It was Monday night, three weeks ago. I was nauseous, had a fever, and couldn't sleep. So there I was laying on the couch moaning. I was hoping I wouldn't wake Christie, or my 2 ½ year old son, Wiley IV. Little did I know that a mere 24 hours later I would be having my appendix removed.
I had just purchased an HSA plan for my family at the beginning of this year. I chose an $8,000 deductible, 100% plan through Blue Cross Blue Shield, replacing my $500 deductible plan whose rates had been going up.
Paying My Deductible
I still haven't gotten the total bill from the surgeon and hospital. The PPO discount will reduce the price a good bit, but I still expect the total to be $5,000 or so. Because I have a high deductible plan, I'll have to cover this myself.
Had I stayed with my previous policy, I would have been responsible for my $500 deductible, plus 20% of the next $5,000. If my total bill is $5,000, then I'd be responsible for $1,400. My premium when I had a $500 deductible plan was $4,600, so my total out-of-pocket would have been $6,000.
Instead, I have an $8,000 deductible, and so will be responsible for the entire $5,000 myself. Adding that to my (much lower) annual premium of $2,600, gives me $7600 in medical expenses. Because I funded my Health Savings Account to the tune of $5,250 this year, I will get to deduct that entire amount from my adjusted gross income when computing my income taxes. By using our HSA Tax Savings Calculator, I can determine that my tax savings on this contribution is $1,732. Since that is money that I will no longer have to pay Uncle Sam, I'm going to deduct that from my total medical expenses. $7,600 - $1,732 = $5,868.
That's right. Even though I will have to pay the $5,000 bill myself, I still have more money in my pocket than if I had kept my old low-deductible plan. I can either pay this expense out of the Health Savings Account right now, or pay it from my regular checking account, and reimburse myself later.
Paying a $5,000 Claim Every Year, with $434,000 Left Over
Most medical expenses in America are lifestyle related, and can be reduced or eliminated by attention to diet, exercise, stress management, and other lifestyle factors. Because I do pay attention to all of this, the hospitalization and surgery I experienced took me by surprise. But hey, things happen
I certainly don't expect to be experiencing medical expenses like this very frequently. But as a thought experiment, let's say that I do. What will my account look like if I have a $5,000 claim every year?
I'm 42 years old, and expect to have my HSA until I'm 65. Using the HSA Future Value Calculator, I can see that if I contribute $5,250 into my account every year, if I can earn a 12% return, and if I withdraw nothing during that time period, I'll have $549,165 in my account. At that point, I can reimburse myself for each of those $5,000 claims that I theoretically had during the previous 23 years, for a total $115,000. The withdrawal of this money will be tax-free, since it is going to cover medical expenses. The remaining $434,165 will then be mine to spend in retirement, just like an IRA. Additionally, any future medical expenses I incur can still be paid for tax-free from the account.
That's exactly the strategy I plan to take. I am paying the deductible out of a different account, and leaving the funds I deposited in my HSA undisturbed. I'm keeping a record of my medical expenses, and will reimburse myself from the HSA once it has had time to appreciate, tax-deferred.
If you haven't done the math, I encourage you to do so. Calculate how much you'll save in health insurance premiums, just by switching to an HSA. Then, just for fun, calculate how much money you'll have in your account when you retire using the HSA Future Value Calculator.
If you'd like to discuss whether Health Savings Accounts are right for you, please give us a call at 866-749- 2039.
P.S. - When I got off the post-surgery antibiotics, I went to Whole Foods and purchased a pro-biotic supplement. Next month we'll talk about some expenses like this that qualify to be paid from your HSA, but that most insurance agents and accountants know nothing about.