Personal Finance HSA Plans

BamaNation

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As always, I offer no credentials nor am I a financial advisor. I do offer to the reader my own research and opinions which should be checked with your accountant or tax advisor and your own investigation before taking any actions based on this post or the links it contains. Caveat emptor!

Inspired by @2003TIDE in my 529 Plans thread, I wanted to post the same kind of overview for HSA plans. Again, I'm not a financial advisor in any way so everything posted is based on my own research or experience. Caveat emptor!

What is an HSA?
The Bogleheads Wiki provides this definition: "A Health savings account (HSA) is a special account which is used in conjunction with a high deductible health plan. Contributions to the account are tax-deductible on the federal and most state tax returns, and withdrawals are tax-free if they are used for medical expenses. Unlike a flexible spending account (FSA), unused money remains in the account and can be invested; most accounts offer either mutual funds or brokerage accounts for investing."

The Bogleheads wiki on HSAs linked above has a GREAT overview of HSAs, how they work, Pros & Cons, what you can/can't do, etc.

Key points about HSAs
  • You must have a HDHP (High Deductible Health Plan)
  • Contributions are tax-deductible for federal & state in most cases (reduces your taxed net income). CA & NJ state tax monsters are not included in this statement.
  • Withdrawals are tax-free if used for medical expense (in the year of contribution or anytime later)
  • Contributions can be invested
  • Investment returns & dividends are not taxed as they grow and compound.
  • Contributions can be transferred from your employer's HSA plan (wherever your HSA contribution is deposited into your HSA account each payday) to a better/cheaper manager like Lively.com or others.
  • The 2020 max is $3550 for individual plans and $7100 for family plans. This includes any employer matching
  • Medicare recipients contribution limit is $0 but your medicare premium can be paid with HSA funds.
  • HSA's are sometimes called "stealth IRAs" because they are pre-tax, w/d are tax free, earnings aren't taxed
  • There are no income restrictions restricting contributions
A good explanation of the HSA Tax benefits:
"The HSA is arguably the best tax savings vehicle available. Normally you have to either choose between a tax break now (traditional) or tax break later (Roth). With an HSA, you get both, also called "triple-tax-free": (1) you get a tax deduction the year you contribute, (2) the earnings grow and compound tax free as long as you want, and (3) when you withdraw, you don't pay any taxes on principal or earnings. The only catch is the withdrawals must be used for medical expenses."

How to use HSAs
The best usage for most healthy families is to cash flow your occasional medical visits and let your HSA grow year after year while invested in a reasonably cheap index fund or funds. Don't use it as a day trading account or for other active trading. Remember this is to pay your healthcare costs in retirement.

If you use the HSA for current expenses, at least one year's deductible should be considered as part of your emergency fund (and invested very conservatively) while you invest the remainder as if it were part of your 401k or IRA. The idea is that you will use these funds in retirement to pay for healthcare needs at that time.

PROS
  • Tax deductible
  • Tax-free w/d if used for medical
  • Money remains in account year after year (unlike FSA which must be used in current year)
  • Employers may match some contributions
  • Funds can be invested
  • Funds can be transferred to an external / better custodian if your employer's HSA custodian is high cost or not flexible enough
  • You can be reimbursed in future years for current year expenses
CONS
  • You must be in an HDHP
  • If your medical costs are high, HSAs may not be a good idea
  • HSAs are relatively new
  • If you cash-flow your current medical expenses and want to be reimbursed later for those expenses (i.e. expense occurs in 2020 but you wait until 2040 to be reimbursed), you need to keep up with receipts & proof of your medical expenses.
  • HSAs do not enjoy the same favorable treatment upon death of the HSA holder.
  • If the HSA holder dies before being reimbursed for expenses there may be some negative tax consequences of not getting reimbursed before date of death. However, the long growth of tax-free earnings generally makes this worth the "risk."
HSA Custodians
This is a list of custodians that might be worth transferring to if your employer-provided HSA plan isn't great. I make no guarantees about any of these custodians listed here but the listed ones are those that our own research has suggested might be worthwhile if your HSA investment options or fees aren't great. For example, for our own HSA, we currently transfer to Lively because several years ago they offered a much lower fee and better total market index fund than my employer's plan. Now the plans are about equal as of January 2020 but we continue to do this for simplicity's sake. The process: I have all HSA contributions into my employer-provided plan completed by mid year and then do a custodian to custodian transfer for everything from my employer plan to Lively. It's a simple online form and typically happens in July. Some of the custodians/administrators below were not available or didn't have great options when we setup my Lively account. Within Lively, I use the TDA trading platform to invest (long-term) in Vanguard's Total Stock Market Index ETF (VTI) with no expenses. Fidelity began offering what looks to be a fantastic plan in late 2018.
  • Fidelity offers HSAs for employers and, as of November 2018, individuals
  • Health Savings Administrators offers 22 Vanguard funds
  • The HSA Authority is highly rated by Morningstar. One of the oldest HSA administrators.
  • HSA Bank offers a TD Ameritrade brokerage option which offers commission-free trades on over 100 ETFs (excluding Vanguard)
  • Lively offers a TD Ameritrade brokerage account which offers commission-free trades on over 100 ETFs (excluding Vanguard). No fee to invest.
Morningstar's 2019 HSA evaluations: "In summary, Fidelity, a new entrant to the individual HSA space, is the best HSA provider for both spenders and investors. For HSA spenders, Lively represents the second-best choice. For HSA investors, The HSA Authority and Bank of America are the next best picks. Besides Fidelity, The HSA Authority is the only other provider that we recommend to both spenders and investors."

Links to HSA reviews and resources

TideFans Personal Finance
[These links are also now under Personal Finance in the secondary navigation menu near the top.]

 
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B1GTide

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We have maxed out our HSA account for years now. We had to draw down some a few years ago because of my medical problem, but most that we have contributed is still in there and growing. My company also contributes $1k/year, so it is a no-brainer.
 
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2003TIDE

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I've had a HSA for years.

My order of operation are

-6 months expenses in savings
-Max 401k's for me and wife
-Max dependent care FSA
-Max my HSA. I'm the only one with a HDHP. I keep the deductible in "cash" then invest the rest in a Vanguard S&P500 fund.
-Contribute to 529.
 
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uafanataum

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Are these things really more cost effective than health insurance if you have something major come up. I ask because in my experience ER visits are expensive. About 6 years ago I visited an ER and was in between plans due to switching employers. I paid the hospital bill in cash and thought that was enough. A little over a month later I received a $700 doctor bill. It turns out hospital bills are separate from doctor bills. I had cellulitis so all the doctor did was poke the infected area and write me a prescription. For $700. I cannot imagine a bill if the doctor actually had to do something or if I ended up in long term care. I would think premiums are more cost effective.
 

BamaNation

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Are these things really more cost effective than health insurance if you have something major come up. I ask because in my experience ER visits are expensive. About 6 years ago I visited an ER and was in between plans due to switching employers. I paid the hospital bill in cash and thought that was enough. A little over a month later I received a $700 doctor bill. It turns out hospital bills are separate from doctor bills. I had cellulitis so all the doctor did was poke the infected area and write me a prescription. For $700. I cannot imagine a bill if the doctor actually had to do something or if I ended up in long term care. I would think premiums are more cost effective.
We run a sensitivity analysis each year before signing up. We look at both employers’ various plans and then do a what if to see what happens at various medical cost levels relative to plan selection and premiums. It is a complex analysis across several spreadsheets. The recommendation to select HDHP usually assumes you are in relatively good health. But it depends on how much your employer contributes to premiums and if they match some of your HSA. For us it is typically a no-brainer even for major medical issues since there are caps for out of pocket expenses.
 

uafanataum

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We run a sensitivity analysis each year before signing up. We look at both employers’ various plans and then do a what if to see what happens at various medical cost levels relative to plan selection and premiums. It is a complex analysis across several spreadsheets. The recommendation to select HDHP usually assumes you are in relatively good health. But it depends on how much your employer contributes to premiums and if they match some of your HSA. For us it is typically a no-brainer even for major medical issues since there are caps for out of pocket expenses.
Since you are not paying insurance premiums how do you have anyone to cover anything after you exceed the cap?
 

BamaNation

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Since you are not paying insurance premiums how do you have anyone to cover anything after you exceed the cap?
oh, we pay premiums! And our employers pay a bunch as well. Expense Caps are like $13k for out of pocket.
 

B1GTide

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Are these things really more cost effective than health insurance if you have something major come up. I ask because in my experience ER visits are expensive. About 6 years ago I visited an ER and was in between plans due to switching employers. I paid the hospital bill in cash and thought that was enough. A little over a month later I received a $700 doctor bill. It turns out hospital bills are separate from doctor bills. I had cellulitis so all the doctor did was poke the infected area and write me a prescription. For $700. I cannot imagine a bill if the doctor actually had to do something or if I ended up in long term care. I would think premiums are more cost effective.
At 50 years old my health score was that of a 24 year old. I ran 40 miles/week, lifted weights, did P90X, watched what I ate because of gout. I was exactly the kind of person who one might think could get away without health insurance if I were single. Had a routine test two weeks after running a marathon which led to a surgery and 5 day stay in an ICU ward. Because of my high deductible plan I paid $10k out of pocket, but my insurance was billed hundreds of thousands of dollars.

Would I have had the routine test without insurance? It cost $1200, so probably not. IMO, insurance saved more than my wallet 3 years ago - it saved my life.
 
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crimsonaudio

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HSA makes great sense for my family - me, wife and kids pay $800/month for health insurance (decent coverage, too, including dental and vision). We use the HSA to offset the occasional doc visit, prescriptions, etc. That said, while we're not a 'young family' (I just turned 48), we're very healthy, all of us exercise daily, we eat very clean (no fast food), maintain our weight, no underlying health issues. For example, my wife ran into our PCP at the store about a year ago and she asked who we were seeing now. My wife asked what she meant and she noted she hadn't seen any of us in a couple of years - we just don't get sick.

Not sure they work for everyone, but an HSA has been a great way for us to save money.

Again, keep in mind we have the luxury of using health insurance as insurance, not as a health care plan, due to our good health. i realize that's not necessarily the norm.
 
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crimsonaudio

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Had a routine test two weeks after running a marathon which led to a surgery and 5 day stay in an ICU ward.
That's your body telling you to stop running marathons. Pheidippides died, you know. :)

You should ruck them instead. Or if you want to see how mentally tough you are, sign up for a 50 mile Star Course.
 
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2003TIDE

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Again, keep in mind we have the luxury of using health insurance as insurance, not as a health care plan, due to our good health. i realize that's not necessarily the norm.
While I get what you are saying, ppl with a HDHP should really leverage the plans which in my experience incentivize $0 wellness visits to catch things early.
 
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BamaNation

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So, like I said, we do a very complex analysis that includes all available plans (for both my and Mrs. BN's employers). My wife is an Excel super ninja and I ain't half bad.

Here's our process:
  1. We look at our recent medical expenses to understand trends.
  2. We look at what each plan provides regarding coverage, co-pays, % applied to deductibles, co-insurance %, maximum OOP Limits (in and out of network), prescription costs and co-pays, etc.
  3. We analyze the tax implications because insurance is pre-tax.
  4. We add in the HSA cost impact and tax savings from that and also include FSA and HSA employer contribution matches, if any.
  5. For each plan we then have low end assumptions (i.e. what we paid for healthcare over last 12 months) and high-end assumptions (what if there's major injury or health issue).
  6. We run the analysis for total costs after tax to see which plan or combination of family + single plans works "best" for our family.
Obviously lots of analysis of assumptions going on, but they're educated assumptions and that's the best we can do. We can't know the future but we can make some good assumptions based on data we have (or presume) and, given there are upper limits in play, we can know with decent confidence what happens if our expenses are much higher.

I just looked at the actual #'s from my family plan for this year. We have a $7,400 max annual OOP limit for in-network expenses. Deductible is $4,400. Co insurance is 80% on the HDHP + HSA plan. Triggering the OOP max would require $19,400 in medical costs. The HDHP w/ HSA is about 1/3 (!!!) the cost of the comprehensive care plan considering all factors, including pre-tax implications + HSA tax benefits.

But we don't just "pick one plan go with it." We run this analysis each and every year. This year, it was actually better that me and the kids are on my family plan and my wife is on her single plan. We ran 4 scenarios: Everybody on mine, My family plan + her single plan, Her family plan + my single plan, Everybody on hers.

There are some scenarios where it might be better for the plans to be different or the balance but the sensitivity analysis shows it would only be a few hundred dollars different per year in extreme cases so we go with what looks to be best given what we know and presume and we have the HSA funds available to use as needed.

Anyway, that's what we do :)
 

AlistarWills

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So if you have the HDHP/HSA plan, and you don’t use the HSA to pay for add visits in order to let the funds in it grow, can you count the monies paid toward healthcare on your taxes?
 

BamaNation

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So if you have the HDHP/HSA plan, and you don’t use the HSA to pay for add visits in order to let the funds in it grow, can you count the monies paid toward healthcare on your taxes?
From Intuit: "In 2019, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income. Beginning in 2020, the threshold amount increases to 10% of AGI."

Obviously, I would consult TurboTax, my tax advisor, etc. for specifics but if your health care expenses are >10% of AGI in 2020, yes, you can deduct them. You have to decide whether to reimburse yourself via HSA (immediately or any point in the future) or use as a deduction on current year taxes. You can't do both.

"If you had significant medical expenses last year, or if you're anticipating significant medical expenses this year, you might be wondering whether you'd be better off itemizing your expenses or paying them with money from your HSA.

To clarify an important point: You can't do both, as that would be double-dipping — the money in your HSA is already pre-tax, so if you use HSA funds to pay your medical bills (or reimburse yourself for them later on), you can't deduct these expenses on your tax return."

Source: https://hsastore.com/learn/taxes/itemize-medical-expense
 

B1GTide

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I fully fund my HSA every year and let it grow. My wife and I will need this money more and more as we get older, and I want it to be there when we have retired and our income is diminished. We are earning the most that we ever will right now, so we pay our medical bills out of pocket.

The HSA can be a second 401k plan.
 

AlistarWills

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From Intuit: "In 2019, the IRS allows all taxpayers to deduct the total qualified unreimbursed medical care expenses for the year that exceeds 7.5% of their adjusted gross income. Beginning in 2020, the threshold amount increases to 10% of AGI."

Obviously, I would consult TurboTax, my tax advisor, etc. for specifics but if your health care expenses are >10% of AGI in 2020, yes, you can deduct them. You have to decide whether to reimburse yourself via HSA (immediately or any point in the future) or use as a deduction on current year taxes. You can't do both.

"If you had significant medical expenses last year, or if you're anticipating significant medical expenses this year, you might be wondering whether you'd be better off itemizing your expenses or paying them with money from your HSA.

To clarify an important point: You can't do both, as that would be double-dipping — the money in your HSA is already pre-tax, so if you use HSA funds to pay your medical bills (or reimburse yourself for them later on), you can't deduct these expenses on your tax return."

Source: https://hsastore.com/learn/taxes/itemize-medical-expense
We are already in an HSA (forced in to it more or less) and pay medical expenses out of it. Reading your information, makes me reconsider what we are doing. But that 10% of AGI number is significant.
 
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BamaNation

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We are already in an HSA (forced in to it more or less) and pay medical expenses out of it. Reading your information, makes me reconsider what we are doing. But that 10% of AGI number is significant.
So just to be clear, your HSA is not a use it or lose it fund (unlike FSA). You can put the max in every year, invest it, let it grow until you retire and use it to pay retirement medical needs (including medicare). OR you can use it to pay your non-insurance medical funds each year. OR use it in retirement (or really any point in the future) to pay past years' expenses (which means you would need to keep/scan your receipts now and pay them later). OR if you have large medical expenses now (or any year in the future) that are >10% AGI in that year, you could deduct those from your taxes if it makes sense but couldn't reimburse those deducted expenses from your HSA now or anytime in the future.
 

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