A Smarter Way to Buy Health Insurance
Step 1: ENROLL
Enroll in an affordable HSA-Compatible High Deductible Health Plan (Bronze) to protect against large unexpected medical bills.
Save 20% to 60% on premiums compared to Silver, Gold and Platinum plans
Step 2: SAVE
Put these premium savings into a Health Savings Account (HSA) to pay for routine, expected medical bills and prescription costs and to save for future deductibles.
IF possible, make additional contributions up to the maximum allowable limits each year.
Tax-free contributions, growth & withdrawals
Step 3: INVEST
Set a goal to “save and invest” HSA dollars to provide a lifetime of benefits.
Now Until Retirement:
- Covers current health care expenses
- Covers future expenses up to age 65
At Retirement, a pool of tax-free money to pay for:
- Medicare premiums: Part B and Part D
- Expenses not covered by Medicare: deductibles, co-insurance, physicals, dental and vision
- Long Term Care (LTC) insurance premiums
- Un-reimbursed TLC expenses
Also, at Retirement:
- Supplement your retirement income (taxed like IRA)
- Final expenses (taxed like IRA)
Step 4: OPTIONAL
A bottle of champagne for your agent!
“I often tell people that when they reach age 65, they will have a tremendous urge to buy me a bottle of very expensive champagne. Why? If you follow my advice, you will have a nice sized balance in your health savings accounts to help pay the costs not covered by Medicare.”
– Bob Hopper, PhD
Think of an HSA as a “Medical IRA” (IRA = Individual Retirement Account). That is, money you are saving now for your future medical needs.
Triple Tax Benefits
- Tax deductible contributions to health savings account
- Tax-free growth while in HSA
- Tax-free withdrawals for qualified medical expenses.
Pay Expenses Over a Lifetime
You can use your health savings account to pay qualified medical expenses including doctor visits, labs and x-rays, hospital expenses, surgeons, dental, vision, prescriptions, over-the-counter medications and alternative care.
During retirement you can pay Medicare Part B and D premiums; deductibles and copays; as well as expenses not covered by Medicare such as dental, vision and annual exams, etc….
“I believe that the large majority of people under age 65 should seriously consider having a health savings account. It provides a way to plan and save for the future. It is the smartest way to finance health care expenses now, and in the future.”
“As I often say in the workshops that I conduct for the CPA society, “HSAs are the only legal way to launder money; money is totally tax free when used for qualified health care expenses.”
Having “tax free” HSA dollars may be better than having low copays for doctor visits.
The major benefits of health savings accounts are due to the ability to use “tax free” dollars to pay for health care expenses. It is often true that using tax free dollars is better than having office visit copays and much better when you’re faced with large and unexpected medical bills. But, to understand the magical powers of a health savings account, you need to understand taxes. Ugh.
The taxes that are withheld from your paycheck –
When you earn wages, your employer is required to withhold three types of taxes before you get your paycheck:
Example: Single Filers earning $36,901 to $80,350
|TOTAL TAXES WITHHELD:||32.65%|
We will round to 33% for simplicity sake.
So, for every $100 you earn, your employer is required to withhold $33 in taxes (33% x $100 = $33). You would then be left with $67 in your check. Keep this in mind as you read on to learn about how health savings accounts (HSAs) reduce your tax liability.
The basics of HSAs
In order to qualify for a health savings account you need to have a high deductible health plan that ALSO does NOT have copays for office visits and prescription drugs. Not having copays can sometimes worry employees. It shouldn’t and here’s why. Insurance plans without copays have lower premiums, which allows you to put money into a tax-free health savings account that you would otherwise be paying towards a higher premium for a plan that provides copays.
Let’s look at an example of someone who is age 40.
|Plan||Monthly Premium||HSA Contribution|
|Bronze 60 HSA||$280||$75/mo or $900/yr|
Which is better – to pay an additional premium of $75 monthly to get a Silver 70 health plan that offers copays for office visits and prescription drugs? Or is it better to put that additional $75 into a health savings account. The key to understanding is best determined by knowing how much you need to earn in order to afford a copay.
Let’s look at a typical office visit copay
If your copay is $50, you need to earn a larger amount, since your earnings are taxable. In our earlier example, we determined that if your annual gross income as a single taxpayer is between $36,901 and $80,350 ($73,801 – $148,850 for married filers) you would be paying 33% (rounded) in taxes (Federal, Social Security and Medicare). So, how much do you have to earn in order to be left with $50 to pay your doctor’s office copay?
How we get there mathematically:
- Amount earned = Amount of copay ÷ (100% – tax bracket)
- Amount earned = $50 ÷ (100% – 33%)
- Amount earned = $50 ÷ 67% = $75 (rounded)
That means that the “real cost” for you to pay that $50 copay is $75, since that’s what you must earn to have enough left over after taxes to pay the copay.
Ballpark it with this quick method:
For people who fall within the 20-28% Federal tax bracket (including our example above), there’s a simple “ballpark” method to figure out how much you need to earn to pay a medical bill. Simply compute one half of the bill and add that amount to the total bill.
In our example, the bill is your copay, which is $50. One half of $50 equals $25. Add $25 back into the total copay of $50 and you get $75. Therefore, you need to earn $75 in order to pay a $50 copay.
NOTE: This method only works for taxpayers falling within the 20-28% Federal tax bracket, which is most people.
The HSA-qualified health plan negotiated fee versus a copay
When you have an HSA-qualified health plan with NO copays, you pay a negotiated fee to see the doctor. For example, a family practice or general doctor might charge $100+ for someone without insurance but when you show your insurance card, you get the negotiated fee which might only be $65 for a simple office visit.
You’ll recall from the chart above, the Bronze 60 HSA health plan allowed you to put $75 each month or $900 a year into the HSA and avoid paying taxes. So, when you pay that $65 negotiated doctor fee, you do so with tax-free money out of your HSA account!
As a reminder, with the Silver 70 or any non HSA-qualified health insurance plan, you need to earn $75 just to have $50 left over for the doctor’s visit copay.
Conclusion – Often paying for routine doctor visits with your HSA ($65) will be roughly the same as what you need to earn to pay a copay (earn $75). When you understand taxes, then you can figure out how much you have to earn.
So, is an HSA-qualified health plan right for you?
Assuming you fall into the 20-28% Federal tax bracket, like many Americans, then YES an HSA-qualified health plan is right for you.
Using tax-free dollars from your HSA will make visits to the doctor about the same as paying a copay for a doctor visit, HOWEVER with the HSA you get the added benefit of growing your investment over time for your medical needs during retirement – in other words tax-free dollars go into your HSA and tax-free dollars come out for medical needs.
That’s the next magical step . . . it’s what I like to call, “Super Charged Medical IRAs.”
HSA magic solves problem of huge retirement healthcare expenses.
Retirement healthcare expenses – Are you prepared?
How much do you think you and your spouse will spend on healthcare expenses from age 65 until your final years? Most people guess $20,000, $30,000 or $50,000.
According to Fidelity Investments, the average couple will spend around $220,000!
|Medicare Part B Premiums||$104.90||$1,258|
|Medicare Supplemental Premiums||$150.00||$1,740|
|Prescription Drug Plan Premiums||$25.00||$300|
|TOTAL PER PERSON/YEAR:||$3,298|
|TOTAL PER COUPLE/YEAR:||$6,596|
|COST OVER 20 YEARS:||$131,920|
Now add out-of-pocket expenses such a copays, deductibles, and services such as chiropractic, acupuncture, etc. Then add dental and vision expenses. It’s easy to see how a couple can reach $220,000 in healthcare expenses in their senior years. Oh by the way, long-term care expenses are not included in that $220,000.
Now ask yourself, “Will these costs go up with inflation over the next decades?” Most assuredly so.
The Solution: The HSA Strategy – Save for medical needs in retirement
Think of HSAs as “Super Charged Medical IRAs”
Einstein once said that “compound interest” is the 8th Wonder of the World. If that’s true, then “tax-free” compound interest is the 9th Wonder of the World. One of the only ways you can get tax-free compound interest is by opening a Health Savings Account (or HSA).
- With traditional IRA or 401(k) retirement plans, you pay taxes when you withdraw the money, approximately 25%.
- With a Roth IRA, you pay taxes before you put money into the IRA.
- The HSA is a “Super Charged Medical IRA.” You put dollars into the account “tax-free” AND take the money out “tax-free” for health care expenses. Like other retirement vehicles, you have a variety of investments available to you, which is good because you’ll need your money to grow for your future healthcare needs.
STEP 1 – SAVE
If you have a health savings account, per 2015 tax laws you can save $3,350 per year or $270 per month. A family can save $6,650 per year or $550 per month.
What if you are 35 years old and you save just $100 per month for your future medical needs.
(with 6% compound interest)
So, if you are 35 years old and save just $100 per month, when you retire at age 65 you will have $100,451 tax-free dollars in your health savings account!
STEP 2 – SPEND
Once you have $100,000 in your HSA and are earning 6% interest, as per the example above, you will have $500 per month or $6,000 per year of tax-free money to spend on health care. This will cover both Medicare Part B AND Medicare Supplemental insurance for you and your spouse. It’s worth noting that you do not have to touch the principal and therefore still have $100,000 in your HSA account. If however, you took that money out of a 401(k) or traditional IRA to pay your premiums, you would first have to pay taxes of around 25%.
Let’s say that you only saved $50,000 in your HSA, and are still earning 6% interest, that will yield you $250 per month of tax-free money. This will cover the Medicare Part B premium for both you and your spouse, at current rates. Again, you will not have touched the principal.
So what’s the lesson? It is far better to leverage your good health now, pay lower premiums for an HSA-qualified insurance plan, put money into an HSA, and save as much as you can for future medical expenses. The alternative of procuring a more expensive health plan while you’re young and still in good health just doesn’t make sense.
Health savings accounts were designed to help people pay for health care expenses. This leads to the logical question: “What are the allowable health care expenses?”
As a general guideline, health savings account dollars should be spent on prevention, diagnosis and treatment of medical problems. If you see a health care provider such as a physician, dentist, optometrist, alternative care provider, pharmacist, chiropractor or psychologist, those expenses are probably allowable expenses.
IRS Publication 502 explains which expenses are HSA-eligible and which are not. There is a section for includible expenses (page 5) and non-includible expenses (page 14).
Always use your insurance company ID card
Your insurance company will provide you with an ID card which will allow you to access medical care at a discount when using contracted providers. Show this card when filling prescriptions, visiting the doctor, ER, hospital or facility. You can even use this card to get discounts for acupuncture, chiropractic and eye care when visiting providers contracted with your insurance company.
Read your Explanation of Benefits (EOB)
Using your ID card also provides your health care providers with the information they need to send your claim to your insurance company for you. You will receive an Explanation of Benefits (EOB) in the mail (also available to view online when you register). The EOB is the key to understanding the bill your doctor will eventually send you to pay. Medical care from the insurance company will be discounted during this process. Be sure to wait for the bill from the provider and make sure it agrees with your EOB before you pay the provider.
Paying for doctor visits
When you visit an in-network doctor for a cold, show your insurance company ID card and wait for the EOB from the insurance company and the corresponding bill from the doctor. A doctor may bill $125 to $250 for these services, and the insurance company may negotiate this amount to $65. You will pay the $65 and that will be credited toward your plan deductible.
Labs and x-rays
When you visit an in-network lab, they will submit the bill to the insurance company, and you will only need to pay the negotiated fee, which can be substantially less than for an out-of-network lab. Sometimes an imaging center will offer you a cash price, which is often a good bargain. In this case, you pay cash and they don’t submit to insurance company. You simply pay at time of service using your HSA card.
Prescriptions are automatically discounted and credited towards your deductible at the pharmacy—just show your insurance card! You can then use your HSA card to pay at the time you get your prescription(s). You may also want to explore the mail service benefit offered by your insurance company where your prescriptions are mailed to you in a 2-month or 3-month supply.
Use HSA dollars to pay for wellness services
You can use your health savings account for diagnosis, treatment and prevention of medical problems. Thus, you can use your tax-free HSA dollars to actually improve your health.
Here are the services I feel can make you healthier.
- Personal Wellness Program: If you would like to embark upon a personal wellness program, ask your physician to recommend health professionals or programs that can improve your health. If your physician recommends a program, it will likely be an HSA-allowable expense. When in doubt, always check IRS Publication 502 to verify.
- Dietitian: A dietitian can help you develop programs in a variety of areas such as,
- Weight control: work with a dietitian to develop a dietary plan and get coaching along the way as you lose weight.
- Lowering cholesterol: develop a cholesterol-lowering diet. If a dietary program can control cholesterol, you will save tens of thousands of dollars required to take a medication for a lifetime.
- Exercise Physiologist: If you have difficulty sticking with exercise, consider seeing an exercise physiologist to help you develop a personal exercise prescription for you. While you cannot use your HSA dollars for a fitness center membership, you can pay for professional services in developing an exercise program. Lack of exercise is a risk factor for heart disease, stroke and diabetes, and developing a good exercise program will help prevent serious medical problems in the future.
- Psychologist: A psychologist can help you develop a stress management program that will relieve stress and improve quality of life.
- Weight Loss Programs: In the case of weight loss programs, IRS publication 502 suggests that you need a doctor’s referral to a weight loss program. As an example, you can use HSA dollars to pay for the Weight Watchers program.
- Smoking Cessation Program: You can use your HSA dollars to pay for a smoking cessation program. Since smoking is one of the most serious health risk factors, a smoking cessation program is highly beneficial.