Health plans: HSA vs HRA - in respect to FI in ~5-8 years

[icefr]

I'm at a crossroads. I have two health insurance plans that are pretty similar and I'm not sure which one to go with. I thought I was sold on the HSA one, but now I'm not so sure. Perhaps you guys can help.

Commonalities:

• Premiums are the same for both of them.
• Coinsurance is 10% in network and 30% out of network.
• Employer covers first $500 of costs in each plan.
• I have zero anticipated health costs this year since birth control is now covered 100%.

In the HRA plan:

• Employer puts $500 into HRA, which is used first to cover health expenses. If you don't use the money, it's rolled over until you leave the plan (or the company.)
• My deductible is $500.
• My out of pocket maximum (i.e. max coinsurance payments) is $1,000.
• My maximum total cost after premiums is $1,500.

In the HSA plan:

• Employer contributes $500 to HSA throughout the year.
• I can contribute up to $2,750 to an HSA and save on 28% federal income tax and 1.45% Medicare tax (my income should be well over the Social Security tax maximum earnings, so this would just delay when I max out on that slightly). Possible tax savings: $809.875  Net cost of maxing out the HSA: $1,940.125 or $161.68/month.
• Deductible is $1,500.
• My out of pocket maximum (i.e. max coinsurance payments) is $1,500.
• My maximum total cost after premiums and less the employer HSA contribution is $2,500.

If I have < $500 in health costs, the HSA is the better one (bank the employer HSA funds). If I have $500 < health costs < $1,000, the HSA and the HRA plans are equal. If I have > $1,000 in health costs, the HRA is a better deal. (All of these notes are ignoring tax savings of the HSA.)

I was sold on the HSA plan since the tax savings is close to the difference in maximum total cost between the two plans. But maxing out the HSA is $161.68/month that could be thrown at the mortgage instead, which I am working to pay down within 5 years (by the end of 2017). Or perhaps I could go with the HSA plan but not put any of my own money into the HSA? I could handle such a health emergency pretty easily, but I also wonder if having funds in a HSA would be helpful for FI, which could be 5-8 years out.

How would you choose between these two plans?

[sherr]

If it were me I would go for the HSA in a heartbeat, unless you are expecting medical costs for some reason. If you will be using all the money you contribute to the HSA each year then the benefit is less clear.

With HSAs once you reach retirement age you can withdraw the money penalty-free for any reason. So it becomes an additional way to contribute to a Traditional 401k / IRA. And I'm betting your mortgage rate is a lot less than 28%.

[sherr]

With HSAs once you reach retirement age you can withdraw the money penalty-free for any reason.

And to be clear "retirement age" in this instance is the normal 59 1/2. That help so much in the early part of early retirement, but you can always withdraw extra money from other sources first and save the HSA money for later. Or, if you end up spending all the HSA money on medical expenses throughout your lifetime, then hey you spent tax-free money where you otherwise would have had to spend taxed-money! There isn't really a downside IMO.

[icefr]

From what I've read, it looks like you can also use the HSA to pay for premiums on private health insurance plans?

Yes, my mortgage rate is much, much less than 28%.

I read a bit more into it and it looks like I can set it to the max now and then change my mind at any point throughout the year. That's a nice benefit - with the FSA, it was a set it and forget it for the whole year. So I can't change my mind on the plan later in the year, but I can reduce the amount of money going to the HSA later on.

[sherr]

In general, no you can't use it to pay for insurance premiums, unless you fall into one of these three exceptions:

    A health plan during any period of continuation coverage required under any federal law.
    A qualified long-term care insurance contract.
    A health plan during a period in which the individual is receiving unemployment compensation under any Federal or State law.

Whether you can change the contribution amount mid-year probably depends on your employer, I'm only allowed to change my contribution amounts once a year or if I have a "life status change" like getting married or having a baby.

[Hotstreak]

Your HRA you lose when you leave the company or plan in 8 years -- short term plan.  The HSA you can keep forever.  Many of them allow you to invest your balance over a certain amount (5k) in a variety of stocks, bonds, or index.  I prefer the HSA because in your situation.. if you max your contributions while only using a small amount of the balance per year, when you stop working you may have 20k or more in the account.  At that point your HSA SWR can cover basic needs or the occasional illness, tax free by the way, without you needing to put any more in.  For most folks, when you age a few decades and approach 100, you will need to use quite a bit of the HSA money.  No telling what the rules are that long in the future, but if they are the same or similar, you are in a great position to pay for those things without having your HSA investment withdrawals count as taxable income.

[icefr]

Your HRA you lose when you leave the company or plan in 8 years -- short term plan.  The HSA you can keep forever.

Yup. And the HRA money is lost when you use it up as well, which I have been doing for the last few years. I think the deductible difference is worth the risk at my age (24) for the tax-free savings growth.

I'm going to give the HSA plan a try! If I have higher expected health expenses next year or the math changes, I can always switch back to the HRA plan.

[Hotstreak]

Absolutely!  This year so far I have 600 from my company, and will donate 1200 myself to the HSA.  Unless I get extremely sick or have a serious accident I will end up with all but 1-200 in it, which is used on co-pays for dental and vision.

[TN_Steve]

icefr,

My wife and I are also high income, albeit at a far different stage of life; thus, take this for whatever it is worth.

I take HRA because it is free at work.  She has HSA family plan that includes our kids until the youngest is out of college (the elder two don't have absolutely free coverage at work, and they are "free" for my wife as long as she is covering the youngest).  Because it is family plan, she gets pretax funding of 6250 or so a year with 10K deductible (In the eyes of the IRS, the money comes from employer; economically, it is from her other pocket). 

The fun part is that we have chosen to make no withdrawals from the HSA for several years, and immediately transfer each year's contribution (less a $50 placeholder in the employer's institution for our administrative convenience) to HSA Bank and its TD Ameritrade investing option.  Thus, her HSA currently has just less than $50,000 invested in index ETFs and is managed as part of our overall portfolio.  (Unlike 401k, etc., an employee "owns" HSA balance immediately and can transfer to another institution.)

Long term, we plan to use it tax free for health expenses in retirement.  (might be better for us to use it now for our health expenses, given our ugly marginal tax rate, but another tax free source of funds in retirement will assist with adjusting taxable income and MAGI as appropriate each year.)

Thus, we've found the HSA to be another useful tool in structuring our portfolio to maximize tax efficiency in retirement.

[icefr]

Wow, $50,000 in an HSA is hard to fathom for me! Thanks so much for sharing your experience.

It's definitely attractive to me that the employee immediately owns their HSA since it looks like the investing options with my employer's HSA provider might not be very good. I think that I will probably withdraw money from my HSA as I use it, but we'll see how things go and I doubt I'll hit the out of pocket maximum and will still leave plenty of money there each year. I'll need probably two years' worth of HSA contributions as a single person ($6,500) before it makes any sense to start investing with HSA Bank, so that gives me two years to figure out whether I'll just keep it in cash or not.

[TN_Steve]

Wow, $50,000 in an HSA is hard to fathom for me! Thanks so much for sharing your experience.

*** [Snip]

Yea, that's why I've put my age up on profile.  Most of the folks here (including you) are the age of our sons.  So it is necessary to disclose that I'm "old," which puts weight behind the old "YMMV" warning.  :-)