Opt-out of employer healthcare?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Opt-out of employer healthcare?

Post by johnanglemen »

If I'm eligible for an employer healthcare plan, am I allowed to opt out of it and purchase my own High Deductible Health Plan (HDHP) so that I can open a health savings account? My employer does not offer a HDHP.
User avatar
tetractys
Posts: 6193
Joined: Sat Mar 17, 2007 3:30 pm
Location: Along the Salish Sea

Re: Opt-out of employer healthcare?

Post by tetractys »

johnanglemen wrote:If I'm eligible for an employer healthcare plan, am I allowed to opt out of it and purchase my own High Deductible Health Plan (HDHP) so that I can open a health savings account? My employer does not offer a HDHP.
Most likely. But I think unlikely you'll get a better deal doing that. First, purchasing your own HDHP could be as or more expensive than your employer's health plan. And second, health savings accounts can have high expenses. Also health insurance deductions are usually pretax. You'll have to shop around and pencil everything out. -- Tet
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

Can you explain what you mean by "Also health insurance deductions are usually pretax"? What is the significance of that here? (I don't mean that rudely.)

In terms of cost, I figure that if I'm able to contribute $3000 to my HSA a year, then I could actually come out ahead. Because I'm in the highest tax bracket, that would save me $1200+ via the tax deduction, and I've seen HDHP premiums that are less than that.
User avatar
ejvyas
Posts: 773
Joined: Sat Apr 30, 2011 12:09 am
Location: Boston, MA

Re: Opt-out of employer healthcare?

Post by ejvyas »

johnanglemen wrote:Can you explain what you mean by "Also health insurance deductions are usually pretax"? What is the significance of that here? (I don't mean that rudely.)

In terms of cost, I figure that if I'm able to contribute $3000 to my HSA a year, then I could actually come out ahead. Because I'm in the highest tax bracket, that would save me $1200+ via the tax deduction, and I've seen HDHP premiums that are less than that.
That means suppose you pay $XXXX for HDHP through employer/yr, you dont pay taxes on those $XXXX. If you purchase outside on your own you will have to itemize and look at IRS Topic 502 to see if you qualify for deduction.

You can definitely opt-out from employer HC plan
bungalow10
Posts: 2311
Joined: Sat Apr 09, 2011 6:28 am
Location: Chicago North Shore

Re: Opt-out of employer healthcare?

Post by bungalow10 »

You will probably save more by paying your premiums pre-tax through your employer, rather than after-tax on your own.
An elephant for a dime is only a good deal if you need an elephant and have a dime.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

My understanding is:

* Contributions to an HSA are tax-deductible in all cases regardless of whether I pay them via payroll deduction or separately.
* If I pay via payroll, I can also avoid payroll taxes (which are smaller)

Is that incorrect? I'm confused about the reference to itemizing deductions.
masteraleph
Posts: 821
Joined: Wed Nov 04, 2009 8:45 am

Re: Opt-out of employer healthcare?

Post by masteraleph »

johnanglemen wrote:My understanding is:

* Contributions to an HSA are tax-deductible in all cases regardless of whether I pay them via payroll deduction or separately.
* If I pay via payroll, I can also avoid payroll taxes (which are smaller)

Is that incorrect? I'm confused about the reference to itemizing deductions.
Let's say that your current (employer provided) insurance is costing you $1000/month in premiums. That money is taken from your paycheck, and is entirely tax free.

Now, let's say you have the option of an outside HDHP, at $700/month in premiums. You figure you'll put in $250/month into the HSA, and at some point maybe stop that if you have substantial savings in there.

The issue here is that the $700 is post tax dollars. In order to pay $700 in post tax dollars, you'll be paying upwards of 30% in taxes, in which case you're actually losing money by going this route, even before the lower coverage and necessity of contributing to an HSA come into the picture (i.e. you might need to make $1050 pretax to have $700 post tax).

In theory, health insurance premiums are deductible after a certain point, but there's a floor before you can itemize for health costs (I think it's now 10% of income; it used to be 7.5%). If you're actually in the highest bracket, then you shouldn't ever hit that, so the premiums will all be post tax.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

Sorry if I'm dense, but I'm still not quite understanding.

Nothing is currently taken out of my paycheck for my employer-provided health insurance. It is paid for by my employer.

I understand that, if I opt to buy a HDHP on my own, I will need to pay the premiums with my own money and will not receive any sort of tax benefit by doing so. However, my understanding is that my contributions to my health savings account WILL be deductible at the federal level.

Now, there are HDHPs available through companies like HealthNet for as low as $63/month (perhaps because I'm young). So if I'm paying 63*12 = $756 a year for that plan, but I'm contributing $3000 to an HSA (and thus getting back 35% * 3000 = $1050 from the federal tax deduction), haven't I in fact come out ahead assuming that I do not incur unexpected medical expenses?
awval999
Posts: 1318
Joined: Fri Apr 08, 2011 10:17 pm

Re: Opt-out of employer healthcare?

Post by awval999 »

johnanglemen wrote:Sorry if I'm dense, but I'm still not quite understanding.

Nothing is currently taken out of my paycheck for my employer-provided health insurance. It is paid for by my employer.

I understand that, if I opt to buy a HDHP on my own, I will need to pay the premiums with my own money and will not receive any sort of tax benefit by doing so. However, my understanding is that my contributions to my health savings account WILL be deductible at the federal level.

Now, there are HDHPs available through companies like HealthNet for as low as $63/month (perhaps because I'm young). So if I'm paying 63*12 = $756 a year for that plan, but I'm contributing $3000 to an HSA (and thus getting back 35% * 3000 = $1050 from the federal tax deduction), haven't I in fact come out ahead assuming that I do not incur unexpected medical expenses?
Yes, your math may be right, but the health care insurance/coverage you are buying with a HDHP is substantially less "good" then the coverage your employer provides. There is a reason no one rejects his/her own employer's coverage and purchases a policy as an individual with post-tax money.

Finally, "assuming that I do not incur unexpected medical expenses?" is so faulty I hope and pray that you look pass the small amount of dollars that you may save and see the forest for the trees.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

Everyone who purchases a high deductible healthcare plan is "assuming that I do not incur unexpected medical expenses".

If I would not have any trouble covering the deductible in the worst-case scenario, why is this such a faulty plan?
awval999
Posts: 1318
Joined: Fri Apr 08, 2011 10:17 pm

Re: Opt-out of employer healthcare?

Post by awval999 »

johnanglemen wrote:Everyone who purchases a high deductible healthcare plan is "assuming that I do not incur unexpected medical expenses".

If I would not have any trouble covering the deductible in the worst-case scenario, why is this such a faulty plan?
It still may not be +EV.

You would have to estimate how often each year you will utilize health care resources. Let's say one 26 year old out of every 50 has health care expenditures > $5000/year. You would have to do a whole calculation, etc, with probability and all that.

Anyway, I am just simply answering your OP. I am a 26 year old male. I do not opt out of my employers coverage to purchase a HDHP in order to stash cash in an HSA. If I was you, I would first max a 401k/403b, Roth IRA (backdoor if neccessary), pay off student loans, then invest in a taxable account. I would not try to nickle and dime, especially if my employer was paying the full cost of the health benefits. Of course, your mileage may vary, but this is my opinion.
tdogz
Posts: 179
Joined: Fri Nov 11, 2011 11:28 am
Location: United States

Re: Opt-out of employer healthcare?

Post by tdogz »

johnanglemen wrote:Everyone who purchases a high deductible healthcare plan is "assuming that I do not incur unexpected medical expenses".

If I would not have any trouble covering the deductible in the worst-case scenario, why is this such a faulty plan?
By your calculations above, you're only saving a couple of hundred dollars a year. What's the difference between your employer's plan and the cheap HDHP? What's the difference in the cost of prescriptions? Does it cover cover ER visits? How about yearly eye exams? Is dental insurance separate or included? I've personally never seen an instance where it is advantageous for an employee to get their own health insurance instead of the company provided plan (especially if the company is paying 100% of premiums).

In my 20s I ended up having over $250k worth of orthopedic surgeries over 6 years that I wasn't expecting. Luckily I was on good insurance and I paid less than 10% of that. What would happen to you if that situation occurs on your HDHP vs your employer plan? Just other angles to think about.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

But it's not just saving a couple hundred dollars a year. It's also establishing a new tax-deferred investment vehicle that effectively acts like a Traditional 401k if I withdraw after age 65. This is pretty useful since I've already maxed out my 401k and IRA limits.
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: Opt-out of employer healthcare?

Post by tfb »

johnanglemen wrote:Everyone who purchases a high deductible healthcare plan is "assuming that I do not incur unexpected medical expenses".

If I would not have any trouble covering the deductible in the worst-case scenario, why is this such a faulty plan?
Everyone who purchases a high deductible healthcare plan is also saving a premium differential between the PPO/HMO plan and the HDHP. The premium savings makes HDHP worthwhile [for some people]. It's very much like increasing your deductible on auto insurance. You take a higher risk for the premium savings. In your case you are paying more for worse coverage, only to get the HSA tax deduction. Not worth it.
Harry Sit has left the forums.
awval999
Posts: 1318
Joined: Fri Apr 08, 2011 10:17 pm

Re: Opt-out of employer healthcare?

Post by awval999 »

tfb wrote: In your case you are paying more for worse coverage, only to get the HSA tax deduction. Not worth it.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

tfb wrote:You take a higher risk for the premium savings. In your case you are paying more for worse coverage, only to get the HSA tax deduction. Not worth it.
But again, it's not only the tax deduction, right? It's also the extra $3000/yr that I can set aside for tax-deferred growth.

It seems like it comes down to this question: Would you set up a special new IRA with contribution limits of $3000/yr (plus get a few hundred dollars back each year) at the risk of having to pay a high deductible at some point in the event of an unexpected medical condition?

I can see how many people would not take that deal, but it seems like a fair question of risk tolerance. I just want to make sure I'm understanding it properly.

Also, how am I paying more? If I'm paying $750 a year and getting a $1000 tax deduction, aren't I actually making money in the end?
awval999
Posts: 1318
Joined: Fri Apr 08, 2011 10:17 pm

Re: Opt-out of employer healthcare?

Post by awval999 »

johnanglemen wrote:
tfb wrote:You take a higher risk for the premium savings. In your case you are paying more for worse coverage, only to get the HSA tax deduction. Not worth it.
But again, it's not only the tax deduction, right? It's also the extra $3000/yr that I can set aside for tax-deferred growth.

It seems like it comes down to this question: Would you set up a special new IRA with contribution limits of $3000/yr (plus get a few hundred dollars back each year) at the risk of having to pay a high deductible at some point in the event of an unexpected medical condition?

I can see how many people would not take that deal, but it seems like a fair question of risk tolerance. I just want to make sure I'm understanding it properly.

Also, how am I paying more? If I'm paying $750 a year and getting a $1000 tax deduction, aren't I actually making money in the end?
But in the end it's still not the same coverage. You are only thinking of catastrophic medical events. What about the yearly physicial, ER visits, medications like antibiotics (birth control if female), etc. Now mind you, I have had health care coverage for two years through my employer and haven't used a single cent of it, but yes, it is a question of risk tolerance. I also have a better one, might as well just go without, you can save even more. Now of course I'm being snarky here, but I will attest, I am a health care professional, I would never do what you're doing. It's simply not worth it. You have no out of pocket costs. You can still save in a taxable account. You won't pay capital gains until you sell years and years down the road.

I would also ask approx. 20 people (close friends, parents, advisors, etc) of this plan. I suspect you will have a unanimous verdict.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

The annual physical is covered by the plan. HDHPs cover preventative care. An ER visit to me is akin to a catastrophe -- I don't think it will happen, I realize it very well could, and I'm financially able to cover the deductible in the event that it does.

I appreciate everyone's viewpoints on this.
covertfantom
Posts: 228
Joined: Thu Feb 02, 2012 6:42 pm

Re: Opt-out of employer healthcare?

Post by covertfantom »

Even if your numbers are correct, that means you will be trading your existing (and superior) plan for $300/year. I think you underestimate how quickly things add up. Unless you're a homebody (and I'm not), unplanned doctor's visits happen and things get x-rayed. Those costs will not likely hit the deductible, but will easily eat up $300 at a time (I've been to the doc once this year and it was easily billed at $300).
Last edited by covertfantom on Mon Apr 30, 2012 4:46 pm, edited 2 times in total.
DSInvestor
Posts: 11647
Joined: Sat Oct 04, 2008 11:42 am

Re: Opt-out of employer healthcare?

Post by DSInvestor »

johnanglemen wrote:The annual physical is covered by the plan. HDHPs cover preventative care. An ER visit to me is akin to a catastrophe -- I don't think it will happen, I realize it very well could, and I'm financially able to cover the deductible in the event that it does.
The medical costs out of pocket don't end with the deductible. Once the deductible has been met, the HDHP will start paying for covered expenses. Some plans may pay 100%, some 80%, some 60%. Say you have an event that costs 20K. You may still be on the hook for 20-40% of the remaining 17K. Take a look at the coinsurance for the HDHP and your employer sponsored plan.
Wiki
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: Opt-out of employer healthcare?

Post by G-Money »

Talk to your employer. Your HDHP premiums, especially if medically underwritten, will likely be lower than the premium for your group health plan. Tell your employer that in an effort to save yourself and the employer money, you want to opt out of the group plan and get your own HDHP. Ask if the employer will reimburse you for your premiums, as well as some (up to the total group plan premium) of your HSA contributions.

The employer's reimbursement of your health insurance premiums should be tax deductible. See http://www.irs.gov/pub/irs-drop/rr-61-146.pdf. I believe I have seen that your contributions to your own individually-held HSA would also be tax deductible (although you won't reduce your FICA contributions).

So, for example (and using round numbers), if your premiums under the Group Plan total $12,000/year, and your premiums for the HDHP are $4,000/year, ask if your employer will reimburse you for the $4,000 in premiums, and give you the $3,000 for your HSA. I don't think you'd pay federal income tax on either the $4,000 in premium reimbursement or the $3,000 you put in your HSA. Your benefit would be any amount of the $3,000 HSA savings that you do not use. In this example, your employer would save the difference of $12,000 - $4,000 - $3,000 = $5,000. Everybody wins (unless you spend more than you saved in your HSA).
Don't assume I know what I'm talking about.
mamster
Posts: 850
Joined: Tue Jan 11, 2011 12:05 pm

Re: Opt-out of employer healthcare?

Post by mamster »

This is a great thread.

The reason it's almost never a good reason to turn down employer health insurance in favor of a private plan goes beyond taxes and deductibles. It's because the employer plan gives you an opportunity to buy something you can't buy individually: membership in a risk group composed of mostly healthy people. All individual health insurance (including HDHPs) has a severe adverse selection problem: despite the insurance company's best efforts, people who think they're going to need it are more likely to buy it. That's much less the case when a company corrals a whole bunch of employees, healthy and otherwise, into a group and insures them all.

In other words, opting out of employer health insurance is, in most cases, sort of like turning down an employer match because you don't like the 401(k) options. The financial benefit of lower group insurance rates/the 401(k) match is so compelling, it hardly ever makes sense to turn it down.

Self-insurance, when you can swing it, is usually the cheapest insurance. In this case, it's usually not.
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: Opt-out of employer healthcare?

Post by G-Money »

mamster wrote:This is a great thread.

The reason it's almost never a good reason to turn down employer health insurance in favor of a private plan goes beyond taxes and deductibles. It's because the employer plan gives you an opportunity to buy something you can't buy individually: membership in a risk group composed of mostly healthy people. All individual health insurance (including HDHPs) has a severe adverse selection problem: despite the insurance company's best efforts, people who think they're going to need it are more likely to buy it. That's much less the case when a company corrals a whole bunch of employees, healthy and otherwise, into a group and insures them all.

In other words, opting out of employer health insurance is, in most cases, sort of like turning down an employer match because you don't like the 401(k) options. The financial benefit of lower group insurance rates/the 401(k) match is so compelling, it hardly ever makes sense to turn it down.

Self-insurance, when you can swing it, is usually the cheapest insurance. In this case, it's usually not.
I think your analysis is probably true with many/most guaranteed-issue individual plans, but not for medically underwritten individual plans. Obviously people should get real quotes for real plans for which they are eligible before making a decision.
Don't assume I know what I'm talking about.
clevername
Posts: 292
Joined: Sun Jul 10, 2011 7:13 pm
Location: FL

Re: Opt-out of employer healthcare?

Post by clevername »

There was a thread a week ago about how to avoid medical bankruptcy. The OP mentioned that his neighbor had a good job that provided his health care. The neighbor then contracted cancer, began treatment, and got fired/replaced a few months later because he couldn't work and lost his health care. Sad, but not an unreasonable move on his employer's part.

Personally, I like my individual HDHP policy. I'm an otherwise healthy 20 something though and my premiums are about $800/yr. If I do actually use my insurance it means there is an excellent chance I would be fired imminently anyway (I probably can't work with cancer, or after getting hit by a bus, or whatever). Going with the employer plan might save a few bucks, but the peace of mind knowing I have emergency health care coverage independent from my employment is worth a lot. As always, your mileage may vary.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

What stops an employee from opting out of their employer health care plan on the last day of the year, entering into an HDHP to fund an HSA for the year, and then rejoining the employer group plan for the following year?
awval999
Posts: 1318
Joined: Fri Apr 08, 2011 10:17 pm

Re: Opt-out of employer healthcare?

Post by awval999 »

clevername wrote:There was a thread a week ago about how to avoid medical bankruptcy. The OP mentioned that his neighbor had a good job that provided his health care. The neighbor then contracted cancer, began treatment, and got fired/replaced a few months later because he couldn't work and lost his health care. Sad, but not an unreasonable move on his employer's part.

Personally, I like my individual HDHP policy. I'm an otherwise healthy 20 something though and my premiums are about $800/yr. If I do actually use my insurance it means there is an excellent chance I would be fired imminently anyway (I probably can't work with cancer, or after getting hit by a bus, or whatever). Going with the employer plan might save a few bucks, but the peace of mind knowing I have emergency health care coverage independent from my employment is worth a lot. As always, your mileage may vary.
I'm sorry. I call have to call bullshit on this. This just doesn't happen in America.
http://www.dol.gov/dol/topic/health-plans/cobra.htm
http://www.dol.gov/whd/fmla/

An employer just doesn't fire employees with cancer. The job is protected by FMLA, even then, if the person cannot return to work after FMLA, COBRA allows the the person to continue paying the premiums for a year or so. Most companies won't risk the media storm by firing someone with cancer. Anyway, I know you were just being proactive, but we do have a safety net for these types of things. Obviously, long-term disability insurance, a large emergency fund, life-insurance, is all necessary but we don't live in a country where we fire employees with cancer and cut off their health insurance.
awval999
Posts: 1318
Joined: Fri Apr 08, 2011 10:17 pm

Re: Opt-out of employer healthcare?

Post by awval999 »

johnanglemen wrote:What stops an employee from opting out of their employer health care plan on the last day of the year, entering into an HDHP to fund an HSA for the year, and then rejoining the employer group plan for the following year?
The open-enrollment period only occurs once a year (usually November) and only lasts two weeks or so.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

awval999 wrote:
johnanglemen wrote:What stops an employee from opting out of their employer health care plan on the last day of the year, entering into an HDHP to fund an HSA for the year, and then rejoining the employer group plan for the following year?
The open-enrollment period only occurs once a year (usually November) and only lasts two weeks or so.
Yeah but still, couldn't you terminate the employer coverage at the beginning of the enrollment, enroll in the HDHP, fund the HSA and then sign up for employer coverage for the following year by the end of the enrollment period?
User avatar
G-Money
Posts: 2867
Joined: Sun Dec 09, 2007 6:12 am

Re: Opt-out of employer healthcare?

Post by G-Money »

awval999 wrote:
clevername wrote:There was a thread a week ago about how to avoid medical bankruptcy. The OP mentioned that his neighbor had a good job that provided his health care. The neighbor then contracted cancer, began treatment, and got fired/replaced a few months later because he couldn't work and lost his health care. Sad, but not an unreasonable move on his employer's part.

Personally, I like my individual HDHP policy. I'm an otherwise healthy 20 something though and my premiums are about $800/yr. If I do actually use my insurance it means there is an excellent chance I would be fired imminently anyway (I probably can't work with cancer, or after getting hit by a bus, or whatever). Going with the employer plan might save a few bucks, but the peace of mind knowing I have emergency health care coverage independent from my employment is worth a lot. As always, your mileage may vary.
I'm sorry. I call have to call bullshit on this. This just doesn't happen in America.
http://www.dol.gov/dol/topic/health-plans/cobra.htm
http://www.dol.gov/whd/fmla/

An employer just doesn't fire employees with cancer. The job is protected by FMLA, even then, if the person cannot return to work after FMLA, COBRA allows the the person to continue paying the premiums for a year or so. Most companies won't risk the media storm by firing someone with cancer. Anyway, I know you were just being proactive, but we do have a safety net for these types of things. Obviously, long-term disability insurance, a large emergency fund, life-insurance, is all necessary but we don't live in a country where we fire employees with cancer and cut off their health insurance.
Except FMLA generally only applies to employers with 50+ employees. And COBRA will only be available for a year or two after termination. And not every termination, even for cancer, creates a media firestorm.
Don't assume I know what I'm talking about.
cheesepep
Posts: 1287
Joined: Wed Feb 17, 2010 9:58 pm

Re: Opt-out of employer healthcare?

Post by cheesepep »

Sorry for the tangent, but this is related. For someone who is self-employed (contractor) and young, is purchasing a HDHP the best choice? What other choices are there?
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: Opt-out of employer healthcare?

Post by tfb »

johnanglemen wrote:Yeah but still, couldn't you terminate the employer coverage at the beginning of the enrollment, enroll in the HDHP, fund the HSA and then sign up for employer coverage for the following year by the end of the enrollment period?
That would be too clever. No, it's not possible. Your decision during open enrollment doesn't take effect until next year. If you don't have HDHP coverage for a single day, you can't fund HSA.
Harry Sit has left the forums.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

tfb wrote:
johnanglemen wrote:Yeah but still, couldn't you terminate the employer coverage at the beginning of the enrollment, enroll in the HDHP, fund the HSA and then sign up for employer coverage for the following year by the end of the enrollment period?
That would be too clever. No, it's not possible. Your decision during open enrollment doesn't take effect until next year. If you don't have HDHP coverage for a single day, you can't fund HSA.
But I'm not signing up for the HDHP plan through my employer (and thus through the open enrollment period). My employer doesn't even offer it, which is what started this whole train of thought in the first place. So what stops me from signing up for the HDHP on my own at the end of the year and having it take effect immediately, and briefly?
User avatar
kramer
Posts: 1952
Joined: Wed Feb 21, 2007 1:28 am
Location: World Traveler

Re: Opt-out of employer healthcare?

Post by kramer »

mamster wrote:This is a great thread.

The reason it's almost never a good reason to turn down employer health insurance in favor of a private plan goes beyond taxes and deductibles. It's because the employer plan gives you an opportunity to buy something you can't buy individually: membership in a risk group composed of mostly healthy people. All individual health insurance (including HDHPs) has a severe adverse selection problem: despite the insurance company's best efforts, people who think they're going to need it are more likely to buy it. That's much less the case when a company corrals a whole bunch of employees, healthy and otherwise, into a group and insures them all.

In other words, opting out of employer health insurance is, in most cases, sort of like turning down an employer match because you don't like the 401(k) options. The financial benefit of lower group insurance rates/the 401(k) match is so compelling, it hardly ever makes sense to turn it down.

Self-insurance, when you can swing it, is usually the cheapest insurance. In this case, it's usually not.
I believe your analysis is flawed here on a number of levels.

Those buying individual insurance plans must go underwriting (in most states). Those in the group plan at work do not. This is the primary reason why individual plans are typically cheaper than group plans if you can pass an underwriting without problems. Also, the work group plan charges the same price for everyone, regardless of age. This means that if you are young and healthy you can typically get *much* cheaper insurance on the individual market since health care usage increases dramatically with age. The older you are, the less likely you are able to get cheaper insurance on the open market via an individual plan which are rated by age (in most states).
xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: Opt-out of employer healthcare?

Post by xerty24 »

If you want an extra $3k of retirement space so badly, start a do-nothing company, pay yourself a salary (and payroll tax, and Medicare tax), open a new 401k/SIMPLE plan, and contribute to that.

Turning down free company health insurance for your own personally-funded, crappy HDHP is taking a huge risk. It's a bad idea when you're young and healthy, and it may turn out to be a terrible idea if you get sick, can't work, and can't by health insurance on your own at any price.
Last edited by xerty24 on Mon Apr 30, 2012 10:20 pm, edited 1 time in total.
No excuses, no regrets.
User avatar
tfb
Posts: 8397
Joined: Mon Feb 19, 2007 4:46 pm

Re: Opt-out of employer healthcare?

Post by tfb »

johnanglemen wrote:But I'm not signing up for the HDHP plan through my employer (and thus through the open enrollment period). My employer doesn't even offer it, which is what started this whole train of thought in the first place. So what stops me from signing up for the HDHP on my own at the end of the year and having it take effect immediately, and briefly?
It's time to read that Publication 969. Funding HSA requires that you have no other coverage except the HDHP. During open enrollment presumably you still have employer's coverage for the current year. Come next year you will have employer's coverage again. You don't have a single day of eligibility. Even if you find a brief period of eligibility, funding is a month-by-month calculation. One month of eligibility = 1/12 of maximum contribution. There's a "last month rule" but it requires you to maintain eligibility for the following 12 months.
Harry Sit has left the forums.
xerty24
Posts: 4827
Joined: Tue May 15, 2007 3:43 pm

Re: Opt-out of employer healthcare?

Post by xerty24 »

The only good reason I can think of for opting out of a company-paid health insurance is that your spouse works for a company with even better insurance (and can cover you at a modest cost and/or your company pays you extra for not taking theirs).
No excuses, no regrets.
stan1
Posts: 14235
Joined: Mon Oct 08, 2007 4:35 pm

Re: Opt-out of employer healthcare?

Post by stan1 »

As someone else pointed out, lobby your company to offer an HDHP option.

If that doesn't work, just buy equities in a taxable account if you've maxed out your tax advantaged accounts.
There are advantages to a taxable account. You defer capital gains until the securities are sold. Today there is preferential treatment for capital gains under the tax law (may not always be true). Your heirs get a stepped up basis if a taxable account is carried into your estate, and you can donate appreciated securities to charity without paying capital gains tax.

Yes you might have to pay some taxes on the dividends, but even after years of purchases in a taxable account the annual tax paid on dividends is going to be less than the cost of buying an individual HDHP insurance policy you don't need. I can't think of many situations where spending money to save on taxes is a good ROI. Would you buy a more expensive house in order to get a bigger mortgage deduction? Do you donate more to charity so that you'll get a bigger tax deduction?
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

stan1 wrote:As someone else pointed out, lobby your company to offer an HDHP option.

If that doesn't work, just buy equities in a taxable account if you've maxed out your tax advantaged accounts.
There are advantages to a taxable account. You defer capital gains until the securities are sold. Today there is preferential treatment for capital gains under the tax law (may not always be true). Your heirs get a stepped up basis if a taxable account is carried into your estate, and you can donate appreciated securities to charity without paying capital gains tax.

Yes you might have to pay some taxes on the dividends, but even after years of purchases in a taxable account the annual tax paid on dividends is going to be less than the cost of buying an individual HDHP insurance policy you don't need. I can't think of many situations where spending money to save on taxes is a good ROI. Would you buy a more expensive house in order to get a bigger mortgage deduction? Do you donate more to charity so that you'll get a bigger tax deduction?
People keep throwing out generalities without responding to the specific numbers I threw out.

As noted above, I can not only cover the low cost of the premiums with the tax deduction I get by contributing to the HSA, but I in fact exceed it -- meaning I MAKE money from purchasing the plan over sticking to the employer plan. That's in addition to the tax-free growth of the investments in the HSA.
SobeCane
Posts: 283
Joined: Mon Oct 25, 2010 11:13 am

Re: Opt-out of employer healthcare?

Post by SobeCane »

John-

This thread hit home because I did the exact same thing last year. I had already maxed out my 401(k) and IRA and wanted additional tax preferenced space so I opted out of the Employer provided PPO and was able to find a cheap HDHP because of my young age and good health. Thus, I was able to put $3,050 in an HSA. During the year I only had my annual physical and did not incur any medical expenses. (If I did, I would have paid them out of pocket and let the HSA accumulate forever) In the meantime, I recommended an HDHP plan to my employer for the next open enrollment but nothing changed.

Even though everything worked out well, I think I am going to just purchase the employer provided PPO which is much better than my HDHP and stick the extra money that would have gone into my HSA into my taxable investments. I think I was just being hard headed trying to get more tax preferenced space and have to realize that taxable index funds are not the worst thing. This will also simplify my investing because the HSA investing options are very lousy and with high fees.
bluemarlin08
Posts: 1561
Joined: Wed Aug 29, 2007 12:18 pm

Re: Opt-out of employer healthcare?

Post by bluemarlin08 »

Kramer is spot on. Individual plans must be underwritten and you are part of thousands of policyholders. Group plans take everyone, regardless of health.
User avatar
steadyeddy
Posts: 771
Joined: Tue Mar 31, 2009 5:01 pm
Location: The Alps of the Midwest

Re: Opt-out of employer healthcare?

Post by steadyeddy »

johnanglemen wrote:
stan1 wrote:As someone else pointed out, lobby your company to offer an HDHP option.

If that doesn't work, just buy equities in a taxable account if you've maxed out your tax advantaged accounts.
There are advantages to a taxable account. You defer capital gains until the securities are sold. Today there is preferential treatment for capital gains under the tax law (may not always be true). Your heirs get a stepped up basis if a taxable account is carried into your estate, and you can donate appreciated securities to charity without paying capital gains tax.

Yes you might have to pay some taxes on the dividends, but even after years of purchases in a taxable account the annual tax paid on dividends is going to be less than the cost of buying an individual HDHP insurance policy you don't need. I can't think of many situations where spending money to save on taxes is a good ROI. Would you buy a more expensive house in order to get a bigger mortgage deduction? Do you donate more to charity so that you'll get a bigger tax deduction?
People keep throwing out generalities without responding to the specific numbers I threw out.

As noted above, I can not only cover the low cost of the premiums with the tax deduction I get by contributing to the HSA, but I in fact exceed it -- meaning I MAKE money from purchasing the plan over sticking to the employer plan. That's in addition to the tax-free growth of the investments in the HSA.

I think you're assuming that you'll never pay tax on the HSA savings which is not my understanding. Paying ~$1000 per year in premiums for $3000 in tax advantaged space is a horrible deal, is it not?
2wolves
Posts: 158
Joined: Sun Apr 10, 2011 11:57 am

Re: Opt-out of employer healthcare?

Post by 2wolves »

bluemarlin08 wrote:Kramer is spot on. Individual plans must be underwritten and you are part of thousands of policyholders. Group plans take everyone, regardless of health.
But the group plan here is free. Unless we have a 1000 year time horizon, the expected return over the free option is likely negative.
Skiffy
Posts: 232
Joined: Tue Oct 30, 2007 2:13 pm

Re: Opt-out of employer healthcare?

Post by Skiffy »

You're forgetting that when you have a medical expenses, your large group plan proably has discounts with the provider. So the few bucks you're saving in a HSA will be nothing compared to one event--. Go and price out any medical procedure, it is a lot more than you might guess, or save in taxes.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

steadyeddy wrote:
johnanglemen wrote:
stan1 wrote:As someone else pointed out, lobby your company to offer an HDHP option.

If that doesn't work, just buy equities in a taxable account if you've maxed out your tax advantaged accounts.
There are advantages to a taxable account. You defer capital gains until the securities are sold. Today there is preferential treatment for capital gains under the tax law (may not always be true). Your heirs get a stepped up basis if a taxable account is carried into your estate, and you can donate appreciated securities to charity without paying capital gains tax.

Yes you might have to pay some taxes on the dividends, but even after years of purchases in a taxable account the annual tax paid on dividends is going to be less than the cost of buying an individual HDHP insurance policy you don't need. I can't think of many situations where spending money to save on taxes is a good ROI. Would you buy a more expensive house in order to get a bigger mortgage deduction? Do you donate more to charity so that you'll get a bigger tax deduction?
People keep throwing out generalities without responding to the specific numbers I threw out.

As noted above, I can not only cover the low cost of the premiums with the tax deduction I get by contributing to the HSA, but I in fact exceed it -- meaning I MAKE money from purchasing the plan over sticking to the employer plan. That's in addition to the tax-free growth of the investments in the HSA.

I think you're assuming that you'll never pay tax on the HSA savings which is not my understanding. Paying ~$1000 per year in premiums for $3000 in tax advantaged space is a horrible deal, is it not?
No. The contribution to the HSA is tax deductible. At my income rate, if I put $3000 into my HSA, I save over $1000 on taxes. That outweighs the cost of the premium. Can you explain why that's a horrible deal?
covertfantom
Posts: 228
Joined: Thu Feb 02, 2012 6:42 pm

Re: Opt-out of employer healthcare?

Post by covertfantom »

You seem pretty set on the idea that you won't use your health care plan between now and whenever. That may be true... and it might not be (that's why it's call insurance.) All of your numbers explicitly exclude you from ever getting sick, breaking a bone, or whatever... and you seem content to bet on it. So you save $300 after paying $700 for your premium. I'm on an HDHP plan (at the age of 27, but I actually go and play hockey twice a week and hike/backpack at least once a month). The cost of seeing a doctor in California because I tweaked something + X-rays was $165 out of pocket. While it turns out nothing was wrong, my costs would have only gone up from there if I had a real problem. That was on a good HDHP too...

I wish you well in your little bubble.
User avatar
steadyeddy
Posts: 771
Joined: Tue Mar 31, 2009 5:01 pm
Location: The Alps of the Midwest

Re: Opt-out of employer healthcare?

Post by steadyeddy »

johnanglemen wrote:
steadyeddy wrote:
johnanglemen wrote:
stan1 wrote:As someone else pointed out, lobby your company to offer an HDHP option.

If that doesn't work, just buy equities in a taxable account if you've maxed out your tax advantaged accounts.
There are advantages to a taxable account. You defer capital gains until the securities are sold. Today there is preferential treatment for capital gains under the tax law (may not always be true). Your heirs get a stepped up basis if a taxable account is carried into your estate, and you can donate appreciated securities to charity without paying capital gains tax.

Yes you might have to pay some taxes on the dividends, but even after years of purchases in a taxable account the annual tax paid on dividends is going to be less than the cost of buying an individual HDHP insurance policy you don't need. I can't think of many situations where spending money to save on taxes is a good ROI. Would you buy a more expensive house in order to get a bigger mortgage deduction? Do you donate more to charity so that you'll get a bigger tax deduction?
People keep throwing out generalities without responding to the specific numbers I threw out.

As noted above, I can not only cover the low cost of the premiums with the tax deduction I get by contributing to the HSA, but I in fact exceed it -- meaning I MAKE money from purchasing the plan over sticking to the employer plan. That's in addition to the tax-free growth of the investments in the HSA.

I think you're assuming that you'll never pay tax on the HSA savings which is not my understanding. Paying ~$1000 per year in premiums for $3000 in tax advantaged space is a horrible deal, is it not?
No. The contribution to the HSA is tax deductible. At my income rate, if I put $3000 into my HSA, I save over $1000 on taxes. That outweighs the cost of the premium. Can you explain why that's a horrible deal?

Tax deferred, not tax free.
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

steadyeddy wrote:
johnanglemen wrote:
steadyeddy wrote:
johnanglemen wrote:
stan1 wrote:As someone else pointed out, lobby your company to offer an HDHP option.

If that doesn't work, just buy equities in a taxable account if you've maxed out your tax advantaged accounts.
There are advantages to a taxable account. You defer capital gains until the securities are sold. Today there is preferential treatment for capital gains under the tax law (may not always be true). Your heirs get a stepped up basis if a taxable account is carried into your estate, and you can donate appreciated securities to charity without paying capital gains tax.

Yes you might have to pay some taxes on the dividends, but even after years of purchases in a taxable account the annual tax paid on dividends is going to be less than the cost of buying an individual HDHP insurance policy you don't need. I can't think of many situations where spending money to save on taxes is a good ROI. Would you buy a more expensive house in order to get a bigger mortgage deduction? Do you donate more to charity so that you'll get a bigger tax deduction?
People keep throwing out generalities without responding to the specific numbers I threw out.

As noted above, I can not only cover the low cost of the premiums with the tax deduction I get by contributing to the HSA, but I in fact exceed it -- meaning I MAKE money from purchasing the plan over sticking to the employer plan. That's in addition to the tax-free growth of the investments in the HSA.

I think you're assuming that you'll never pay tax on the HSA savings which is not my understanding. Paying ~$1000 per year in premiums for $3000 in tax advantaged space is a horrible deal, is it not?
No. The contribution to the HSA is tax deductible. At my income rate, if I put $3000 into my HSA, I save over $1000 on taxes. That outweighs the cost of the premium. Can you explain why that's a horrible deal?

Tax deferred, not tax free.
Wrong. Contributions to HSAs are tax deductible, not tax deferred. You're thinking of the investment growth, which is not what I'm referring to.
User avatar
steadyeddy
Posts: 771
Joined: Tue Mar 31, 2009 5:01 pm
Location: The Alps of the Midwest

Re: Opt-out of employer healthcare?

Post by steadyeddy »

johnanglemen wrote:
steadyeddy wrote: Tax deferred, not tax free.
Wrong. Contributions to HSAs are tax deductible, not tax deferred. You're thinking of the investment growth, which is not what I'm referring to.

Perhaps I'm mistaken about the tax code surrounding HSA's, but you said yourself earlier in the thread that you are trying to augment your retirement savings and that the HSA would mimic a traditional IRA contribution. Withdrawals from traditional IRA's are taxed, are HSA withdrawals different?
Topic Author
johnanglemen
Posts: 713
Joined: Thu Oct 01, 2009 1:00 pm

Re: Opt-out of employer healthcare?

Post by johnanglemen »

steadyeddy wrote:
johnanglemen wrote:
steadyeddy wrote: Tax deferred, not tax free.
Wrong. Contributions to HSAs are tax deductible, not tax deferred. You're thinking of the investment growth, which is not what I'm referring to.

Perhaps I'm mistaken about the tax code surrounding HSA's, but you said yourself earlier in the thread that you are trying to augment your retirement savings and that the HSA would mimic a traditional IRA contribution. Withdrawals from traditional IRA's are taxed, are HSA withdrawals different?
There are two different tax benefits. The initial contribution to the HSA is tax-deductible, and that outweighs the cost of the premiums. Separately, the growth within the HSA is tax-deferred (if used for non-medical expenses) or tax-free (if used for medical expenses).
tdogz
Posts: 179
Joined: Fri Nov 11, 2011 11:28 am
Location: United States

Re: Opt-out of employer healthcare?

Post by tdogz »

johnanglemen wrote:There are two different tax benefits. The initial contribution to the HSA is tax-deductible, and that outweighs the cost of the premiums. Separately, the growth within the HSA is tax-deferred (if used for non-medical expenses) or tax-free (if used for medical expenses).
This rule also applies to your contributions, not only the growth. So if you reach age 65, any money you take out for non-medical expenses won't be subject to the 20% penalty, but is taxed as regular income. If your medical expenses are small in retirement, and you withdrawal from your HSA to cover other costs, you could easily end up paying almost as much (or more) in taxes during retirement than the $300/yr you would be saving now.
Post Reply