How to Reach Health Insurance Nirvana with your Employer’s HDHP & HSA
Health Care Cost Nirvana
If you’ve made the move to a HDHP, paired with an HSA that is sponsored by your employer, there is a health insurance “sweet spot” that nobody ever really talks about that you should aim to hit. And it’s significant. Why? When you hit it, health care costs will effectively be zero for you and it will be one less thing you’ll have to stress about financially.
This sweet spot that I speak of occurs when your HSA balance (fed by employer’s contributions) exceeds your annual out-of-pocket maximum for the first time. When this happens, your health care expenses are limited only to the HDHP premiums that you pay for your insurance – which should already be less than a traditional health insurance plan because of the high deductible.
At this point, your cost of health care expenses that you will personally pay out-of-pocket are zero, and since HSA’s roll over from one year to the next, each subsequent year that you don’t have a major medical issue should also lead to zero health care expenses out of your pocket. On top of that, any additional contributions will continue to add up, extending your protection beyond one year.
Pretty nice, eh?
Here’s how to figure out what you need to do to hit this health care “nirvana”…
1. Find out what your Employer Contributes to your HSA
The amount your employer contributes to your HSA will vary, so you will need to find out what your employer offers. Most employers offer an annual contribution because HDHP’s save them cost on premiums versus traditional health insurance plans and they want to encourage their employees to enroll in them.
I’ve seen employers contribute up to the annual deductible amount. The annual deductible amount varies per the plan your employer offers, but the minimum allowed by the IRS is $1,200 per individual and $2,400 per family in both 2011 and 2012.
The annual deductible is the annual amount you are responsible for before your insurance kicks in. Once you hit this point, your expenses for a given year are limited since the HDHP will kick in and cover a large percentage (usually 90%-100%) of additional costs.
When your HSA balance exceeds your annual deductible, your risks of significant out-of-pocket expenses are pretty limited, but they can still occur. This is a great milestone to hit, but we want to take it one step further, which leads me to the second component…
2. Find Out what your Annual Out-of-Pocket Maximum is
Again, this will vary by employer. The maximum out-of-pocket allowed by the IRS for a HDHP per year is:
- 2011: individuals – $5,950, family – $11,900
- 2012: individuals – $6,050, family – $12,100
This is the most that you are ever responsible to pay out of your pocket for health care expenses in a given year. Once you hit this point with your HSA balance, you will no longer have any out-of-pocket expenses, so long as you stay on your employer’s plan. Even if you switch employers or become self-employed, you can take your HSA with you and if you sign up for a new HDHP you still may be safe from out-of-pocket expenses if your balance exceeds your new out-of-pocket maximum.
This amount may vary based on whether the medical services you receive are in-network or out-of-network. In-network will always be lower, so make sure that you stay in-network, if at all possible.
3. Calculate your “Sweet Spot” and Start Working Towards it
The equation is pretty simple. You will hit the sweet spot when:
HSA Balance – Out-of-Pocket Maximum >= $0
Whether that takes one, two, three, or more years, it’s a worthwhile milestone to set out to achieve.
My HDHP & HSA Example
- My employee contributes $2,400 annually for the family plan
- My out-of-pocket maximum is $4,800 annually for the family plan
- So, technically, if I have zero health expenses over a two year period: ($2,400 x 2) – $4,800 = $0
It would only take me two years to hit health insurance nirvana. Having zero health expenses over a two year period is possible, if not likely, but you get the idea. What’s more likely is that I hit this point when my employer contributes at the start of year 3.
Health Care Nirvana Discussion:
- Have you reached this health care expense sweet spot?
- How much of an HSA balance would you need to exceed your out-of-pocket maximum?