I made a comment a few months year ago on a post offering financial advice to younger people on finances. The writer advised signing up for an HSA (health savings account) and I advised being careful about one.
A quick back and forth earned me the comment that I should write about my experience, so here it is.
Just to be clear: I am not saying that HSAs are bad; in fact, for many people they are great vehicles for saving (and investing!!) for the future.
I’m just saying that an HSA was a bad idea for me.
Below I will go through why the HSA and accompanying HDHP (high deductible health plan) didn’t work for me and my husband, and point out a few things to think about before deciding on the HSA route for you.
When I first read about HSAs on various personal finance blogs, they sounded absolutely amazing. In short, instead of paying so much for insurance, some of the premium costs were instead transferred to a tax free account to be used later.
What does that look like in real life?
Why HSAs are the Bomb
You sign up for a high deductible health plan. The plan costs you less, because the insurance company pays less through the year. Instead, you are on the hook for more of your costs with the high deductible. I suspect your employer pays less too—so they also give you a little money in an account you can use to pay for health care (your HSA).
The money in your health savings account isn’t use-it-or-lose-it like the FSA (flexible spending account). That means that if you are healthy and don’t have a lot of costs—or you choose to pay out of pocket—HSA money can accumulate, possibly over years.
A super sweetener: you are allowed to invest this money. If you and your employer put in money every year, and you don’t use it to pay for health care costs but invest it instead, you could have a lot of money after 10 to 20 years. If you can start an HSA in your 20s, and stay healthy, you could even get 40 years of compounding gains.
Did I mention the tax free part?
- Contributions to an HSA are not taxed.
- If you invest the money, any returns you earn are not taxed.
- And if take money out to pay for health care related expenses—also not taxed.
It’s quite a deal.
Except when they are not
So, why won’t I be signing up again for such a great deal?
The answer is specific to my employer plan and my health.
Specifically, I don’t see a reduction in premiums, I can’t easily invest the HSA money, and I find the high deductible challenging.
One of the underlying principles that makes this such a great deal is how much less you pay each month for insurance. In exchange for taking on risk with a higher deductible, your premium should be significantly lower than a plan with better coverage/lower deductibles. Every year, I find my HSA premium would not be much lower. In fact, one year the premium was higher! This is not a good deal.
The HSA offered by our plan makes it hard to invest the money. One has to keep a significant amount in cash, presumably to pay for co-pays and the deductible. I know now that I could transfer my money from my employer’s HSA plan to another company, but that is yet another task to finish. I don’t always want to make more work for myself. If I don’t invest my HSA money, though, I am missing out on one of the big advantages of the plan.
Lastly, the principle of the high deductible health plan is that you have to pay a lot of money each your to cover health costs. If you are healthy, and have no costs, this is not a problem.
However, Mr. PiN and I now have several medical issues.
In my case, I’m one of the 1 in 13 people in the US with asthma, and require a daily (or twice daily) inhaler so I can breathe.
When I signed up for a HDHP with HSA, I knew I’d have to pay full price for my inhalers. I also happened to know that a few years prior, a one month inhaler cost $110. I figured I’d be paying about $1300 a year, maybe a smidge more—still less than my employer’s contribution. This was pricey, but manageable, and I thought going for the HSA would be worthwhile.
However, that first month on the new plan, I was dismayed to be asked for over $900 when I went to pick up my 3-month supply. I was embarrassed to see how concerned the pharmacist was over the bill, when I had done this to myself. They did find a manufacturer coupon for me, which reduced my costs for the year. Nevertheless, I paid way more money than I expected that year.
If you have chronic, pricey medical issues, like asthma, or you need a surprise big operation, like Mr. PiN, with an HDHP you may find yourself with medical bills each year that strain your budget.
If you make plenty of money, maybe an extra $10K or $11K in yearly spending isn’t a big deal. In that case, you might choose to cash flow these costs, and keep your HSA growing tax free for decades.
On the other hand, if you don’t make so much money, that $10K yearly might be a huge burden. Even if you pay for it with pre-tax money (so it effectively only costs $6K or $8K), that’s a lot of money. You may find that coverage with a plan with a lower annual deductible is a better deal for you. I, myself, would rather pay an extra $12 per month for a more comprehensive plan and a $3000 annual deductible.
Making a decision
Choosing an HSA eligible plan is one of those topics in personal finance where the decision is personal.
For a young, healthy person, the HSA is often an excellent choice, but there are a number of questions to answer:
- Does the plan make sense in general?
- Do you save money on the HDHP monthly deductible?
- Does your employer add money to your HSA?
- Can you easily invest your HSA money? If not, will you truly take the extra steps to transfer to another HSA?
2. Does the plan make sense for your health?
- Do you have chronic conditions which will require expensive medications or testing?
- Are you going to be able to afford your out of pocket costs on this plan? (Do you have a strong income to pay on your own? Or will your health care costs come out of your HSA, stunting its long term growth in the market?)
For me, the answers all point to a lower deductible plan as being best for my household.
For you? You’ll have to figure that out for yourself.
Have you had the option to choose a high deductible health plan with an HSA? If so, was it a good choice financially for you?