dollars.
Do Your Homework
Consider what you and your family typically spend on medical care in a year and ask yourself these questions:
- Do we make frequent visits to the emergency room, or just go to the doctor for routine visits? Families who frequent the emergency room might not be good candidates for an HDHP/HSA.
- Does anyone have a chronic condition? Those with regular monthly costs due to a chronic condition might not be good candidates for an HDHP/HSA, but it's worth calculating to see if the difference in deductible amounts offsets the costs associated with the condition.
- Do I purchase medications that would be more expensive if enrolled in an HDHP/HSA? If so, you may not be a good candidate for an HDHP/HSA, but it's worth calculating to see if the difference in deductible amounts offsets the higher medication costs.
- Is a lower deductible worth the higher out-of-pocket costs? Having an HDHP/HSA means spending more money upfront on a medical expense when a traditional plan would simply require a co-pay. Again, it's worth calculating to see if the difference in deductible amounts offsets potential out-of-pocket costs for an average year.
- Does our HDHP cover preventative care? If so, and you can say "no" to the first two questions, you may be the ideal candidate for an HDHP/HSA!
Make an informed decision before enrolling in an HDHP, and ensure that it’s the right choice for you, your family and your medical needs. For more information, please contact our Benefits team at firstname.lastname@example.org.