Today I did some research on Health Savings Accounts. It’s difficult to get decent real-world insurance information for self-employed persons so I thought I’d share some of my conclusions in the hopes that someone can educate me as to why these HSAs are a good thing. To me, they seem like a pretty raw deal.
First of all, being self-employed sucks. You get no paid vacation days. No paid sick days. Your insurance costs a fortune, so you probably buy a high-deductible plan. Your retirement options (IRAs, etc) are incredibly restrictive, unless you’re willing to hire an accountant and setup a plan. You pay 15.3% self-employment tax instead of the 7.65% FICA/Medicare that everyone else does. You deal with a massively overburdening tax system that’s aimed at big business, but constantly hits you. Politicians talk about “taxing the rich”, but few people realize these rich-targeted tax increases often hit the self employed.
So, I look at the HSA, and it seems like a good idea. I can save away some pre-tax money, and spend it tax-free on medical expenses. I have a bunch of dental work, some eye work, etc, coming up so this sounds like a good idea. An HSA requires a qualified “High-Deductible” plan, and I have already have a $2500 deductible health insurance plan (at $175/mo), so I ought to be all set, right?
Problem #1: My High-Deductible Health insurance plan isn’t a ‘qualified high-deductible health insurance plan’. As far as I can tell, the problem is that I’m allowed to pay a $30 copay for doctor visits. HSA doesn’t allow that. So, I have to change health plans to a different one. The qualified plan costs the same amount ($175/mo), raises my deductible by $500, and requires me to pay in full for doctor visits until the premium is satisfied (no nice $30 co-pays anymore).
My doctor charges $169 for an office visit. Under current plan I pay $30, under new plan I pay $169. That’s a difference of $139 per doctor visit. Of course, nobody wants to visit the doctor, but consider how quickly these visits might add up. You get a sinus infection, and need some antibiotics prescribed – a 5-minute doctor visit, but it costs me $169. What if you have an incident and need a couple of follow-ups? What if you need a referral to a specialist ($169 to the primary doctor, $169 for the specialist, and then who knows what the specialist will want to do the actual “work”). Losing the $30 copay for doctor visits sounds like a huge hit, and I would actually be paying the same damn thing for the insurance. That’s right, the HSA-Qualified plan costs the same amount as my current plan, but given 3 doctor visits I had this year, would have incurred an additional $402 in expense.
Well, the real benefit of an HSA is that I can write this off as a business expense, right?
Problem #2: HSA is not a business expense. It turns out that while I’m a business for the purposes of self-employment tax, I’m still an individual for the purposes of insurance. Thus, I can’t deduct HSA as a business expense. That already knocks off a large portion of the tax savings.
But, I can still save off my plain ordinary income taxes, right? Assuming I make it to the highest tax bracket, that’s 28%
Problem #3: 28% of $3050 isn’t that much money. 3050 is the maximum contribution I can make as a single individual. Assuming I make it into the maximum tax bracket of 28%, then I could save $854. Well, if I made those 3 doctor visits documented above, then I’d have already wiped out half of the savings by going to this new scheme.
Well, at least I can earn an investment return on the balance of my HSA, right?
Problem #4: HSA maintenance fee exceeds investment return. I checked with Bank of America. They pay a generous 1% interest rate (that’s actually quite good these days). But, they charge $4.50/mo maintenance fee. That’s $54 per year with no guarantee the fee won’t increase. 1% of $3050 is $30.50. Assuming I spent none of the money, I’d lose$23.50 in my investment the 12 months. Given that I’d probably be using some benefits, then it’s going to take multiple years to ramp up to the point where I’d actually be making a positive return on my investment. If I invest > $1000, then BofA does let me buy ‘select mutual funds’ (whatever those are, probably mutual funds with high maintenance fees that pay a marketing fee back to BofA). That might sound good, but medical expenses are one of the few things you actually may need in emergency and really aren’t what you want to make long-term gambles on. Retirement is different because you might not need it for 30 years, but medical you could need tomorrow.
So, at least the money remains mine and I can spend it even if I change jobs, right?
Problem #5: HSA testing period. If you enroll in an HSA mid-year and make the maximum contribution then you’re subject to the HSA ‘testing period’. You have to remain in the HSA for one year. If you were to, for example, change jobs and become eligible for “real insurance” or wanted to change to a different health plan that wasn’t HSA-qualified, then you face a penalty. The penalty looks like it’s roughly 10% of each month that you expected to be qualified, but were not. Oh, and you pay back tax on those months too. So I have to have fortune-telling ability, and know that I’m going to remain self-employed for the next 12 months, lest I end up giving a 10% penalty (and tax) back to the government. Self employed people don’t have this perfect predictive ability; our needs do change.
So, in short:
- My current $2500 deductible health plan doesn’t qualify, but my insurer is kind enough to offer me a $3000 deductible plan for the same monthly fee.
- I don’t save that much tax, because I still have to pay 15.3% self-employment tax on the contributions. The maximum saved is at the top tax bracket of 28%, or $854 per year.
- It’s going to cost me $54/yr maintenance money to have the HSA
- HSA return is poor (1%, or gamble in the bond/stock market)
- Loss of $30-copay presents a significant increase in expense, in my case it would have been $402 this year
- Change of plan within the first year would incur a 10% penalty + tax, if a full contribution is made the first year
- If I actually made 3 doctor visits ($402 extra expense) and also used the full $3000 deductible, then I’d lose $102 by choosing the new plan and HSA. ($854 tax savings – $402 doctor visits – $500 additional deductible – $54 maintenance = -$102).
I suppose an investment adviser would advise that any money saved is worthwhile, but I think there’s too much risk inherent here. Maybe some qualified insurance person will find their way to this link and correct the error of my ways.
NOW, BACK TO ELECTRONICS-RELATED BLOG POSTS!!!!
Since I found your site by doing nest stuff, I thought I would go ahead and comment.
You are absolutely right that HSA might not be a good idea for your situation. But my situation is that I can pick between a $200/month High Deductible plan or $400/month regular plan that pays co-pays. The different in premium is $2400/year. Instead of paying for the plan with the co-pays, I take the difference in premium and put it in my HSA. I actually put a little more than that in it.
My HSA does not have the fees you mention with BoA.
My family(me, wife, and 3 year old son) have never spent more than $1000/year from my HSA over the past two years.
Therefore, I have pretty much pocketed the difference in premium. It all depends on your plan and how much you need to go to the doctor. As it stands now, I have more than $6000 in the HSA so now I have my deductible for any given year and I don’t need to even care. And the difference in my premiums pretty much will cover my deductible moving forward.
Thanks for sharing your analysis, it’s helpful for looking at all the aspects of the HSA. As far as the tax treatment of premiums for sole proprietors go, isn’t it the same for any health insurance, HDHP or otherwise? They go on the 1040.
The contributions themselves aren’t a business expense because they aren’t an expense at all–you’re keeping that money. That is, I think the best way to think of the HSA is as an investment vehicle that has the added advantage of being available for health costs in a pinch. Especially if you can make contributions and continue to pay out of pocket for your health expenses.
The savings on an HSA plan may not be so obvious at first glance. One thing I have noticed about some high deductible plans is that the deductible is not always the same as the total out of pocket expense,& may be an additional cost. Two plans with the same deductible may not have a straight across the board premium to premium comparison, due to these extra costs. The non-HSA plan mentioned above may also have other ways that the total annual exposure is more than the HSA plan, thus making the premium differences make more sense. I am working on a comparison right now where that is true.
For example, one plan I am reviewing keeps the doctor co-pays out of the total out of pocket calculation. So that non-HSA plan may cost more in the end if there are high medical bills in any given year. There is no annual limit to the co-pays, no matter how much the other bills cost. Also, the prescription drug coverage isn’t part of the maximum out of pocket on the non-HSA plan. On the HSA plan I am reviewing, the prescription drugs and office visits all count to the max. out of pocket.
Deductible isn’t always the full story.
To make it even more interesting, two plans I am comparing handle deductible either included in total out of pocket or not. No apples to apples there. Total exposure for one is $500 more per year than the other, just on that one factor. Read carefully!
One thing I am not clear on – can the HSA funds be used toward the deductible, copays or coinsurance? If so, I can’t see how anyone’s fund would ever earn interest – with the maximum contributions to it being less than the deductible in most cases, the entire HSA would go toward paying the deductible every year. If you didn’t have expenses sufficient to pay out your entire deductible, or even to pay out the amount you had in your HSA if permitted, the the insurance you pay premiums for would never pay out, so THAT money would be wasted. I doubt enough interest would be earned or tax money saved would ever outweigh my premium costs. Thank you for your information, it is more clear than any information my insurer or employe has provided to date. I wonder, what is in it for those who are pushing for enrollment?