Contributed by: Matthew E. Chope, CFP®
I am a big fan of High Deductible Health Care Plans. As individual and group premiums rise, employers are pushing their employees to take more responsibility for their health and healthcare costs, and offering High Deductible plans is one way they are doing this. You can have a High Deductible plan as an individual or in a group plan.
There are some basics about these health care plans that you need to understand. Basically, high deductible plans are not allowed to offer any co-pay benefits – like paying $10 for a generic prescription or $35 for a doctor visit. Thus, they usually work well for healthy people, although more and more, they work even if you know you’re going to hit your out of pocket maximum for the year because of their lower premiums.
If you have a High Deductible Health Care Plan, you can take advantage of a HSA (Health Savings Acccount) which is typically opened at a bank or credit union. If you have an HSA plan, you are allowed to make pre-tax contributions to that account. The maximum contribution will be $6900 in 2018 for a family and $3450 for an individual. If you are 55 or older, you can add another $1000 to those figures. If you get your insurance through your employer, you may find that your employer offers the HSA account for you and even makes a contribution to it during the year. In which case, you would count this money as part of your contribution limit.
You might be thinking, what’s so great about this if my insurance covers almost nothing unless I hit my deductible and/or out of pocket maximum? (They are often, but not always, the same amount.)
The High Deductible Health Care Plan is a wonderful planning tool for several reasons
First, they operate the way insurance is supposed to operate: a smaller cost for an unlikely (but potentially catastrophic) event... think fire insurance on your home. Going to the doctor or filling a prescription are not unlikely events at all, so really, when a plan offers copays for things like doctor appointments and prescription medication, that’s not really insurance, that is a discount plan. Consider it as though you are paying for the discount in the premium.
Second, HSAs offer a great tax break: the money is contributed with pre-tax dollars, the account grows tax-free… and best of all… none of it is taxed coming out. (as long as you use them for qualified medical expenses.) Yes, there are rules about what is a qualified medical expense but in a nutshell most legitimate expenses for healthcare are okay. You can’t use them for: the actual premium cost of the insurance, supplements, massage, or elective surgery (this is usually the case but there are exceptions). The HSA is the only vehicle where the money isn’t taxed going in or coming out, if you follow the fairly simple rules.*
Third, HSA dollars can be used on things that insurance doesn’t typically cover, such as alternative care with a chiropractor or acupuncturist for example. You can also use HSA money to pay for things like the dentist or eye doctor. (See IRS Pub. 502 for a list of qualified medical expenses.)
Some people also use the HSA as another savings vehicle. They max out their contribution each year, but instead of spending the money on medical costs, they pay for their costs with regular old post-tax dollars. They still get the tax deduction, because the deduction is based on the contribution, not on the spending. Then in retirement they’ve got an account they can use for health care costs.
Taking the Strategy One More Step
If you have a large expense pre-retirement and you pay for it with post-tax dollars (i.e you just write a check), you can reimburse yourself for the cost years later. That means you can make a tax free withdrawal in retirement for a pre-retirement healthcare expense. This could make sense for a large ticket item, like a hospital bill. Having a tax-free account such as an HSA could really help you be strategic with retirement income. (Consult with your CPA, and save those receipts for this strategy!)
The High Deductible Health Care plan/HSA Strategy isn’t for everyone, but to figure out if it makes sense for you, it’s best to speak with someone who can analyze your individual situation and advise you. Brokers’ services are free to you, as they are compensated by the insurance carrier you choose. You can also contact us for help with deciding if this strategy makes sense for you.
* May be subject to State or local taxes.
Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.
This information does not purport to be a complete description of High Deductible Insurance Policies or Health Savings Accounts, it has been obtained from sources deemed reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Matthew Chope and are not necessarily those of Raymond James. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.