As a new employee, you may be confused by all the health insurance terms out there: what are PPOs and HDHPs, and how are they different? What’s going on with this (relatively) new option, the HSA? And which one makes sense for me?
Let’s start with the basics. Preferred Provider Organizations (PPOs) vs. High Deductible Health Plan (HDHPs). If you select your PPO plan, you’ll likely have a smaller deductible with higher premiums but then you’ll pay co-pays for doctor visits and prescriptions. With a HDHP, you’ll have a higher deductible but lower premiums. You’ll also have the ability to choose to contribute to a Health Savings Accounts (HSAs) to help you fund your health care costs and cover prescriptions and doctor’s visits until your deductible kicks in.
You can’t have an HSA and be a part of a PPO. You need to elect the HDHP in order to qualify for an HSA.
What Is an HSA?
A Health Savings Account isn’t its own insurance plan. An HSA is a newer, slightly different option for workers who want to make the most of their healthcare dollars. They were created to help ease the financial burden of rising health care costs.
The money you contribute to your HSA is pre-tax, which reduces your overall tax burden. HSAs allow you to spend money on medical expenses because you have a high-deductible plan. This includes costs not covered by your insurance.
Contributions to an HSA can vary. Currently an individual can contribute $3,300 to an HSA and a family can contribute $6,550. HSA contribution amounts don’t change based on your tax bracket. Anyone can contribute as much or as little to the account as they like.
Anyone can set up an HSA. It’s not something you need to get through your employer (although that is an option as well). To qualify, you need to be under 65 and have health insurance in the form of a High Deductible Health Plan (HDHP) that is your only form of insurance.
How to Use Your HSA
Before setting up an HSA for yourself, check with your provider to make sure your doctor is within network. If you don’t yet have a doctor, it’s easy to check your provider’s website and search for primary care physicians, or other specialized doctors you may need. (For example, if you sign up with Blue Cross Blue Shield for your HDHP, go to bcbs.com to search for doctors in your city.)
The Affordable Care Act has mandated preventative care be covered completely, so you should not have to pay a copay when you visit your doctor for annual wellness exams. But if you visit your doctor for blood work, or to get antibiotics when you’re sick, you will have to pay for your medication. This is where your HSA kicks in!
Depending on your provider, you may be issued a debit card with which to pay for your medications and doctor’s visits, or you pay upfront and login to your provider’s website to get reimbursed. Either way: save all your receipts just in case! You want to make sure you track all your expenses.
You Get a Tax Break for Contributing to An HSA
HSAs are funded with pre-tax dollars. Some employers allow you to deduct your pre-tax HSA contributions directly through your paychecks. If you set up an HSA on your own outside of your employer, you would simply take your HSA contributions as a tax deduction at the end of the year.
Some people choose to use their HSA like another IRA. They save their healthcare receipts in case they decide to withdraw funds from their HSA at some point, but choose not to touch the money in their HSA until retirement. At age 65 you can access the money in your HSA without paying a 10% penalty and you can use the funds for anything, not just healthcare costs. (You do have to pay taxes on the distributions, like you would with an IRA).
The maximum amount that you can contribute to your HSA as a single taxpayer is $3,300 for 2014 and $3,350 for 2015. If you file a joint tax return and have a family HDHP, you can contribution $6,550 for 2014 and $6,650 for 2015. (There is a $1,000 catch up contribution for those over age 55, in case your mom is reading this article). You have to contribute to your HSA during the calendar year unlike an IRA that you have until April 15 of the following year to make prior year contributions.
The Money In Your HSA Is Yours to Keep
Gen Y has earned a reputation for being job-hoppers, but that’s not always a bad thing. A recent Forbes article claimed that staying in a job for more than two years could leave you earning 50% less than your Millennial friends who change jobs frequently.
But changing jobs can cost you in terms of company benefits.Those usually don’t come with you when you switch positions, and that can cost Gen Y in terms of retirement or healthcare.
Which is why I love HSAs for Millennials who change it up, career-wise. You own your Health Savings Account — which means you can take it with you when you leave your employer.
That’s not the only reason I’m a fan of HSAs for Gen Y. You can also invest the money in your HSA and the value rolls over from year to year. The same can’t be said for similar health savings vehicles, like FSAs. (Here’s an article I wrote about the differences between the two). For example: if you contribute $3,000 to your HSA this year but only use $1,000 this year for health care expenses, the remaining $2,000 stays in your account.
You Can Invest the Money in Your HSA
I recommend keeping enough money in the cash portion of your HSA to fund your deductible, but after that, you may want to consider investing a portion or your HSA. Some HSA plans only invest your money once you’ve reached a minimum, such as $2,000 and above, but others allow you to invest immediately. Even if you switch jobs and forget to continue investing in your HSA, that money will continue to accrue and gain in value based on your investments.
And you can use your HSA for any health-related expense (with the exception of over-the-counter medications). You can use it to purchase contacts, prescription glasses, crutches, dental care, lab fees (like for blood tests), and more. (I just used my HSA last year to pay for LASIK eye surgery). Check out the IRS’ Publication 502 for a full list of qualified medical expenses.
If you plan correctly, you can:
- invest money into your HSA;
- use it for already planned health expenses throughout the year, like your annual eye exam;
- and have money left over that isn’t taxed and goes directly into an investment account.
Downsides to Health Savings Accounts
While I enjoy HSAs and use one for my own medical expenses, they’re not without drawbacks and downsides. If you choose to invest the money in your HSA, your money is susceptible to stock market risk. A recession like the one experienced in 2008 can negatively impact your account and leave less money available for increasing medical care costs. This is just like any other investment; they all come with risks.
Additionally, you need to note that HSAs are limited to those with High Deductible Health Plans (HDHPs). To qualify for an HSA, you must enroll in a HDHP. The downside of an HSA and HDHP is right there in the name: they come with high deductibles. An individual HDHP deductible can range from $1,250 to $6,350, which means your out-of-pocket costs are capped at either $1,250 or $6,350 (depending on your plan). Out-of-pocket costs include your deductible, any co-pays from doctors or specialists you see, prescription medications and hospital costs.
For families, the minimum deductible is $2,500 and the maximum is $12,700. The actual amount of your family’s deductible depends on the plan offered, but it can vary between those two amounts. As with an individual deductible, a family’s out-of-pocket costs also include the deductible, co-pays, prescription medications and hospital costs.
This is why you will want to save all your receipts – if you reach your deductible, you will want proof for your insurance company that it is their responsibility to cover the rest of your expenses. Determine whether or not you could pay for any serious medical emergency based on your employer’s HDHP.
These plans can be problematic for low-income individuals, especially those with chronic conditions like diabetes whose complications can make it hard for them to work. High Deductible Health Plans require you to pay the full dollar amount of your medical expenses until your deductible is met, which can put strain on people whose incomes are low or erratic.
Is an HSA Right for You?
HSAs offer a level of flexibility for Millennials that is practically unheard of in other health insurance plans. HDHPs are, by design, intended to encourage people to monitor and evaluate their expenses. You are given a greater variety of doctors from which to choose, but it is up to you to determine if your doctor, who charges more for a certain procedure, is better than another doctor who charges less for that same procedure.
You can maximize your HSA by planning your expenses, and you can also maximize it in terms of your investment future. By investing more money into your HSA right now, you reduce your tax burden and make more money available to your future self, when you inevitably will spend more on medical procedures.
Despite the intentions of the Affordable Care Act, it doesn’t look like medical care will get cheaper in the long term. By investing in an HSA now, you can build up another account to help guard you against medical emergencies that may come up along the way. One of the biggest reasons to take out money from your emergency savings is because of a medical emergency, but an HSA would allow you to tap that for medical expenses before raiding your emergency fund.
And of course, you can still take advantage of the HSA benefits today as well. The biggest of those include a health care account where the funds can grow like other investments and that roll over from year to year. Don’t forget, contributing to your HSA today means a tax break this year and money available for health care in the future!