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 HSAs 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 HDHPs 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 annual deductible is at least $1,400 for individual coverage or $2,800 for family coverage (in 2021).
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 that is HSA compatible, per year, is:
- individual: up to $7,000 (2021)
- family: or $14,000 (2021)
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.
And outside of your employer’s contribution, you can also personally set aside additional tax-free funds by going up to the maximum HSA contribution annually. If you have upcoming expenses this year, you can even front-load HSA contributions.
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?
My credit union (employer) contributes $75.00/month for a total of 900/year. I have been participating in the HSA for a little over 2 years now and have accrued 1900.00 plus pennies in interest. (.25%!!!) I have one more year to reach NIRVANA as my out of pocket MAX is 3k. I have seen the employer up the anti in previous years so I’m crossing my fingers and hoping I can actually get there this time, next year.
Question for GE:
With HSA being relatively new investment vehicles, at least to me. Are you familiar with any ways to invest the money as oppose to the employer sponsored account. ADORANDACK TRUST had at one point, I believe, 3% returns on investment. I’d be interested in rolling the money to a brokerage to invest in no load funds, low risk etf, etc. I can’t find anything with no major fees.
Love you guys with ultra sweet hdhp/hsa plans. My deductible is $4100, insurance pays 70% afterwards, with max out of pocket at $12,100. Seems that if have one of the weaker plans.
Ouch. Yeah, that’s why I’ve been trying to point out that plans do vary. What makes perfect sense for some, may not make sense at all for others.
That’s pretty terrible. Wish you can shop out of state for health insurance.
I’m planning on switching to an HDHP with an HSA that will begin January 1. What concerns me most is definitely those first two years. I’m not one to typically get sick (knock on wood), or even go to the doctor, but now I’m a bit paranoid about having a health-related emergency and not being able to pay for it. My employer will pay $75 a month, but if something happens I might be screwed. My out of pocket is $5k with the HDHP kicking in 100% after that. I’m actually kind of looking forward to taking the plunge. :)
I have an HDHP and an HSA for my family through my husband’s employer. They offered it for the first time two years ago, but I was pregnant with our son and expecting significant medical costs very soon so we stuck with the traditional plan for the first year. This year (2011) we switched to the HDHP/HSA and it turned out to be a good choice. This plan has a $3000 deductible and $6000 out of pocket max for the family. His employer does not contribute, but the premiums are over $2000 less per year.
This year was the first year we participated in the HSA and we contributed $3000. Most of that is still there and we will contribute $2000 next year. I’m planning (elective) eye surgery in a couple of years which will be about $6k so that will drain the account again, but it’s very nice to get to use tax advantaged funds for the surgery that wouldn’t be covered by insurance in any case.
The interesting thing about the offering from his employer is that the out of pocket maximum for both plans is the same ($6000), but with the traditional plan you also pay $2000 more in premiums, so it ends up being more expensive even in a worse case scenario. The only case where it makes sense is if you are expecting a medical event costing more than $3000 and you don’t have enough savings to pay it up front so you annualize the cost with the traditional insurance. That’s the only reason I chose the traditional plan for one more year.
The thing that scares me is that half of the people who choose an HDHP do not contribute to an HSA. Also, anecdotally, most of the people my husband has talked to at his work have chosen the traditional plan because they could not come up with $3-6k for an unexpected medical expense. If they just chose the HDHP and contributed the difference in premiums they would be ahead very soon. It’s only the first year or two that is risky.
Sounds like you know what you’re doing, but don’t forget to elect an FSA for your LASIK. Even with an HSA that restricts the use of an FSA for medical expenses, dental and vision expenses are eligible right away, meaning that if you know you’re going to have LASIK, you can pay for part of it with your FSA and keep some of your HSA balance intact. This is ultimately he goal since an HSA rolls over from year to year, unlike an FSA.
I’m in a Kaiser HDHP with an HSA that my employer funds with up to $4K based on participation in our wellness program. If you eat right, exercise regularly, and do other things to improve your overall health, then my company will basically cover the entire deductible (Family Coverage – $4K). I’m in my late 20s and have been in the HDHP since 2009. With my good health and active lifestyle, I haven’t had to touch hardly any of my account balance. That is until this past year when my wife gave birth to our first child. As you would expect, the birth caused us to hit the $4K deductible, with we paid $2,400 out of the HSA and then $1,600 out of our FSA. Even after this major expense, we came out ahead for 2011 and still have a growing HSA balance of over $10K. We consider ourselves fortunate to be able to have the HSA option and hopefully it’ll pay even greater dividends down the road when we’ll likely need it for medical expenses.
Awesome example of how this strategy being enacted! Thanks for sharing, Trevor.
As a 50-something, I would like to make a comment. We have a $5000 HDHP deductible (ins. pays 100% after it is reached) which we can cover if necessary through an emergency fund. Because of my husband’s age, in 2012 we will be able to sock away the maximum allowed of $7250 ($2000 of which his employer contributes)in his HSA account. I would like to encourage any 20-somethings who can afford it to put away the max allowed. We get a great tax savings and now have over $16,000 in the HSA after switching to a HDHP in 2009. I, like Cuba Steve, would love to find a better “safe” investment vehicle for the HSA, but I am thankful for the $2000 the employer contributes and the tax savings we get.
I guess I am one of the lucky ones even though my employer contributes nothing to my HSA. I have the Kaiser HDHP HMO w/ HSA at Wells Fargo Bank. The max deductible is $3000/yr. I contribute $6150/yr for my family. We have almost $7000 in the account now which I’ve been doing since 1/1/2010 or was it 2009.
Anyways, for the tax benefits, I don’t plan on changing my contributions other than to max out at $6250 for next year. I don’t know what the out of pocket maxes are.
Your best insurance is to go the GYM and eat non pre-packaged meals. Not only will you be healthier, keeping more in the HSA, but you’ll be saving money at the grocerers. We all know that pre-packaged food although seems cheaper and more convenient, you get less for your buck then buying whole raw material items.
YAY! After not going to the doctor at all this year and starting off with a slightly higher deductible and 50% contribution by my employer I am about to hit that spot! Our plan actually got better this year, it used to have a deductible of $2,000, which has now been reduced to $1,500 with the same 50% contribution by my employer. So now I will have 2 years worth of deductible saved up in the first three months of next year! Very excited. I do feel that the HDHP is a bad idea, though. I am just scared to go to the doctor at all… I have a pre-existing condition – high blood pressure, inherited from my dad, and even my normal visits to the doctor for “preventive” will have to be paid from my deductible.
YAY! After not going to the doctor at all this year and starting off with a slightly higher deductible . I like this blog.
Also with some HSA accounts you can actually use this money to invest through brokerage accounts. For example my HSA bank account allows me to enroll in TD Ameritrade and use the money to invest in anything that TD Ameritrade offers. Granted, you should keep in mind that the money is basically your support for medical expenses so putting the money in a riskier investment vehicle like an emerging markets etf might not be ideal, however you stil can find some funds with little risk that can generate some income on practical “free” money that was given to you by your employer. Just an idea.
I switched my family to a HDHP and HSA some 3 years ago. It works very well for us because 1. We all have healthy lifestyles; 2. I am an internist and so only effectively insure against hospitalizations; and 3. I max out the HSA as an additional tax savings strategy, and 4rth, I am an aggressive shopper of generic drugs outside of the US for our few needs.
Health insurance premiums are high and increasing by double digits yearly. My HDHP started at about $340 a month premium 3 years ago, and in the last couple of months had reached $530 with a $6k family deductible. That was more than enough to set me to price shopping this week. I have switched from GoldenRule to Humana where I now pay $268 monthly premium for an $8k family deductible BUT NO CO-INSURANCE.
How good is it ?
My combined state and federal marginal tax bracket is 30%, so the HSA tax savings is worth $2235 on my $7450 contribution for 2013. My premium is $3216 a year, or a net annual premium cost of $981 a year. Not bad for a family of 4 with a couple of 50 something year olds ;)
The risk of getting hit with the high deductible varies by person or family, but a break-even point can be calculated. This is for privately bought insurance…
No deductible plans for my family are $900 a month, so if I have hospitalizations less frequent than every 8000/(900-268) = 12.6 months I come out ahead.
I just want to make sure I understand. There is an IRS regulated maximum contribution to the HSA each year, but your account can have more in it because of rollover without penalty. So if the maximum contribution was $3000 and you deposited the max amount in 2013 and made no withdrawals, in 2014 you could contribute $3000 again, making it $6000 without penalty?
Dear “Concerned:” You can check out my post from Dec. 9, 2011 for my particular specifics, but you are correct in your assumption. My husband and I have been relatively healthy and have now accumulated about $33,000 in an HSA.
This is all great if you actually have health insurance paid for by someone else – your employer. If you are paying it on your own it never ends!
My husband and i are in our mid fifties with no health insurance. His employer offers it but it will cost over $600 per month for a plan with $12 deductible, they do offer HSA with only $500 contribution per year.. I’m sure we will get hit with the fine but what can we do if we can’t afford to shell out the monthly fee? We would literally have nothing to live on if we paid that amount so we felt the fine would be cheaper in the end but, we worry about what could happen if we needed emergency care. We are pretty healthy, though i have chronic pain from arthritis and at this point we are getting older so i know this could change over night. It is hard to justify shelling out $600-$700/per month for a $12k deductible. This is the first time in our marriage (38 yrs) that we have not had health insurance and before Obama care it was Pay your monthly premium ($250-400) with $20-$30 co pay and $0 deductible.. We aren’t destitute but are aren’t rolling in the dough either. I do not understand Obama care either…