Why I Love My High Deductible Health Insurance Plan

December 18, 2018

I once talked to a fellow employee at Financial Finesse who wasn’t very happy about our health insurance plan. I was surprised because I love it. It turns out that she just didn’t understand how it worked. We both had a high deductible plan with a health savings account (HSA), a relatively new type of plan that’s becoming more common as traditional insurance premiums continue increasing.

Passing the savings along to employees

In my case with single coverage, Financial Finesse pays lower premiums because I currently have to spend $1,500 each year before most of the insurance coverage will kick in. My coworker didn’t think that sounded like a great deal for us employees.

However, the other side is that Financial Finesse uses the premium savings to put $1,500 each year tax-free into my health savings account that I can then use tax-free to pay that $1,500 deductible. (You can also use your HSA tax-free for non-qualified medical expenses for you as well as for your spouse and dependents even if those expenses aren’t covered by your health insurance.) As a result, I don’t really pay anything out-of-pocket until I’ve spent all of that $1,500 and then I only owe a small co-insurance percentage after that.

Letting the money pile up

The best part is that I pay no taxes on this money and unlike with a flexible spending account, I get to keep whatever I don’t spend in the HSA at the end of the year. That doesn’t mean I can take the money and splurge it on a trip (at least not without paying taxes plus a 20% penalty on it), but it does mean I can invest that money in my HSA tax-deferred until age 65. At that time, I can spend it on anything (including a trip) without penalty, use it tax-free for medical expenses (including some Medicare and long term care insurance premiums), or just let it continue to grow tax-deferred.

Why it’s even better than saving in my 401(k)

Another thing I love about HSAs is that I can also add about $2k pre-tax to it this year since the total contribution limit is $3,500 per year for a single person in 2019. If I have the deposits deducted from my paycheck, I also don’t have to pay the payroll tax on it. Not even 401(k) contributions let you avoid that. When you consider that HSAs offer you both pre-tax contributions AND the potential for tax-free withdrawals, there’s an argument for funding it even ahead of your employer’s retirement plan (after you’ve maxed the match) and an IRA.

When you add the premium savings, employer contributions to your HSA, and tax savings from your own contributions, high deductible health plans can be a great deal (especially the less you spend on health care and the more you pay in taxes). So what’s not to love for a relatively healthy professional? Apparently not much. Once I explained all this to my then colleague, she loved it too.