Switching to an HSA with Wife and Kid

[uneven_cyclist]

Greetings All,

I read a Mad Fientist post about using an Health Savings Account (HSA) as a way to deduct $$ on taxes. 

I believe the limit for 2022 is $7200 for family.

I live in Los Angeles and my job offers a High Deductible Health Plan (HDHP) that has a $3000 deductible. 

My wife and I both take prescriptions regularly and we have a young child (18 months). 

I would love to do this and am curious -- have others with similar situations done it (i.e. with young child and regular prescriptions?). If so, do folks have any recommendations for how to navigate the system, either generally, or in LA specifically, for success?  I could easily imagine setting up a $7200 fund and then just spending all of it because of high healthcare costs and then the whole effort would be counterproductive!

Thanks all for your time.

[terran]

You'll have to look at your specific plan options. Usually what I find is that very low spending means the HSA wins (obviously) because of low expenses and low premiums and very high spending means the HSA wins because the out-of-pocket max plus premiums is usually lower, so it's really only medium spending (like a bunch of doctors visits, but no major procedures) when the other plan sometimes wins. If your current plan is offered by the same insurer as the HSA plan you should be able to look at your explanations of benefits to see what the negotiated rates of your recent services are, and from there you can figure out how you would have paid if you had the HSA plan.

One thing to to note given that you live in CA is that you don't get a state tax deduction and you'll owe state tax on investment gains in the account (it's treated like a taxable account for CA state taxes).

[LightStache]

One thing to to note given that you live in CA is that you don't get a state tax deduction and you'll owe state tax on investment gains in the account (it's treated like a taxable account for CA state taxes).

Thanks @terran I didn't know this!

OP, I have a HDHP in Los Angeles, but I'm single and don't use a lot of care, maybe 3-5 trips to the doc every year. You can easily create a spreadsheet to compare costs across plans.

I did an analysis not to long ago for a pregnant woman on here who was debating the switch. It turns out that even maxing the in-network OOP for the HDHP, she still came out ahead with the HSA compared to an HMO. I speculate that you pay less overall with the HDHP because actuaries have figured that people use less care with an HDHP since they have to pay out-of-pocket. So it's probably a win if you can handle the irregularity of the OOP costs.

[sonofsven]

I have very low medical expenses and I don't have a young child anymore, but I think of it as more of an emergency plan and fund.

 I don't ever have enough expenses to meet my deductible (it's $6,000). But I have more than $6k in my HSA account, so in a medical emergency I could cover expenses until I met my deductible.

I'd put expenses on credit cards (I have a lot of them due to card churning) and pay the cards off with my HSA money. You could just skip the cards if you wish and pay with HSA money. Mine has a debit card available but I didn't get it. So the process, according to my HSA provider (Lively) is that I would pay the bill and upload the receipt to them to get reimbursed.

I've never done it, though. Every time I think I might use some of it for medical expenses I'm able to cover it by cutting spending somewhere else. I'll dip into my cash emergency fund before I'd take it out of the invested HSA account. And then replenish the cash fund, of course.

In the meantime it is a great tax write off, as you read, and a great place to invest long term as well. I buy VTI with mine.

Every time I think I might use some of it for medical expenses I'm able to cover it by cutting spending somewhere else. I'll dip into my cash emergency fund before I'd take it out of the invested HSA account.
 
Knowing the money is there if needed gives peace of mind.

I agree that simply putting money in and spending it back out is somewhat counterproductive. It's benefit is as savings, not spending.
 

[Dave1442397]

I treat the HSA account as a long-term savings account to help cover health care costs in retirement. We put the maximum in every year, and all but $1000 is invested in VTSAX. I keep track of all expenses, and have added each one to the 'file cabinet' section of the HSA provider's website, along with scanned receipts. We currently have close to $9,000 in unclaimed expenses, which I think of as an emergency fund in case we ever need money to cover something non medical.

I haven't worked out whether it would have been cheaper in the short term to take the medical plan without the HSA option, but I like the idea of all that money being invested with triple tax savings. Market gains should offset any short term losses from choosing the HSA plan pretty quickly, I think.

[Malum Prohibitum]

I treat the HSA account as a long-term savings account to help cover health care costs in retirement. We put the maximum in every year, and all but $1000 is invested in VTSAX. I keep track of all expenses, and have added each one to the 'file cabinet' section of the HSA provider's website, along with scanned receipts. We currently have close to $9,000 in unclaimed expenses, which I think of as an emergency fund in case we ever need money to cover something non medical.

I haven't worked out whether it would have been cheaper in the short term to take the medical plan without the HSA option, but I like the idea of all that money being invested with triple tax savings. Market gains should offset any short term losses from choosing the HSA plan pretty quickly, I think.

This is what I do, too.  We just pay cash for medical expenses and keep track of our receipts.

[boarder42]

It's a simple math equation for you to calc. But outside of prescription drugs being way more heavily subsidized under the expensive plan HSAs rarely lose.  Esp if you're in Cali with some of the highest income taxes in the country.

[LightStache]

It's a simple math equation for you to calc. But outside of prescription drugs being way more heavily subsidized under the expensive plan HSAs rarely lose.  Esp if you're in Cali with some of the highest income taxes in the country.

Did CA start conforming to Fed tax treatment for HSAs? My understanding is that contributions and earnings in HSA are taxable in CA.

[boarder42]

It's a simple math equation for you to calc. But outside of prescription drugs being way more heavily subsidized under the expensive plan HSAs rarely lose.  Esp if you're in Cali with some of the highest income taxes in the country.

Did CA start conforming to Fed tax treatment for HSAs? My understanding is that contributions and earnings in HSA are taxable in CA.

I was unaware of this in Missouri if it's salary deduct it bypasses fed/state/FICA

[terran]

CA and NJ don't give a state tax deduction for HSA contributions. I'm not sure about NJ, but CA also taxes investment gains in the HSA the same as if they were in a taxable account. I think all the other states with an income tax give a deduction for HSA contributions, but I could be wrong.

[uneven_cyclist]

Thanks all for the comments and replies. 

I'll reach out to my health care providers to request receipts and then once I have that info I'll have a better idea about what my family's annual costs would be with the HSA that we are considering vs. the HMO that we have currently. 

Thanks again for comments, it helps a lot to learn a bit more about how folks are using these plans and how/why you decided to opt in. 

[nereo]

The most important part of the equation seems unanswered - what current healthcare plans are available to you and what are their premiums and deductibles and coverage.

If you are comparing having a family HDHP through your work to, say, a ‘cadillac’ plan offered through your wife’s workplace, then no, the tax savings from an HSA will be unlikely to offset the increased OOP costs paid by you.  But if your only other option is to buy a plan through the individual market absolutely go with having an HSA.  In our personal situation we have a choice between a HDHP through my work with about a $125 monthly premium or a ‘cadalliac plan’ through my wife’s job with a $230 deductible, lower co-pays and better coverage. The tax savings from the HSA won’t come anywhere near the additional OOP costs in switching to my work plan with our HDHP.

Even if you spend all $7200 in your HSA every year there is still great reasons to have one. As you no doubt know it will lower your current year tax burden, but also become an ‘easy pot’ of tax-free money to be used at any later date with no restrictions once you can document having spent that amount on health care. Which makes it more accessible than a Roth for early retirees with the same benefits.

[seattlecyclone]

I have no personal experience with regular prescriptions, but I have heard there are many drugs where you can find a much better deal if you don't involve the insurance company, using cash-pay discount programs and such. Of course if you don't tell the insurance company it won't count toward your deductible and it might cause you to pay more for other procedures later, but if the prescription is the main thing you expect to pay for it can be worth exploring.

That aside, I've generally been quite satisfied with the HDHP coverage I've had in the past. My employers have priced it low enough in comparison to the other plans that it's hard to come up with a scenario of medical spending where the other plans turn out better (assuming all the tax benefits of a full HSA contribution). This is of course very much dependent on the specific plan lineup available to you.

[mamabear18]

Hi! I’ve lived in So Cal and had a HDHP WITH 2 kids. I had the same concerns as you. We were all healthy - rarely went to the doc unless it was the annual physical and well visits for both kids.
Annual physicals for adults and kids are all included in the plan including immunizations.

I was nervous the first year but nothing happened!! Imagine that. I realized how much money I saved and  I fell in love with the HDHP.

We are now in year 5 and finally had an emergency room visit for one of the kids and other random unexpected doc visits. We had a minor accident so the bill was only approx $1200. We also had 2 doc visits - about $340 for both. My husband just had a visit for severe foot pain - my guess is it’ll be about $300 for that. My husband takes 1 prescription Med and so do I. Super cheap monthly.  If I add that up along with my monthly premium  and divide that by the last 5 years - I am still ahead of the game and have saved sooooo much on health care.  I have plenty of money in my HSA which I saved in the last 5 years - normally I pay for prescriptions and random doc visits out of pocket - but since these bills were adding up for 2022 - I decided to use hsa money to pay for them.

Im sure you will be ahead overall - most years nothing happens and your hsa builds up while keeping health care costs down- once in awhile you may have an unexpected high bill. But if you look at from a long term view - my thoughts are you will come out ahead- if any of us ended up having a severe illness - I would switch over to the regular plans the following year - you’d still be ahead long term.

I didn’t know about CA taxes on hsa’s- is that accurate? If contributions are pre tax tax - how is the state able to tax them? Unless you are finding after taxes????

[s0198362]

I have no personal experience with regular prescriptions, but I have heard there are many drugs where you can find a much better deal if you don't involve the insurance company, using cash-pay discount programs and such. Of course if you don't tell the insurance company it won't count toward your deductible and it might cause you to pay more for other procedures later, but if the prescription is the main thing you expect to pay for it can be worth exploring.

I've got cheaper Rx's sometimes with GoodRx.  I then submit it to my insurance company.  They don't pay me any money back (as I have not met my deductible), but they do count it towards my deductible.  Aetna by the way.

[Runrooster]

I've got cheaper Rx's sometimes with GoodRx.  I then submit it to my insurance company.  They don't pay me any money back (as I have not met my deductible), but they do count it towards my deductible.  Aetna by the way.

I didn't know you could do this.  Thanks.

[charis]

I've had an hdph with HSA for six years with two young kids, chronic health conditions and medications. We usually meet the 3k deductible by August and then our copay is 5%. If you can afford the deductible out of pocket, I don't get the trepidation. We pay all medical costs out of pocket and I invested HSA contributions immediately, so there's no temptation to reimburse.

[uneven_cyclist]

Thanks all for your posts -- I am almost at end of open enrollment and figured out an important detail -- the HDHP/HSA plan has a $145 monthly premium whereas the HMO/FSA plan that I've been using up to this point does not have any premiums (i.e. $0 premium). 

Soooo...with that major difference in price, I think I may have to stick with the HMO/FSA even though the HSA benefits seem super cool, I do not feel like I could still come out ahead when paying $1740/year for them :(

I'll keep an eye on things with my plan because it does change from year to year and then if the premiums go down on the HSA maybe I'll make the switch!  Thanks everyone!

[charis]

Thanks all for your posts -- I am almost at end of open enrollment and figured out an important detail -- the HDHP/HSA plan has a $145 monthly premium whereas the HMO/FSA plan that I've been using up to this point does not have any premiums (i.e. $0 premium). 

Soooo...with that major difference in price, I think I may have to stick with the HMO/FSA even though the HSA benefits seem super cool, I do not feel like I could still come out ahead when paying $1740/year for them :(

I'll keep an eye on things with my plan because it does change from year to year and then if the premiums go down on the HSA maybe I'll make the switch!  Thanks everyone!

That's bizarre.  The HDHP is usually lower premium.  What's your co-pay for visits and medication on the HMO?  We have a couple of expensive meds that count toward our deductible.

[Tigerpine]

Regarding CA, there have been bills introduced to change the tax status of HSAs.  Most recently AB 727.

However, it does appear that CA currently treats HSAs as ordinary after-tax investment accounts, based on a quick search on the interwebs.