Should You Choose a High Deductible Health Insurance Plan?

March 27, 2025

With “consumer-driven health care” (CDHC) being a common option during annual enrollment, you may soon face the decision of whether to switch to a high–deductible health care plan with a health savings account (HSA) if you don’t have one already. The basic idea is that your health insurance premiums are lower but you have to pay more out-of-pocket (the deductible) before the insurance kicks in. To help you cover those higher out-of-pocket costs, you and your employer can contribute pre-tax to a health savings account, which allows you to use the money tax-free for qualified medical expenses like a medical FSA. Continue reading “Should You Choose a High Deductible Health Insurance Plan?”

Why You Should Pay Medical Expenses From Savings Instead Of Your HSA

July 24, 2017

My colleagues and I have quite the debate going about the merits of using your Health Savings Account (or HSA) versus excess savings to pay for medical expenses. (yes, this is what CFP®’s call “fun”) After all, isn’t the whole purpose of your HSA to pay for medical expenses? What’s the point if you’re just going to spend other savings when you incur medical bills anyway? Well, I have to admit that after running the numbers, it actually makes sense under certain assumptions. Stick with me here.

First of all, the assumptions

Let’s assume you have a cash reserve of at least 6 month’s essential expenses, no high interest rate debt, are saving up to the match in your 401(k) and also have extra savings set aside. In other words, you have the flexibility to pay medical expenses from somewhere other than your HSA if you wanted to. (Short answer if you don’t have these assumptions met: use your HSA.)

Growth of your savings account

Now let’s also assume that you are 45 and have $10,000 in extra savings and a $10,000 balance in your HSA. In today’s interest rate environment, your savings account is probably earning basically 0%, but let’s assume you earn 2% interest, and that you are in the 25% federal income tax bracket. That makes your effective interest rate 1.5%. Projecting that out, in 20 years your savings account would grow to $13,469 by the time you were age 65.

Growth of your HSA

Now let’s look at that scenario inside your HSA. Because HSA money grows tax free, the effective interest rate would be the full 2%, which means that in 20 years your account would grow to $14,860. If you waited until you were age 65 and then withdrew your full balance all at once for a non-medical expense and were still in the 25% tax bracket, then you would pay $3,715 in taxes for a net of $11,145, which would be less than your traditional savings account. (Remember that HSA withdrawals are tax-free for medical expenses no matter when you withdraw, but once you’re 65, you can actually use your funds for anything, just like your 401(k) — you just have to pay taxes on the money if you use it for non-medical.)

The caveat

“But wait,” you might be asking, “can’t I invest my HSA?” Yes you can once you accrue a certain balance set by your HSA provider, which means that even if you invest it conservatively to earn 3%, your HSA balance would grow to $18,061, which after you pay $4,515 in taxes will net you $13,546 — more than your savings account. If you take a more aggressive investment approach and are able to grow your HSA by 6%, then you’d end up with $32,071 which after paying taxes of $8,018 would net you $24,053.

The bottom line is that if you are able to earn a higher tax equivalent yield in your HSA than you traditional savings account, it makes sense to let your HSA accrue and grow, even if you DON’T end up using it for medical expenses in retirement. Obviously if you end up using it for medical expenses, even after 65, it’s an even better deal. The other bottom line is I can’t wait for football season, so the geeks and I (excuse me, my colleagues and I) can talk about something else.

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Have a Pre-Existing Condition? Here’s What to Do Now

May 15, 2017

There’s been a lot of talk in the news this past week about health insurance for people who have pre-existing health conditions. Are you worried about what the American Health Care Act (AHCA) could mean for you or your family’s health insurance should it eventually be signed into law? Here are some ways you can prepare if the current law on pre-existing conditions and health coverage changes.

What We Know

Under the Affordable Care Act (known as “Obamacare”), insurers could not deny coverage for pre-existing health conditions or charge higher premiums for plans beginning in 2014. The AHCA still requires insurers to cover those with pre-existing conditions but allows states to seek a waiver so that insurance plans they regulate could charge higher premiums for those with pre-existing conditions who let their insurance coverage lapse as long as those states meet certain conditions such as setting up a high risk insurance pool. For those with pre-existing health conditions such as diabetes, epilepsy or cancer, this introduces a new level of uncertainty of future, affordable coverage. You couldn’t be denied insurance coverage, but the premiums could be so high you might not be able to afford them. This may put insurance out of reach for those who lose their employer coverage (such as in a layoff or by retiring before Medicare eligibility at age 65).

Note that the AHCA version that recently passed the House of Representatives eliminates the Affordable Care Act penalties for large employers who do not provide affordable health coverage to their employees. For employees of most companies, that is unlikely to have much effect in my opinion. That’s because health insurance is currently considered an expected employee benefit and companies would need to offer it to attract talent.

What We Don’t Know

I don’t pretend to know what’s going to happen with the law. The version passed by the House is not likely to be the version passed by the Senate. Both the House and Senate need to come to agreement on a final version and then the President needs to sign it before it becomes law. If the bill passes as written, we also don’t know if your state would apply for a waiver to allow the insurance companies they regulate to charge premiums that reflect the individual cost of covering pre-existing conditions. If you have strong opinions about it and want to express your views, you can contact your congressperson and senators. You can find their contact information here.

While We Wait For More Information

While we’re waiting to see what finally shakes out, here are a few suggestions for how to put yourself in the best possible financial position in the event you lose your insurance or face significantly higher premiums. Remember that if you are currently covered by your employer’s plan, your risk of that is very low. However, it won’t hurt to be as prepared as you can be in the event you lose your job or plan to retire before age 65.

Max out that HSA if you have one.

If you are currently covered by a high deductible health plan (HDHP) with a health savings account (HSA), bulk up your balance as much as you can. Contributions are pre-tax and distributions from HSAs for qualified medical expenses are always tax-free. If the House version of the AHCA passes, the additional tax penalty for taking distributions for non-medical expenses will be reduced from 20 percent to 10 percent. A robust health savings account can help you to pay future medical expenses and well as insurance premiums under certain circumstances. (See below.)

How much can you put in? Those workers with individual coverage can contribute a maximum of $3,400 and those with family coverage can contribute a maximum of $6,750 for 2017, which includes any money your employer contributes on your behalf. If you are 55 or older, you may contribute an additional $1,000.

Under the House version of the AHCA, contribution limits would increase to $6,550 for individual coverage and $13,100 for family coverage. I know that seems like a lot, but it’s a better alternative than paying health care expenses after tax. Usually, you only change your target HSA contribution amount deducted from your paycheck during open enrollment, but you can write a check directly to your account for the difference.

Here’s the key. Don’t spend the money if you can use other funds to pay your current deductible and out-of-pocket expenses. After you have built a balance greater than your out-of-pocket maximum for the year, consider investing the remainder. The goal is to build as big of an HSA balance as possible while you have insurance.

Seek coverage under your spouse’s insurance if you lose your job.

Losing health insurance due to a layoff can be considered a qualifying event and would generally allow your spouse to add you to his/her group health insurance plan during a special enrollment period. Under most plans, you’ve only got a 30-60 day window to apply for the updated coverage, so contact your spouse’s HR department as soon as possible. If you are married, this is a natural first place to start, whether or not you have any pre-existing health conditions.

Continue coverage under COBRA.

If you lose your job or retire early, you may continue your group coverage under COBRA for 18 months. You will have to pay the full premium yourself (unless you are fortunate enough to have a retiree health plan). Note that if you have funds in your health savings account (HSA), you can use them tax and penalty free to pay for insurance premiums for health care coverage on your existing group plan through COBRA.

Bearing the full cost of coverage under a group plan can be expensive, so don’t be surprised. However, if the law becomes unfavorable for folks with pre-existing conditions, COBRA is likely to be your best bet to continue coverage. As I wrote in a previous blog post, “If you have a pre-existing condition and are retiring within 18 months of when you’ll be 65, COBRA is likely to be your best option in this age of uncertainty. As long as you pay your premiums, you’ll remain covered up until you’re eligible for Medicare. Even if you don’t have a pre-existing condition, choosing COBRA still gives you a little breathing room to figure out your next steps for insurance once it’s clear what happens to the ACA.”

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can also follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

Why HSAs Are the Most Underrated Employee Benefit

March 24, 2016

In one of the chapters in her new book, What Your Financial Advisor Isn’t Telling You: 10 Essential Truths You Need to Know About Your Money, our founder and CEO, Liz Davidson wrote about how the best place to invest your money is often where you earned it in the first place: your employer. Last week, I wrote about how to avoid common mistakes when investing in your employer’s retirement plan. This week, I’m writing about some common myths causing people to under-utilize one of their most valuable employee benefits: the health savings account (HSA).

HSAs are generally a bad deal. In order to contribute to an HSA, you have to be enrolled in a high-deductible health care plan. The downside is that these plans require you to spend more out-of-pocket before the insurance kicks in. If you have a lot of health care costs, they may not make sense for you. Otherwise, when you add up the premium savings (high-deductible plans tend to be cheaper), any employer contributions you may receive to your HSA, and the taxes saved on your HSA contributions (contributions are pre-tax), you may be surprised to find that they cost you less money overall.

HSAs are use it or lose it. That’s true for FSAs or flexible spending accounts. But whatever you don’t spend from an HSA, you get to keep in the account even if you leave your job or switch to a non-high deductible health insurance plan,. If you like your HSA, you can keep it.

HSAs are only for health care expenses. It’s true that HSAs are only tax-free when used for qualified heath care expenses but if you really needed the money, you could use it for other things. Be aware that you’d have to pay taxes and a 20% penalty in that case. Even better, you can use the HSA for any purpose once you turn 65 so it can be part of your retirement funds. (It’s still tax-free for health care expenses in retirement, including qualified long term care insurance and some Medicare premiums so unlike your other retirement accounts, you can contribute pre-tax AND make tax-free withdrawals.)

HSAs don’t grow. Many plans allow you to invest your HSA as long as you keep a certain amount (generally around $1k) in cash. Just be sure only to invest any money you don’t plan to spend within the next 3-5 years. In fact, I invest as much of my HSA as I can and make it a point not to use it even for health care expenses. After all, I figure that I’ll have health care expenses in retirement so why not let that money grow tax-free as long as possible?

HSA withdrawals for health care have to be in the same year as the expenses. If you have a health care expense and keep the receipt, you can withdraw that amount tax-free in any future date. That flexibility is one more reason to consider not making HSA withdrawals even for qualified health care expenses unless you need to.

Wish you contributed more to your HSA last year? One more myth is the idea that you have to contribute by the end of the year. Like an IRA, you have until April 18^th to contribute for 2015. You’ll just have to write a check rather than contribute from your paycheck and if you’ve already filed your taxes, you’ll have to amend your return to get the tax deduction. What are you waiting for?

Why Millennials Shouldn’t Worry About Retirement

September 30, 2013

Millennials shouldn’t worry about retirement! OK, now that our CEO, Liz Davidson, and the rest of the research team at Financial Finesse are having heart palpitations (and the CFP® Board has started the process of stripping my credentials) I must clarify this statement. I don’t mean that Millennials (a.k.a “Gen Y”) should ignore saving for the future. My point is that as the saying goes, “Sometimes it’s not what you say; it’s how you say it.” When it comes to financial planning, we often give the right message in the wrong way.

Think about any commercial that you’ve seen for retirement planning or investing. Have any of them been geared towards anyone under 50, let alone 40? There is nothing wrong with the retirement and investment industry focusing their attention on the Baby Boomers – they are the ones that are concerned about a life changing event just around the corner and frankly they have money to invest. Unfortunately, if there is any generation that needs to be prepared financially, it is our youngest generation in the workforce.

As the recently released Retirement Preparedness report from Financial Finesse points out, employees under 30 are actually less prepared for retirement than they were last year and will face higher medical costs, longer life expectancies, and the potential for much higher inflation and higher taxes. So how do we fix it? Maybe we don’t talk about retirement. Think about it. When you were 26, were you worried about what you were going to do after your career was over or were you trying to figure out what in the heck you were going to do for a career?

There is a lot of talk about various methods of reaching Millennials – social media, smartphone apps, and SEO marketing, but in the end, it doesn’t matter how we deliver the message if the message doesn’t resonate. What does matter to someone early in their adult life? I would suggest that the motivating factor when I was a young adult was being able to make my own decisions. From the time we are teenagers and get a taste of freedom, we tend to crave all the freedom we can get our hands on.

So what does freedom have to do with retirement? Everything! Think about it. What retirement really means is that you have options: Do you want to keep working or not? Do you want to live here or travel, or maybe relocate to the place you’ve always wanted to live? In many ways, retirement is the ultimate expression of that teenage craving for the freedom to do whatever we want.

So if you are a human resources professional trying to boost 401(k) participation, a financial planner working with younger clients, or a concerned parent talking to your kid about money, there is a key message here when talking to Millennials about financial freedom. Don’t dwell on retirement. Emphasize that money can’t buy you love or happiness (once your basic needs have been met), but it can buy you freedom to live life on your terms.

For all of the doomsday talk about the financial challenges facing Millennials in so many ways, they have the greatest opportunities of any generation. If a young person today takes advantage of their full 401k match and they max out their health savings account and contribute to Roth IRAs for an entire career, they have a great chance to build wealth. In an era with massive student loan debt it won’t be easy, but if we can help young Americans understand that the biggest limitation on them is not their age but their debt, they will find a way to solve it.

It’s what we do as Americans. Then Millennials will be in a position where they can use the money freed up by paying off their student loans and increasing their savings of all types. Many employees also have the opportunity to set up an automatic increase in the percent they set aside in their 401k every year. Those factors could help them accumulate a bigger nest egg than their parents or grandparents could have imagined.

If you are in the Millennal generation and you are burdened with student loan debt, imagine having your student loans paid off in 5 years. What if you could buy a house and still be debt free by 45? What would life look like if you had true financial freedom (a.k.a. “kiss my back side money”)?

It can happen if you make small changes to help fund the big picture, but it starts with believing it is possible. The reality is that Millennials need to seriously focus on creating and following a plan that will give them financial independence. However, the traditional retirement messages of previous generations needs to be re-framed or Millennials could become the “lost generation” when it comes to retirement.

So go to iTunes , download some of my favorite 80’s rock and Don’t Stop Believing that you can take control of your financial present and future! (Yes, many of us Generation X types are as cheesy as an Adam Sandler or Vince Vaughn movie.)

http://youtu.be/aH0EBpRXixM

Take Three of These and Call Me in the Morning

February 08, 2012

Recently, I took a trip to the urgent care center. I think someone should sue them for false advertising because there was nothing “urgent” about it. I’d been warned that wait times to see a doctor could get lengthy, but when I pulled into a vacant parking lot and walked into an empty waiting room I was beginning to feel optimistic. I was even more hopeful when I was called into the examination room after spending just 15 – 20 minutes in the waiting area. Sadly, I discovered the rumors were true; I sat in examination room #2 for over 75 minutes before being seen. Continue reading “Take Three of These and Call Me in the Morning”

Why I Love My HSA (and You Should Too)

July 14, 2011

I recently talked to a co-worker 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 have a high-deductible plan with a health savings account (HSA), a relatively new type of plan that’s likely to become more common as traditional insurance premiums continue increasing. Continue reading “Why I Love My HSA (and You Should Too)”