Author Topic: Advice: Employer Health Insurance Options  (Read 866 times)

kasperle

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Advice: Employer Health Insurance Options
« on: November 11, 2017, 05:36:21 PM »
Hi there!

It's that time of year again, and I'm once again deciding which health plan to go with through my employer. Some basic information: I am 27 years old, and over the past few years I've had very few medical expenses. The largest was getting my wisdom teeth removed 2 years ago, which cost me $1000.

The two options available to me are:

Premier PPO plan
- $150 deductible
- $15 copay for all visits
- 100/0 coinsurance in-network (70/30 out of network)
- Maximum individual out-of-pocket expense: $1250
- Cost of this plan for me: $0

HSA Plan
- $1700 deductible
- 10% copay for all visits after deductible
- 90/10 coinsurance in-network (70/30 out of network)
- Maximum individual out-of-pocket expense: $3400
- Cost of this plan for me: +$500 added to my salary (this plan is cheaper for my employer, so they pass some of those savings to me)

Both of these are really good plans, and I am very fortunate to have these as my options. Last year, I decided to go with the Premier PPO plan, because it seems safer due to the lower maximum out of the pocket. However, realistically I'm unlikely to have any major medical expenses. And getting the HSA would allow me to begin investing in the ultimate retirement savings account.

My quick math suggested to me that switching over to the HSA plan makes sense, but I wanted to run that by all of you experts on these forums.

I considered a "worst case scenario" where I have some unexpected medical event that costs more than the max out-of-pocket for each of these options. In this situation, I pay $1250 with the Premier PPO, and $3400 in the HSA. The HSA costs $2150 more than the premier PPO for this expense.

However, with the HSA, I would max out the HSA account, which is a $3450 pretax contribution for 2018. My effective tax rate is around 40% for the whole year, so this saves me $1380 in taxes. The $500 that is added to my salary offsets the difference between the plans by $1680 ($1380 + (0.6 * 500), assuming the $500 gets taxed at 40%).

With this adjustment, the HSA only cost me $470 more than the PPO. The last factor is that the HSA grows tax-free. I did a quick mini-calculation to determine that this one-time fee seems at least a little bit reasonable:

Paying $470 for $3450 to grow tax free is only worth it if the taxes on the gains from the $3450 are equal to or less than $470. Assuming a tax rate of 20%, $470 equals $2350 in gains. An investment of $3450 will have $2350 in gains after just around 8 years of growth at 7%, assuming no money is taken out. With luck I'll be alive for 8 years after FI, so this doesn't seem like the worst deal.

Alright, anyway, let's get back to the original question. Given my medical history, it seems unlikely that I'll have a major medical expense next year. And if that ends up being true, then the HSA is clearly the better option here.

As I mentioned before, I'm leaning toward the HSA. It seems to be relatively low-risk with the chance of giving me quite a bit of gains. But I always get nervous when making decisions like this, so I wanted to run it by you.

Thank you for reading!
« Last Edit: November 11, 2017, 06:34:07 PM by kasperle »

MDM

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Re: Advice: Employer Health Insurance Options
« Reply #1 on: November 11, 2017, 10:54:50 PM »
Might be worth putting your numbers into a couple of comparison tools, e.g., Health Savings Account (HSA) vs. Traditional Health Plan and the 'HDHP Analysis' tab of the case study spreadsheet.

Joel

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Re: Advice: Employer Health Insurance Options
« Reply #2 on: November 11, 2017, 10:58:09 PM »
You may want to also do some reading to understand the difference between your marginal tax rate and your effective tax rate. I canít imagine your effective tax rate is 40%.

MDM

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Re: Advice: Employer Health Insurance Options
« Reply #3 on: November 11, 2017, 11:07:40 PM »
You may want to also do some reading to understand the difference between your marginal tax rate and your effective tax rate. I canít imagine your effective tax rate is 40%.
Good point, didn't notice that.

Whatever the effective rate, ignore it.  For personal finance either-or decisions, effective rate is irrelevant.  Marginal tax rate is what matters.