Some friends recently asked me to help them sort through the options their employers were offering for 2019, and while the details might seem counterintuitive, they're actually fairly common. Let's look at two scenarios.
The wife's employer offers a traditional plan with a $500 deductible, or an HDHP with a $2,000 deductible. The employee has to pay about $78/month in premiums for the traditional plan, and about $25/month for the HDHP.
The traditional plan has $0 copays for PCP visits, $75 copays for specialists and urgent care, and prescription copays that range from $10 to $75. That's all excellent coverage, and a person whose healthcare consists mainly of PCP visits and prescriptions would probably be well served by this plan. But what about a person whose healthcare needs go well beyond that?
It turns out that the traditional plan's cap on out-of-pocket costs is $4,500 (incurred via copays and the 20% coinsurance after the deductible is met), but the HDHP caps out-of-pocket costs at just 3,000.
So the HDHP option would save the employee more than $600 in premiums over the course of the year, and would potentially save them up to $1,500 in out-of-pocket costs. And that's before we look at the tax savings that go along with funding the HSA: If she puts $3,500 into her HSA in 2019 and is in the 22% tax bracket, she'll save $770 in taxes, on top of the premium savings and potentially lower out-of-pocket costs.
The husband's employer offers a traditional plan with a $300 deductible, or an HDHP with an $1,800 deductible. But they both have the same $4,000 maximum out-of-pocket limit.
And while the employee has to pay $70/month for the HDHP, he'd have to pay $127/month for the traditional plan — a difference of more than $680 over the course of the year.
In addition to the tax savings that go along with contributing to an HSA, the husband's employer also contributes $1,000 to the employee's HSA if they select the HDHP. He could contribute another $2,500 of his own money, saving himself $550 in taxes if he's in the 22% tax bracket.
So if he incurs substantial medical bills during the year, his out-of-pocket spending is going to be capped at $4,000 regardless of which plan he picks. But with the HDHP, he'll save $680 on premiums, and he'll be able to use $1,000 of his employer's money to put towards his out-of-pocket costs, instead of having to pay it all himself. And if he funds the HSA during the year, he'll be able to use pre-tax money to pay nearly all of the out-of-pocket costs.
An interesting conclusion...
For both of these people, the HDHP ends up being the better option if they have little to no healthcare costs (not surprising), but it also ends up being the better option if they have very significant medical costs, which might catch people by surprise.
The traditional plans might save them money if they end up having modest healthcare costs during the year, although the copay savings would have to be enough to offset the higher premiums, loss of tax savings, and loss of any employer contribution to the HSA.
Your health plan options might look very different from these examples. But it's not uncommon to see HDHPs with maximum out-of-pocket limits that are similar to, or even less than, the limits for the traditional plan options. And the HDHP generally also has lower premiums and might come with an employer contribution to the HSA. That's free money, but you only get it if you enroll in the HDHP.
Here's what you need to keep in mind when you're comparing your insurance options, either from your employer or in the individual market:
- What are the total premiums? How much will you save throughout the year in premiums if you select the HDHP?
- What would your typical healthcare spending look like for each plan? Think about how many times you go to the doctor, fill a prescription, have lab work done, go to the hospital, etc. in a normal year. With the HDHP, you'll be paying for those things yourself, at least until you meet the deductible. With a traditional plan, you might have copays for some of it, but some of it might count towards your deductible, just as it would with an HDHP.
- As well as a typical year, you need to consider how things would look in a really bad year. What is the maximum out-of-pocket cost for each plan? Most people don't hit their maximum out-of-pocket limits most years, but it's good to know what you'd be up against in a worst-case scenario.
- Will your employer contribute anything to an HSA on your behalf if you select the HDHP?
- If you enroll in an HDHP, will you make sure that you fund the HSA? It's easier than it might sound, and something you should take advantage of it at all possible. Assuming you'll fund the HSA, calculate how much you'll save in taxes.
Now that you've got all these numbers, you can compare apples to apples. And an HSA-qualified plan might not seem as scary as you thought it was.
Tax Facts is a weekly column offering straight up, no-nonsense HSA tax and account tips, written in everyday language. Look for it every Tuesday, exclusively on the HSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.