HSA with Significant Known Medical Expenses

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Topic Author
Theoretical
Posts: 1481
Joined: Tue Aug 19, 2014 10:09 pm

HSA with Significant Known Medical Expenses

Post by Theoretical » Sat Feb 21, 2015 12:46 am

I am currently 29 years old, married, and am transitioning to tax-conscious investments in Index Funds from some mutual funds, dividend stocks and Texas Muni Bonds (truly tax free). This site has been very helpful in that regard.

We will be in the lower portion of the 25% bracket.

My concern relates to the fact that I have some chronic medical conditions that require specialist visits, expensive lab tests, and a medication (generic no less) that costs $350-400/month right now under most insurance. It seems like the logical choice is option 3 below, but I'm not sure with considering the tax consequences.

I have a small $1,000 HSA through my bank I started last year, but didn't fund it further. Fortunately, my wife is very healthy, so it's only my medical expenses that are of concern. We're not planning to have children until a few years from now, so I'm the expensive one here.

My wife's going to be starting a job with the following insurance options in a few months:

Current insurance is a Bronze HSA eligible plan through the exchanges at $480/month. I have not put any more into the HSA this year. I have assets available to dump fill up the HSA immediately.

Door Number 1:

High Deductible with HSA
$148/month premium
Company contributes $1400 annually to your HSA

Wife has a $3300 deductible, with $2000 in coinsurance. I get $6,500+4,000.

Prescription coverage would be 90% after meeting the deductible

Door Number 2:
Mid Deductible with HSA
$272/month premium
No employer contribution

Wife has $1650 deductible/I have a $3275 deductible, same coinsurance

Same prescription coverage

Door Number 3:
Open Access with no HSA
$450/month premium
$500/$1000 deductible, same coinsurance

$25 copay or $50 for a 3 month supply at mail order if it's considered a preferred brand. If it's a "specialty medication," then it's $50 per month.

Beth*
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Re: HSA with Significant Known Medical Expenses

Post by Beth* » Sat Feb 21, 2015 11:00 am

What I did in this situation was set up a spreadsheet and calculate what my out of pocket costs would be on each plan my employer offered. I calculated several different ways: (1) based upon my health expenses for the previous year, (2) based upon the minimum health expenses I could expect, and (3) based upon the possibility of a high cost catastrophic illness. While doing this calculation I assumed that I would be using funds from my HSA to pay for out of pocket expenses and I took into account the tax savings of having the HSA.

I came to the conclusion (and this was based on my options, not yours which are different) that I was better off with the high deductible plan and an HSA if I either had minimal or catastrophic expenses but I was better off with the low deductible non-HSA plan if my expenses matched my expenses of the previous year. I decided I was most interested in insuring myself against high costs associated with a catastrophic illness so I went with the high-deductible HSA plan. In my case, the reason the high deductible plan was better in the case of catastrophic illness is that after I met the deductible everything was covered 100 percent as long as I stayed in network. The network was good so I did not anticipate a need to go out of network. The low deductible plan had a lot of continuing 10 and 20 percent co-pays and the maximum out-of-pocket was higher than with the high deductible plan.

furwut
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Re: HSA with Significant Known Medical Expenses

Post by furwut » Sat Feb 21, 2015 11:09 am

Beth* process is absolutely the way I would go. Since you will have predictable medical expenses you can not assume that a HDHP will be the best choice.

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grabiner
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Re: HSA with Significant Known Medical Expenses

Post by grabiner » Sat Feb 21, 2015 11:10 am

You should always fill up the HSA, assuming that you remain eligible. Your current expenses will use up most of the HSA money, so you will get a 25% tax savings by putting money into the HSA and spending it immediately. And if you don't need the money immediately, it grows tax-free for later medical expenses, so this is as good as a Roth IRA with a subsidy from the IRS on contributions.

To compare plans, work out the day-one cost, what you will pay for the insurance less any tax savings or free money. Then add your estimated costs. For the calculations below, I am assuming that you pay the premium by payroll deduction and thus get a 25% tax savings. (You may also avoid Social Security tax, but I am ignoring that because it's close to a wash after reduced benefits.) I am also assuming that you are eligible for a family HSA, which isn't clear from the terms.
Theoretical wrote:Door Number 1:

High Deductible with HSA
$148/month premium
Company contributes $1400 annually to your HSA

Wife has a $3300 deductible, with $2000 in coinsurance. I get $6,500+4,000. Prescription coverage would be 90% after meeting the deductible
$1776 premium is $1332 after tax. $1400 in the HSA is free money, and you can contribute another $5250 of your own to save $1313 in tax. The day-one cost of this plan is minus $1381. If your medical expenses are $5000, not covered at all by the deductible, the total cost is $3619. If you use the whole $6500 deductible, the total cost is $5119.
Door Number 2:
Mid Deductible with HSA
$272/month premium
No employer contribution

Wife has $1650 deductible/I have a $3275 deductible, same coinsurance, same prescription coverage
$3264 premium is $2448 after tax, and you can contribute $6550 to the HSA for a $1638 tax savings, so the day-one cost is $810. If your medical expenses are $5000, that will cost $3275, and $173 with the 10% co-payment on the rest, for a total of $3448 and an overall cost of $4258. If your medical expenses are $6500, that will cost $3275, and $323 co-payment, for a total of $3598 and an overall cost of $4408.

So this plan is better if you expect to use up the entire deductible of Plan 1, which is possible. Either way, it is close.
Door Number 3:
Open Access with no HSA
$450/month premium
$500/$1000 deductible, same coinsurance.

$25 copay or $50 for a 3 month supply at mail order if it's considered a preferred brand. If it's a "specialty medication," then it's $50 per month.
$5400 premium is $4050 after tax. There is no tax savings unless your employer offers a flexible spending account. If your medical expenses are $5000, you will pay $1000 out of pocket and a $400 co-payment, for a total of $400 and an overall cost of $5450; even if you contribute $2000 to a flexible spending account (to cover these expenses and non-insurable things such as glasses and dental care), the overall cost is $4950.

Plan 3 loses to Plan 2 at almost any level of expenses. Plans 1 and 2 are close in your situation; Plan 2 will cost less if you have any additional unexpected expenses and use up the deductible on Plan 1.

(edited to fix quoting)
Last edited by grabiner on Sat Feb 21, 2015 12:13 pm, edited 1 time in total.
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Userdc
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Re: HSA with Significant Known Medical Expenses

Post by Userdc » Sat Feb 21, 2015 11:12 am

Can you do an FSA with option 3?

If you have predictable medical expenses, a traditional plan with an FSA can be just as tax-efficient as an HDHP with HSA.

Topic Author
Theoretical
Posts: 1481
Joined: Tue Aug 19, 2014 10:09 pm

Re: HSA with Significant Known Medical Expenses

Post by Theoretical » Sat Feb 21, 2015 12:12 pm

Yes, it is a family HSA available
Yes, an FSA is available

My coinsurance maximum each year would be $4000 on any of the plans, with them covering 90% of in network expenses. Fortunately, I don't anticipate $45,000 in medical expenses. But $10-12,000, yes.

This has been extremely helpful to consider, especially with the various tax consequences involved. Thank you so much!

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