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 HSAs? 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 Account (HSA) 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 another 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. As of 2020, an individual can contribute $3,550 annually to an HSA and a family can contribute $7,100. HSA contribution amounts don’t change based on your tax bracket, so 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 may be 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).
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 mandated that preventative care must 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 that you can use to pay for your medications and doctor’s visits. Or you might pay up front and log in to your provider’s website to get reimbursed. Either way, save all your receipts, just in case!
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 simply take your HSA contributions as a tax deduction at the end of the year.
Some people choose to use their HSA like an 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 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 $3,550 for 2020. If you file a joint tax return and have a family HDHP, you can contribution $7,100 in 2020. (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, you don’t have until April 15 to make your 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.
That’s why I love HSAs for Millennials who change it up, career-wise. You own your HSA, 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, though. You can also invest the money in your HSA and the value rolls over from year to year. 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. The same can’t be said for similar health savings vehicles, like FSAs.
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 of your HSA. Some HSA plans only invest your money once you’ve reached a minimum, such as $2,000, 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 used my HSA 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 in 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 that of 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, note that to qualify for an HSA, you must enroll in a High Deductible Health Plan. The downside of an HSA and HDHP is right there in the name: they come with high deductibles. The IRS defines “high deductible” as $1,400 or more for an individual or $2,800 for a family for 2020.
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 people 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?
You can maximize your HSA by planning your expenses. 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. Think of an HSA as an account that can help guard you against medical emergencies that may come up along the way. An HSA gives you something to tap in case of an emergency before you have to raid your emergency fund.
And, of course, you can still take advantage of HSA benefits today. 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 means a tax break this year and money available for health care in the future!