Author Topic: Is it worth it to start an HSA if I plan to use all the money in it?  (Read 10223 times)

Cognitive Miser

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My company is switching health care plans.  Each employee has a choice between an HMO and a HDHP.  We can also choose to sign up for an FSA (for the HMO) or an HSA (to go with the HDHP).  If we choose the HDHP/HSA, the company will deposit perhaps $150/quarter in the account on our behalf.  (They pay all employees' premiums completely, so the extra $600/year is to make up for the cost difference between the two different premiums.  Final costs are still in work.)  Neither my SO nor kiddo #1 are on my plan, it's just me.

The new plans start June 1 and will run until 5/31/17.  I am pregnant, due with #2 in late September, so this baby will be born on the new plan.  Handily, the brochures for the two plans came with an "example cost" for having a baby.  The HMO predicted cost is about $1800 assuming one pays the entirety of the $1000 deductible.  The HDHP predicted cost is about $3750, assuming one pays the entirety of the $2750 deductible.  I will have paid about $400 of my deductible by then in ultrasound costs.  So $3750-400=$3350, the maximum allowed amount for an individual to contribute to an HSA.

Is there any benefit to signing up for an HSA if I think I'll completely wipe it out of funds?  I could contribute another $3350 in 2017.  But then I don't know if the account will ever have any more money in it since I am not sure I'll stay in the workforce.  My plan is to take maternity leave for 12 weeks in Oct-Nov-Dec and come back the first of 2017 and work for at least six months part time.  After that point, I will be fully vested in my 401k and all bets are off.  I have mixed feelings about this employer and am considering becoming a SAHM.  But I think I owe it to my company to not cut and run after they pay me short term disability during my leave.  I owe it to myself to collect that remaining free 401k money, and to try out being a working mother of 2.  I've been working part-time since a couple of months before my first was born, and they say they will maintain this arrangement with me as long as they can, considering workload.  It's incredibly helpful to our family.

Alternatively, if I sign up for the HMO I could do the FSA which is tax-deductible, and wipe it out so I avoid the use-or-lose situation.  So at least I reduce my tax burden for 2016, but there's no "retirement account" benefit to doing that.

mxt0133

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #1 on: April 28, 2016, 12:01:45 AM »
When doing the math if it makes sense to you to select the HMO or HDHP, keep in mind the HSA contribution done via payroll deduction avoids FICA taxes, where as FSA and 401k contributions even though are pre-tax is still income subject to FICA taxes.  Yes it does lower your taxable earnings record when calculating SS benefits but that's too far out to compute.

If you do select the HDHP with an HSA put in the max, especially with a new baby, one ER visit and you will be glad you have those funds to spend on a pre-tax basis.

Proud Foot

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #2 on: April 28, 2016, 10:03:04 AM »
Another benefit is that you can put more money into the HSA account than you can with a FSA. Even if you are planning on spending the money it makes more sense to contribute and reduce your taxable income. 

charis

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #3 on: April 28, 2016, 10:09:46 AM »
When doing the math if it makes sense to you to select the HMO or HDHP, keep in mind the HSA contribution done via payroll deduction avoids FICA taxes, where as FSA and 401k contributions even though are pre-tax is still income subject to FICA taxes.  Yes it does lower your taxable earnings record when calculating SS benefits but that's too far out to compute.

If you do select the HDHP with an HSA put in the max, especially with a new baby, one ER visit and you will be glad you have those funds to spend on a pre-tax basis.

Bolded part - It's funny you mention that.  I was surprised (although I shouldn't have been) when I accessed my SS earnings record recently and saw that my "taxed earnings" for 2015 were less than 2014, even though I made quite a bit more in 2015, because we started maxing an HSA and dependant care FSA in 2015.

Cognitive Miser

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #4 on: April 28, 2016, 11:10:56 AM »
When doing the math if it makes sense to you to select the HMO or HDHP, keep in mind the HSA contribution done via payroll deduction avoids FICA taxes
Thank you for this! I hadn't run across that detail yet.  The math doesn't seem to be working out in favor of the HSA, however.  I spend almost double in the HSA scenario.  I could still sign up for the HSA next year this time, if I decide to stay with my company, and contribute the full $3350 in the second half of 2017 instead of the first half.  See attachment for the numbers. I used a 28% marginal Federal tax rate. The situation is worse with our effective tax rate.

terran

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #5 on: April 28, 2016, 11:21:34 AM »
If you have a significant other on your plan or will add your child you'll be able to contribute up to the family limit of $6750. You would have to look into whether the limit is reduced if your newborn is only on the plan for part of the year.

Cognitive Miser

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #6 on: April 28, 2016, 11:39:08 AM »
If you have a significant other on your plan or will add your child you'll be able to contribute up to the family limit of $6750. You would have to look into whether the limit is reduced if your newborn is only on the plan for part of the year.
Nope. Kids and husband are on his plan. My company fully subsidizes employee premiums but puts ZERO toward family member premiums (it's like COBRA high). His company subsidizes family plan premiums significantly.  It's WAY cheaper for the kids to be on his plan and for me to go solo.

seattlecyclone

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #7 on: April 28, 2016, 01:19:57 PM »
Is there any benefit to signing up for an HSA if I think I'll completely wipe it out of funds?

Yes, absolutely. By running your medical expenses through the HSA, you get a discount on those medical bills equivalent to your marginal tax rate (including payroll taxes). You can then put that money you saved on medical bills toward other things (like maxing out your retirement accounts).

In general there are two basic strategies for the HSA, depending on how much you're already saving in your other accounts.
1) If you're maxing out all of your retirement accounts, max out the HSA and pay your medical bills out of your checking account. Save your medical bills. Let the HSA compound along with the rest of your tax-advantaged investments until you retire, at which point you can withdraw tax-free money from the HSA up to the amount of accumulated medical bills you have saved.
2) If you're not maxing out all of your retirement accounts, max out the HSA, pay medical bills out of the HSA. The money you save on taxes by using the HSA instead of post-tax money for medical expenses can be used to get you closer to maxing out those other accounts.

BlueLesPaul

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #8 on: April 28, 2016, 03:06:18 PM »
When doing the math if it makes sense to you to select the HMO or HDHP, keep in mind the HSA contribution done via payroll deduction avoids FICA taxes, where as FSA and 401k contributions even though are pre-tax is still income subject to FICA taxes.  Yes it does lower your taxable earnings record when calculating SS benefits but that's too far out to compute.

If you do select the HDHP with an HSA put in the max, especially with a new baby, one ER visit and you will be glad you have those funds to spend on a pre-tax basis.

The FSA, like all cafeteria plan benefits, is pre-FICA.  You are correct that the HSA is pre-FICA if it is part of a cafeteria plan and the 401(k) is post-FICA.

My eyeballing of the situation is that the HMO/FSA is would be a better option for you this year.  If you do end up staying with the company, you can always switch to the HDHP/HSA in the subsequent year.

Cognitive Miser

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #9 on: April 28, 2016, 07:06:40 PM »

My eyeballing of the situation is that the HMO/FSA is would be a better option for you this year.  If you do end up staying with the company, you can always switch to the HDHP/HSA in the subsequent year.

Thank you! That's the conclusion I'm coming to as well.  Even if I don't use the FSA, I still save money with the HMO.  I was surprised, given the way people talk up HSAs around here.  It pays to run the numbers!

seattlecyclone

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #10 on: April 28, 2016, 08:05:01 PM »

My eyeballing of the situation is that the HMO/FSA is would be a better option for you this year.  If you do end up staying with the company, you can always switch to the HDHP/HSA in the subsequent year.

Thank you! That's the conclusion I'm coming to as well.  Even if I don't use the FSA, I still save money with the HMO.  I was surprised, given the way people talk up HSAs around here.  It pays to run the numbers!

When you're picking from your employer's plans, a lot depends on what they decide to offer and how much they decide to charge for each option. With my employer's options the HDHP + HSA seems like the best option even in a year with high expenses (such as childbirth), but other employers have a different set of options.

I would personally take those examples of childbirth expenses in the plan literature with a grain of salt. My own recent childbirth event had roughly $15k of medical bills for an uncomplicated birth, before insurance. If you choose the HDHP I would fully expect you to exhaust the plan's out-of-pocket maximum. An HMO could save you money if the premium is the same and they just charge you a flat co-pay for most services. But if the premium is higher, you may still be better off with the HDHP + HSA after you consider the tax savings. It all depends on the options you have available to you.

MDM

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #11 on: April 28, 2016, 10:50:39 PM »
Yes it does lower your taxable earnings record when calculating SS benefits but that's too far out to compute.

Perhaps - although you can make a ballpark estimate.  E.g.,
Yes, if you earn less than the cut-off for annual social security taxes, any pre-payroll-tax deductions (such as health insurance premiums or HSA contributions) will reduce your eventual social security benefits.

The formula for people born in 1953 (i.e. just becoming eligible to file for benefits this year) is here. Basically the way it works is you fill in your earnings history and scale each year's earnings up for inflation. Then you take the highest 35 inflation-adjusted years and add them up.

If this total is less than $346,920, each additional $1,000 of lifetime earnings would get you an additional $2.14/month in social security if you start getting benefits at age 66.
If the total is between $346,920 and $2.09 million, each additional $1,000 of earnings would get you an additional 76¢/month if you start getting benefits at age 66.
Past $2.09 million of lifetime earnings, each additional $1,000 earned would get you an additional 36¢/month.

I think most of us will do better by saving the payroll tax and income tax now and letting the money compound for us over time.

See also the 'SocialSecurity' tab in the case study spreadsheet if you want to do more what-if?s but the numbers won't change much from seattlecyclone's post above.


seattlecyclone

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #12 on: April 29, 2016, 08:46:58 AM »
Now the question is does your employer let you change plans for "qualifying life events" like the birth of a child?

Be careful with this. When we had a child we had this option, and any changes were retroactive to the date of birth. If anything, you would probably want to switch to the HMO for the birth, but you would really have to do your homework to make sure you're delivering at a hospital and with doctors that they would approve.

Cognitive Miser

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #13 on: April 29, 2016, 11:19:37 AM »
I would personally take those examples of childbirth expenses in the plan literature with a grain of salt. My own recent childbirth event had roughly $15k of medical bills for an uncomplicated birth, before insurance. If you choose the HDHP I would fully expect you to exhaust the plan's out-of-pocket maximum. An HMO could save you money if the premium is the same and they just charge you a flat co-pay for most services. But if the premium is higher, you may still be better off with the HDHP + HSA after you consider the tax savings. It all depends on the options you have available to you.
I think the estimate is decent - I had a C-section with my first - same hospital I plan to use under a nearly identical HMO plan, and my final bill was about $2200.
I don't pay premiums (my employer subsidizes these 100% for employees), so that wasn't even a factor in my calculations. Lucky me!

Cognitive Miser

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Re: Is it worth it to start an HSA if I plan to use all the money in it?
« Reply #14 on: April 29, 2016, 11:29:16 AM »

Now the question is does your employer let you change plans for "qualifying life events" like the birth of a child? 

One more question:  Will your employer still give you full benefits of the HDHP with $150/quarter towards HSA if you are part time?

I think so, but I can't imagine the funny look my HR rep would give me when I asked to invoke the "life event" provision but NOT add my newborn to the plan.  Again, I'd pay the FULL premium for baby, which is like $500/ month vs. putting her on my husband's plan at $50/month. I can't imagine any scenario where it is favorable for us to do this.

I am lucky to get full benefits at 24 hrs/week. That's one of the reasons I'd have mixed feelings about leaving this company.