A Health Insurance Plan With a Retirement Kicker
College football rivalries and the technicolor foliage show are eagerly awaited fall rituals. The same can’t be said for another fall tradition: the annual message from human resources announcing that your share of the tab for health insurance is going up.
Workers’ share of premiums has, on average, increased every year since 1999, according to the Kaiser Family Foundation. Towers Watson expects employer-provided health-care costs to rise an average 5.9 percent next year. To help offset this, two-thirds of employers plan to increase premiums for single-only coverage, and 73 percent for to do so for family coverage. Many companies also expect to fiddle with coverage, including raising co-pays and deductibles. To contain out-of-pocket costs, more employees are opting for high-deductible health plans (HDHP), which have lower upfront premium costs. The HDHP's real value, however, comes via its important sidekick: a Health Savings Account (HSA).
True to its name, the HDHP potentially saddles you with covering a greater share of initial medical expenses. We’re not talking clean-out-the-bank-account sums. In 2012, for a plan to qualify as “high deductible,” it must have a minimum annual deductible of $1,200 for an individual and $2,400 for family coverage. (In 2011, the average deductible was $1,905 for single coverage and $3,666 for family coverage, according to Kaiser.)
Great Tax Benefits
If a high deductible isn’t a deal-breaker, the real value of the HDHP is that it makes you eligible to open a Health Savings Account (HSA). Once you enroll in an HDHP -- and only when you enroll in an HDHP -- you are eligible to contribute to an HSA. These are funded with tax-deductible contributions. An employer may even chip in (more on that shortly). Money withdrawn to pay for medical expenses is tax-free.
As opposed to a Flexible Savings Account, there’s no use-it-or-lose-it penalty. If you don’t tap the HSA or use only a small portion of the balance, the money can be saved for subsequent years as it grows, tax-deferred. That can be a big help, come retirement time.
To see how helpful, consider the potential health-care costs for a 55-year-old couple in 2010. This pair wants a high probability of being able to cover Medicare part B and Part D (drug) benefits, as well as all the out-of-pocket costs that exceed basic Medicare. The non-partisan Employee Benefit Research Institute (EBRI) estimates that, starting at age 65, the couple would need about $454,000 to pay such bills over the rest of their lives.
If the couple uses a traditional 401(k) or IRA to pay for health care, they'll owe income tax on all withdrawals. If they make qualified health-care withdrawals from an HSA in retirement, however, they pay zero tax. (All non-qualified withdrawals made before age 65 incur a 20 percent penalty. Once someone turns 65, that penalty disappears, although ordinary income tax is owed if an HSA is used to pay for non-medical expenses.)
"Hands-Down, the Best Deal"
“From a tax perspective, it’s hands-down the best deal,” says John Vellines, president of Health Savings Administrators. “You get a triple tax play of the deduction on your contribution, tax-deferred growth and tax-free withdrawals when you use the account for health-care expenses.”
HSAs aren't for everyone. Vellines notes that anyone with a chronic condition that requires frequent doctor visits or an expensive drug regimen could end up hitting the annual out-of-pocket maximum. With a "regular" policy, that person might have higher premiums, but a lower out-of-pocket amount that makes it a better deal than an HDHP. Nancy Metcalf, Consumer Reports’s health-care expert, says the only way to figure out whether an HDHP can make sense is to take time to do the math: “Yes, your premium will be less, but you need to understand your potential total costs.”
Here are tips for evaluating an HDHP:
Make sure you can cover the deductible out of savings. Metcalf notes that if your employer offers to kick in money to your HSA, think of that as an offset to the deductible. In 2011, about 60 percent of employers anted up; the average contribution was $886 for individuals and $1,559 for family coverage.
Size up the maximum annual out-of-pocket cost. In 2012, all HDHP plans have a maximum out of pocket of $6,050 for individuals and $12,100 for families. Many plans set the maximum well below those thresholds.
If you can’t cover the maximum out-of-pocket from savings, a standard plan with a lower out-of-pocket provision might make more sense. Just be sure you understand how that the out-of-pocket provision works on non-HDHP plans. “Many plans [other than HDHPs] don’t have a hard-and-fast maximum out-of-pocket,” notes Scott Borden, an insurance broker with OFM Benefits Consulting in Kansas City, Kansas. “You might have unlimited co-pays, and that can add up if you need a lot of care. With the HDHP, you at least have a clear maximum you can plan around.”
Set up the Companion HSA. The savings component is optional. In 2012 individuals can contribute a maximum of $3,100; for family coverage, it's $6,250. If you’re at least 55, you can add a further $1,000. There are no income limits.
Your employer will have a designated HSA administrator, but -- unlike with a 401(k) -- you're not captive to that HSA. An employer will likely insist that your contribution (and the company's contribution, if it makes one) first goes into the HSA it has set up. Once the money is in that account, you're free to move it to any HSA administrator. Just stay alert for any fees on moving money around. After all, any little bit saved could add up to a nice sum after years of tax-deferred growth.
(Carla Fried is a freelance writer based in California.)
To contact the editor responsible for this story: Suzanne Woolley at swoolley2@bloomberg.net