The Power of a Health Savings Account

Health Savings Accounts (HSAs) are a significant tool to increase your retirement savings, especially due to their tax-friendly nature. If you have the option available, you may want to consider it.

A Health Savings Account (HSA) can feel very daunting. In order to qualify for one, after all, you have to enroll in a health plan that has a high deductible with no fixed-fee copays. Copays (e.g. $25 for a doctor visit) can feel like a real safety net. Without understanding, a high-deductible health plan can feel like you have no insurance at all. My immediate reaction when I first explored HSAs and high-deductible plans (HDHP) personally twelve years ago was the fear of unexpected, high health care costs. I couldn’t understand why someone would want to switch to paying for what seemed like everything, on their own. As I explored further, however, I overcame my fear of unplanned health expenses with some rational, logical thinking.

How did I make my decision to enroll in an HSA? It was mostly about changing my mindset. I came to the realization that there was a cost to HAVE a health plan, and there was a cost to USE a health plan. The cost to HAVE a health plan is really all that money you pay in premiums out of your paycheck (if you have an employer-sponsored plan). I added all of that up as well as my other out-of-pocket costs and quickly realized that I was over-insuring my family. I was not using as much in health care as I was spending out of my paycheck to HAVE the plan. I learned that with a high-deductible health plan, preventive care and certain preventive drugs were covered at 100%. And the cost to HAVE the high-deductible health plan was significantly less (in my case, about 25% less). Additionally, my employer contributed annually to the HSA, and the contributions I made were pre-tax, saving me on my tax bill at the end of the year. By the time I added up how much I was paying for my traditional copay plan, it was astronomical (premiums out of paycheck + copays paid when going to the doctor + prescription copays + deductibles + coinsurance). On the other hand, the high-deductible plan was pretty easy…you pay for all non-preventive medical/pharmacy expenses until you hit your deducible. When I added my premiums out of my paycheck plus my out-of-pocket expenses, I realized that the HSA plan was a better fit for my family. We even had our first child while on the plan.

Flash forward twelve years, and we have amassed a sizable chunk of money in our Health Savings Account, with much of it invested and growing in an index fund as I write this. If we had continued spending more money on a richer health plan, we would not be this far ahead. The money would have gone to my employer vs. in my own pocket.

The biggest advantages of an HSA

1. Triple tax advantage. Money going in is pre-tax, money spent on qualified medical expenses is not taxed, and the interest and gains you earn from investments made inside the account are all tax free!
2. HSA as a retirement tool. If you max out contributions to other retirement accounts annually, an HSA serves as another place to stash money pre-tax for retirement. Some individuals choose to invest the money in the account, similar to a 401k or IRA, vs. use it for today’s health expenses. In doing so, the money you add to the account annually (for 2021, maximum contributions are $3,650 for single, $7,300 for family) continues to grow. By paying out of pocket vs. from the account for today’s health expenses and keeping receipts along the way, you are then able at any time in the future, to reimburse yourself from the account. For example, over 5 years, you accumulate $5k worth of prescription costs, doctor visits, etc. At the end of that time, you can request a $5k payment from your HSA (provided that you’ve saved enough in the account over that time) and use that money for anything. Meanwhile, that $5k earned you a bunch of money from investments while it was in the account over those 5 years. If you keep the money in there longer, you can amass a significant sum that can be used in retirement. When you reach the age of 65, you can then withdraw funds from the account without penalty for ANY type of expense (a vacation, a new car, etc.). Any non-health expenses, however, would incur your normal income tax rate.
3. Portability. Your HSA is fully yours. If you decide to switch jobs, retire or otherwise leave an employer, the account (including any employer contributions) is yours to keep.
4. Carryover year-to-year. The HSA is NOT like an FSA (Flexible Spending Account). It does not run out at the end of the year. There is no “use it or lose it” policy. Your contributions continue to grow year after year.
5. You still benefit from insurer network discounts. When you have a high-deductible plan with HSA, you don’t pay whatever the provider decides to charge. If you use in-network providers, that care is still billed through the insurance company, and the insurance company applies discounts. You pay the lower discounted amount. So, that visit a doctor might normally charge $200 for, the insurance company has negotiated a $100 price on, for instance. You pay the $100.

Overall, HSAs can serve you well financially. We have come nowhere near bankrupt having one (like I had feared originally), and our HSA has actually contributed to the growth of our wealth over the past 12 years. Yes, some years you do have more health expenses than others, but for us, when you look at the bigger multi-year picture, it has been very positive. Once you build a bit of a buffer in the account, the fear of not having enough for health expenses dissipates.

Some recommendations if you are thinking about a Health Savings Account

1. Get into the mindset that you are saving, even if it seems like you’re shelling out money. With a traditional copay plan, you’re not seeing the cost because you’re shielded by copays, paying $25-30 when visiting the doctor. When you have to pay $120, it can seem like you’re losing. Make sure you’re focused on the big picture of the year(s) vs. that one or two-time charge of several hundred dollars.
2. Calculate your “total cost of ownership.” Similar to how Consumer Reports does total cost of ownership calculations for vehicles to show you how a high-quality vehicle that is a bit more pricey can save you in fewer repairs, lower cost to insure, better fuel economy, etc, you need to figure out your total cost of ownership for each of your health plan options. How much do you pay out of your paycheck? How much do you pay for copays and reaching a deductible? How does that compare to what you’re offered with a high-deductible with HSA health plan? For me, the HDHP with HSA always has had the lower cost of ownership.
3. Go shopping. If you need an MRI, get it done at a standalone imaging center vs. a hospital. Ask your doctor to write you a prescription for it vs. automatically sending orders to the hospital. MRIs are 3X more expensive in a hospital setting than at an imaging center. Also, if you need prescriptions for drugs, many are on the 100% covered preventive list. Many national retailers also offer $3 prescriptions on many common drugs. Also, remember that pharmacy costs go toward your deductible. If you or a family member are feeling under the weather, utilize low-cost telehealth services offered by your insurer. Often times, this is a fraction of the cost of a doctor or urgent care visit.
4. Save at least the amount of your deductible annually. Saving at least your deductible amount annually in the HSA will give you a sense of security. Of course, don’t stop there if you don’t have to. Remember, contributions are pre-tax which also saves you on your tax bill.

Overall, the health plan option you choose is a personal choice. If you consider the recommendations I outlined above, it will ensure that you make a better informed decision.

Good health and happy saving!