Articles abound on the pros and cons of high deductible health plans (HDHPs) and if they are the right choice for you and your family. When paired with a Health Savings Account (HSA), the combo is often the right choice. In this article, we’ll examine a particularly cost-effective way to get the most out of an HDHP+HSA setup.
High deductible health plans (HDHPs) let you keep recurring monthly costs low while making sure that major medical events are covered by insurance, even if you will bear some of the medical costs in the event that something happens. If you generally do not need much health care and want to prioritize your monthly cash flow, this is a reasonable option.
"Pairing an HDHP with an HSA lets you set aside pre-tax money"
Pairing an HDHP with an HSA lets you set aside pre-tax money to offset the potential financial hardship of a health insurance bill. Because HSAs can only be used for medical purchases, they can provide some discipline around medical savings beyond what a general rainy day or emergency fund you create on your own can do.
HSA rollover tax rules have interesting implications for your retirement savings.
Funds roll over: Unlike other accounts (such as flexible spending accounts (FSAs)), any unused funds in an HSA roll over to the next year. So you can save freely in any given year without the fear of losing the funds if you don’t use them. Moreover, the restriction that HSA funds must be used for medical expenses no longer apply once you reach age 65. That means any unused funds in your HSA on your 65th birthday become a part of your pre-tax savings, no different from your retirement accounts.
Maximize pre-tax contributions: By contributing to an HSA along with other pre-tax retirement accounts (such as an IRA or 401(k)), you will be able to put away more dollars per year on a pre-tax basis. For example, 2020’s limits are $3,550 for an individual HSA and $19,500 for a 401(k), resulting in a total of $23,050 that can be saved in pre-tax dollars.
Hospital care is among the more expensive medical services we may need one day. So while an HDHP works well when you are healthy and using preventative care, a serious illness or accident needing hospital care can mean large medical bills. If you are saving in an HSA, a hospital stay could mean withdrawing a significant part of your account.
Supplemental hospital insurance (or hospital indemnity insurance) is an extra insurance plan you can purchase that works alongside an existing health plan of any type. A typical hospital indemnity plan will have a monthly premium and offer a cash payout in the event you are hospitalized.
"... [protect] the dollars you’ve saved in your HSA."
Here, the benefit comes from your hospital insurance protecting the dollars you’ve saved in your HSA. Instead of dipping into your HSA and pre-tax savings to pay medical bills, you can use the insurance payout to pay medical bills. Moreover, the insurance payout comes as unrestricted funds, it’s just cash, so you are free to use it however you need.
At Liferaft, we are focused on building simpler, streamlined products that help address surprise events and the associated financial risks you may face. By paying out cash benefits when you need it, our plans prioritize simplicity and flexibility, letting you determine what costs to cover and how.