Some companies offer only a high deductible health plan these days. Many other companies still offer both a high deductible health plan and at least one low-deductible traditional health plan. When the employee’s share of the health plan premium is so much lower on the high deductible plan, healthy employees are better off choosing the high deductible plan.
For example, I found on the web a large public sector employer offers these family plans to its employees:
| Traditional Plan | High Deductible Plan | |
|---|---|---|
| Annual premium | $2,604 | $972 |
| Deductible | $500 | $3,000 |
| Co-insurance after deductible | 10% | 10% |
| Out of Pocket Limit | $3,000 | $5,000 |
| Employer contribution to HSA | None | $1,500 |
If you choose the high deductible plan, you pay $1,600 less in your share of the premium, and you get another $1,500 from the employer in your HSA. The $3,100 difference covers the difference in the deductible. It would be a no brainer for most employees to choose the high deductible plan.
What if the employee’s shares of the premium are close?
A friend’s private sector employer offers these two family plans:
| Traditional Plan | High Deductible Plan | |
|---|---|---|
| Annual Premium | $4,000 | $3,350 |
| Deductible | $600 | $2,600 |
| Co-insurance after deductible | 10% | 10% |
| Out of Pocket Limit | $5,000 | $6,000 |
| Employer contribution to HSA | None | $900 |
In this case if you choose the high deductible plan you save only $650 a year in premiums (pre-tax) and you get $900 from the employer in the HSA but your deductible will be $2,000 higher. If you spend close to the high deductible on health care, which plan is better?
Your tax rates are also a factor. The premiums deducted from your paychecks are pre-tax. The deductible and co-pays you pay under a traditional plan can be covered by contributing pre-tax money to a health care Flexible Spending Account (FSA). Your contributions to the HSA are tax deductible.
I created a calculator to help with the math.
The cells in blue are assumptions. You can change them to numbers specific to your plans. It calculates the bottom-line after-tax cost to you when everything is taken into consideration.
Using the the numbers from my friend’s plan and assuming the cost of my friend’s health care services comes out to $2,000 a year, you see if the employee does not contribute any extra money to the HSA, the total after-tax cost to the employee is about the same between the low deductible plan and the high deductible plan ($3,008 vs $3,244). However, if the employee takes full advantage of the HSA, the total after-tax cost drops to 55% that of the traditional plan. In this case 100% the savings from the high deductible plan comes from the tax savings on the HSA contributions!
From the employer and insurance company’s point of view, they have nothing to gain or lose from how much deduction you take on your taxes. That’s between you and the IRS. Therefore they don’t necessarily consider the tax savings on the HSA contributions when they set the premiums and deductibles to make it break even on average between the high deductible plan and the low deductible plan. The HSA tax savings are yours to keep.
If you choose a high deductible plan, contribute the maximum to the HSA, even if you don’t expect to spend that much on health care now. That’s where you get the savings from a high deductible plan. The remaining money can be used for medical expenses in the future. This also means when a high deductible plan isn’t HSA-eligible (see Not All High Deductible Plans Are HSA Eligible), you are missing a large part, possibly 100%, of the savings from choosing a high deductible plan.
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Lisa says
Hello Harry,
This is a good analysis. However, I grow weary of seeing the words in these types of analyses that “healthy” people should choose a high deductible plan. As a very wise physician once said to me, “You’re always healthy until you’re not.” Truer words never spoken! One never knows when the aforementioned “not” will happen. All it takes is a bicycling accident, an out of the blue cancer diagnosis or stumbling in a dark stairwell (all three of these examples have applied to members of my family) and suddenly you’re at the out of pocket limit.
I suppose my point is that one should choose the high deductible plan if one can live with the risks, not necessarily because one is healthy, as that can unfortunately change in the blink of an eye.
I enjoy your blog and related emails very much. Please keep up the good work.
louis c says
You’re right that one’s health can change.
But if you or your family members have chronic conditions leading to predictably high medical expenses year after year, then you can probably rule out the high deductible option.
The flip side obviously is that if you normally don’t spend much on health care, and you don’t reasonably expect to do so in the future, then the high deductible plan is probably a good bet, especially if you have several years to spread out the risk and to build up your HSA balance.
Yes, it’s all about risk management, that’s what insurance is for.
Harry Sit says
The good thing is you are not locked in forever. If you choose wrong, you are only wrong for one year. You save in the other years. Also, the out of pocket maximum limits your down side. Re-running the spreadsheet at the out of pocket maximum for both examples shows the high deductible plan still wins.
Lisa says
All good points. I agree that one should always “do the math” before choosing and I appreciate that you, Harry, have provided such a nice tool to do so.
Vincent says
It is not always true that families with high medical cost will pay more in a HDHP. Often, the HDHP option has a lower overall cost regardless of your medical cost.
Take your first example for a family that has a $100k medical cost and OOP is hit.
HDHP cost = OOP + annual premium – employer HSA contribution = $5000+$972-$1500 = $4472
Traditional = OOP + annual premium = $3000+$2604 = $5604
Even with a $100k medical cost, the HDHP wins.
In addition, if you have traditional, your flex spending max is lower than the $3000 deductible. While for the HDHP, your $5000 deductible is lower than the HSA’s family max limit.
louis c says
How does an employee contribution save payroll taxes? I have always made deposits into my HSA and then taken the deduction. Is there a way to do it that will be pre-payroll?
Steve M says
“A pre-tax contribution is one made by your employer, either as part of your benefits plan, or as a deduction from your paycheck which you directed to your HSA. In either case, the money comes from your employer prior to payroll taxes (such as FICA and FUTA) and Federal income tax withholding being applied.”
https://support.tangohealth.com/hc/en-us/articles/204315800-Who-is-Eligible-to-Make-Pre-Tax-and-Post-Tax-HSA-Contributions-
Seems in keeping with what other sources also report.
Steve M says
IRS says:
“The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act.”
https://www.irs.gov/irb/2004-02_IRB/ar09.html
So this is different than pretax deferrals for traditional 401(k)s, which are not taxed as income but are subject to payroll taxes (FICA/FUTA).
http://classroom.synonym.com/pay-fica-401k-contributions-20073.html
louis c says
Well, looks like my own ignorance cost me a few percent on my HSA contributions. Time to contact the payroll folks to set up a pre-tax HSA contribution schedule.
Lynne says
I think it’s well worth the risk as long as you have enough of a financial cushion in case in one particular year you might max out your deductible + out of pocket costs (because as Lisa says “You’re always healthy until you’re not”).
In my case, I don’t spend much on healthcare and would have benefited enormously over many (healthy!) years from saving/investing in an HSA if our company had offered a high deductible plan earlier.
Now we’re one of those companies that only offers a high deductible health plan, so no calculations to do apart from being sure to max out my HSA. (And I’m amazed at how few of my colleagues understand the benefits of using an HSA as an investment account, but that’s another topic!)
Lisa says
Yes, Lynne, I too am amazed by how many of my colleagues do not fully utilize the HSA nor understand how it can be part of one’s overall retirement savings strategy.
Leigh says
It’s so key to do the math in these scenarios. Even with pretty reasonable medical usage some years, the high-deductible plan has often come out ahead for me, in no small part due to the tax savings of maxing out the HSA, but also the limits can be advantageous when you have high expense years over the HMO at times.
Eric Gold, MD says
Harry wrote “If you choose a high deductible plan, contribute the maximum to the HSA, even if you don’t expect to spend that much on health care now. ”
There is not much* to distinguish an HSA from an IRA or 401k, so unless those contribution limits are reached and the taxpayer wishes they could save more to pre-tax retirement funds, I’m unconvinced that an HSA should generally be considered de-facto savings from a HDHP.
*One can argue that only an HSA can be used for medical expenses, but if the annual out of pocket is within the range of the pre-tax contributions it does not matter, since the person would simply forgo contributions for that tax year.
Second, I cannot comment on HDHPs without pointing out the elephant in the room, namely one’s own health. For REAL savings learn to live a healthy lifestyle and to mitigate risk**. Then you gain a massive ‘house advantage’ and can play your cards with a lot more success.
** Some of the more obvious examples:
Avoid tobacco, obesity, lack of exercise, high sugar/fat diets
DO NOT drive distracted by Etoh or texting or chatting on the phone
@Lisa
I insure through the ~ equivalent of an HDHP through an Obamacare exchange. If my wife and I were hospitalized the same year, my deductibles would be double the premiums I would otherwise pay for a more standard high premium, low deductible plan. So in my case a HDHP is up to twice as expensive than the alternative and for the 8/10 years we have chosen HDHP like plans, medical care associated costs have been trivial. The other two years the choices would have been about the same cost.
Steve says
An HSA is better tax-wise than an IRA because it is both tax deductible going in and tax free coming out. So those tax savings are real, if arguably overstated.
Also some of us are indeed maxing out our other tax-advantaged accounts. I once signed up for an HDHP that was slightly *more* expensive just so I could contribute to the HSA.
KD says
Excellent and very timely article Harry! Thank you very much! For those who are used to traditional PPO plan and are thinking about HDHP for HSA tax benefits but are daunted by the large deductible – remember even when fronting the full cost until the deductible is met, you pay the negotiated rate which will be lot lower than the sticker price.
For the first time I will have a option to elect HDHP + HSA for next year. Thanks to your calculator, I was able to see what my net costs would be.
Please remember to enter to different numbers in each column for Row 17 as each plan will result in a different amount due to different cost sharing model. Model it on an avg year of expenses (allowable amount + patient responsibility from EOBs) plus a few more medical incidents.
Eric Gold, MD says
@KD,
“remember even when fronting the full cost until the deductible is met, you pay the negotiated rate which will be lot lower than the sticker price.”
Right. There is another substantial savings that can sometimes be obtained: private health providers spend a lot of money dealing with the paperwork, bureaucracy and obstructionism of insurance companies and are often willing to give a discount of 10-30% if charges are paid at the time of service and the patient deals with the insurance company directly.
I usually collect the following savings off the “list price”
1. Negotiated contract rate (varies by provider!)
2. Cash discount
3. HRA (my ~ version of an FSA since I am self-employed.)
On average, I end up paying about 20% of list price for outpatient care, usually dental and vision but also physician related.
Lynne says
That’s a good point. I got a discount on physical therapy by doing “self-pay” for each appointment. The PT practice gave me a discount off their negotiated contract rate because they didn’t have to deal with the insurance company.
I didn’t bother submitting the bills to the insurance company because it was November and I was unlikely to hit my HDHP’s deductible before the end of the year.
If it had been early in the year, I would’ve submitted the PT bills so they would count against my deductible, on the off chance that I might meet my deductible before the end of the year.
Steve says
Ironically, the “list price” is so high because the insurance companies “encourage” providers to have high list prices. At best the insurance co’s do it make it look like they negotiated huge discounts. At worst they do it to force people into having insurance.
simplesimon says
I’m trying to wrap my head around the calculation of the tax savings because in my spreadsheet, I only have the tax benefit being (amount used from HSA)*(tax rate) i.e. the true tax savings in this period is ($1,100)*(35%) or $385 and the rest of the tax savings is deferred until HSA money is spent.
I’m choosing between an HRA plan and an HSA plan and am trying to figure out what is the right way to think about this. Is it ultimately a cash flow vs expense recognition thing?
Harry Sit says
By contributing to the HSA, you are getting the tax savings in the current year. The HSA money will be used in the future. When you use it in the future, it’s just like using after-tax money. By comparison HRA money is forfeited when you leave the company. You wouldn’t contribute to the HRA more than you expect to use now.
E Gold says
@Harry
I have an HRA through my self-employed business and set the employer contribution amount each year to exactly match my eligible expenses.
RG says
I might be missing something in the spreadsheet, but shouldn’t Cell C22 = C21*B12 (instead of C21*B10) to account for the 27% tax reduction (instead of 36%) in the given example?
Wouldn’t make a difference for those with a payroll-deduction HSA option but would for post-tax HSA employee contributions where FICA is paid.
Harry Sit says
Thank you RG. Fixed. The original version only had one tax rate. I forgot to change the formula after I added different tax rates for FSA and HSA (California does not allow deduction on HSA contributions).
RG says
Makes sense; thanks!
Edward says
The calculator I used to determine traditional vs hdhp is from dinkytown.net.
http://www.dinkytown.net/java/HSAvsTraditional.html
Eric Gold, MD says
@Edward
The dinkytown calculator does include the likelihood of hospitalization, so the much higher maximum costs of an HDHP are not captured.
Eric Gold, MD says
Sorry, typo ..
@Edward
The dinkytown calculator does NOT include the likelihood of hospitalization, so the much higher maximum costs of an HDHP are not fully captured.
Will says
Is there a similar calculator for ACA plans?
Harry Sit says
The same calculator can be used for ACA plans. Set the tax rate on premiums and the tax rate on FSA to 0. Do not include Social Security and Medicare in the tax rate on HSA contributions.
Lee says
Great topic and very timely for my family as my wife is having to change insurances at the moment.
Do the same rules apply if you’re self-employed as a sole-proprietor? I’m not sure how to treat the tax rates in our situation.
Thanks!
Harry Sit says
Health insurance premiums are deductible for the self-employed. I don’t think you get a break on the self-employment tax. So it’s just federal and state for the premiums, zero for FSA, federal and state for HSA.
Lee says
So in that situation would you put the HSA contributions under employer or employee? It changes the numbers drastically depending on where you put the contributions (if I put the maximum family contribution in the “Employer Contribution” column, I actually come up with a negative number for the total after tax).
Harry Sit says
Employee.
Pam Potter says
In NC, we now have only one affordable care option, BCBS for 2017, and at 60 yrs old with pre-existing condition, this is only affordable avenue. This carrier offers an HSA that we could select, but only covers 70% after reaching a very high deductible, e.g. $13k family deductible then 30% coinsurance thereafter. Why would they make an HSA option so onerous and offer low premium, low deductible plan that does not qualify for HSA? Can we continue to use HSA acct. to pay low deductible medical bills until it is exhausted?
Eric Gold, MD says
@Pam
You have to look at Maximum Out of Pocket and CoInsurance rates to make your choice.
As for your question regarding “they,”
Obamacare is expensive precisely because it attracts people with pre-existing conditions. In the olde days (or perhaps in the post Obamacare days) you will effectively not have ANY choice because the rates will price you out of the market.
Eric Gold, MD says
@Pam
Another comment meant to clarify health insurance in general although probably not any use to your specific case.
Insurance is meant to diffuse risk of improbable but very expensive outcomes. Any cost that is 100% likely will never be insurance — it is just a pre-paid plan. Depending on the specifics of a pre-existing condition it may be increasingly treated as in the pre-paid charge category.
Obamacare has always been sold by private insurance, for profit companies who either want to exclude pre-paid from their plans or bundle the pre-paid into the premiums and deductibles. Since Obamacare prohibits them from straight-out refusing to insure patients like you with pre-existing conditions, their approach has in general been to raise deductible rates to cover pre-paid.
Pam Potter says
The for profit companies did both before the affordable care act, raise deductible at a premium which exceeded our monthly income. That’s called non-renewing for pre-existing conditions in my book. The affordable care act limits the premium to not more than 1% of adjusted income.
Hope the new legislators don’t repeal the good parts of the legislation, and just improve on it.
I would hate to lose everything we have saved and worked for over the past 40 years because of
an illness. That would make America Great.
Lane says
My options are as follows:
HDHP/HSA: $2747.94 Premium, $3000.00 Deductible, $1000.00 HSA Contribution
Traditional: $3552.12 Premium, $1200.00 Deductible, $0.00 HSA Contribution.
With 0 medical expenses, the HDHP/HSA is $1804.18 cheaper.
One ER visit with transport:
$1800.00 under the HDHP/HSA plan. (Counts against deductible)
$100.00 co-payment under the Traditional plan. (Does not count against deductible)
At this point, the HDHP/HSA plan is $104.18 cheaper.
Deductible remaining: $1200.00 HDHP/HSA, $1200.00 Traditional.
Four doctor office visits at $250.00 per visit:
$1000.00 under the HDHP/HSA plan. (Counts against deductible)
$100.00 total co-payments under the traditional plan. (Does not count against deductible)
At this point, the HDHP/HSA plan is $795.82 more expensive
Deductible remaining: $200.00 HDHP/HSA, $1200.00 Traditional.
One hospitalization at $2000.00:
$200.00 (from deductible) + 20% of remaining $1800.00 = $560.00 under HDHP/HSA.
$1200.00 (from deductible) + 20% of remaining $800.00 = $1360.00 under Traditional.
At this point the HDHP/HSA is $4.18 cheaper.
Deductible met under both plans.
One more doctor office visit at $250.00:
$50.00 (20%) under the HDHP/HSA plan.
$25.00 (co-payment) under the Traditional plan.
At this point the HDHP/HSA is $20.82 more expensive.
This difference can only get larger because HDHP/HSA is 20% across the board and the Traditional plan still has co-payments for some expenses which are less than the 20%.
I realize I have not considered the tax advantage of the HSA account, but my 2015 tax software calculated that I owed $271.00 in taxes on the HSA account. Even if this was mistake, the tax advantages of the HSA still probably not overcome the higher overall cost of HDHP/HSA.
Harry Sit says
Not a surprise at all. Just another example that shows 100% of the savings comes from the tax savings on HSA contributions. Use the embedded calculator.
sfchris says
I max out my HSA for the tax advantaged space ($3400). There’s a pretty good chance that the amount I put in the HSA above what I use for medical expenses that year will never be used for medical expenses in the future and will be withdrawn when I am an old man and used for general expenses. I will pay taxes on it at withdrawl time. Does that change your calculator? Does it still make sense for the calculator to show the tax savings on the whole $3400 and subtract that from the costs in that case?
Harry Sit says
You will still have medical expenses when you are an old man. You will have Medicare premiums and deductible and co-pays. I heard medical expenses make up a large percentage of one’s budget in retirement. However, if you are confident you won’t be able to use 100% of the money for medical expenses, you can assign a percentage for unused money and reduce the tax savings by your expected tax rate in retirement, which is likely lower than your tax rate today.
Marcus Welby says
I have a child with a chronic medical condition requiring somewhat increased health care usage. I still planned to choose the high deductible option based upon the flowing calculation:
HD Out of pocket max + HD premium < LD out of pocket max + LD premium
Am I correct in my thinking?
E Gold says
Co-insurance ?
Marcus Welby says
25 % for HD and 15 % for LD
E Gold says
Your thinking seems OK, even before considering tax advantages … for one child.
You probably have to estimate costs for the rest of your family.
Marcus Welby says
The calculation takes into consideration OOP max for the family. I didn’t even look at individual. I’m gonna review everything again, but it just seems simple when I figure that I’ll be spending over the out of pocket max, especially since some of the devices and care we will be pursuing is above and beyond what the plan covers (physical therapy and walkaide device). I guess I need to determine if those expenses count toward out of pocket max.
Thanks
Joe says
What about a traditional PPO that has no coinsurance ? My employer offers two PPOs…. One that has a 10% and one that doesn’t have any. I am not a believer in the free market and HSAs coupled with high deductible plans fixing our system. Illness and injury is too common and the ordinary trump voter is not going to save nor cover themselves enough for routine care. The trump voting public will shy away from “being responsible” with their health the moment they are faced with out of pocket maximums in a single year. Chronic illness and the lack of routine preventive care is what taxes our system over the long haul. This why governmental control and mandates for healthcare are essential. I am a fifty year old health care provider for the last 25 years and I am going to marvel at all the idiots voting for Trump when they have very limited health and health care available to them due to “being priced out of the market”……over the next 20 years much less having any “social safety net”! Goodbye social security and Medicare you idiot Trumpeters!
Harry Sit says
What about it? Enter the premium and estimate how much you will pay out of pocket. Make several estimates of your health care costs: low, average, and high. The calculator works the same regardless whom you voted for.
Lane says
I realized I made some mistakes in my first reply (#16).
1. Although the Traditional deductible is $1200 for a couple, it is $600 per person. The $3000 deductible in the HDHP/HSA plan does not have a per person amount, so one person has to meet the entire amount. (Reduces cost of Traditional plan by $600. My wife used 100% of the expenses, I used 0)
2. I forgot to include $1000 transport to the ER under the HDHP/HSA. (Increases the cost of this plan by $1000)
Based on this new evidence, the tradition plan with a higher premium is a much better deal if the plan is used only for ER / Urgent Care / Doctor / Specialist visits. The Tradition plan is $1600 cheaper than my initial calculations.
CK says
You need to make a FSA contribution row, & use that to calculate the FSA tax savings. It isn’t accurate the way the current calculation uses FSA tax rate * you expected deductible, co-pay/co-insurance
Harry Sit says
You contribute your expected deductible, co-pays and co-insurance to the FSA to maximize your FSA tax savings.
Ben says
If you have it deducted from your payroll, can you do it in two months or does it have to be equally split across 12 months? I’d rather do it in the first two months, so that it is available.
Harry Sit says
It’s up to the employer. Most employers spread it evenly per pay period.
Jennifer Faren says
Confused by our employer sponsored options for next year. Would love extra insight… we’d be looking at the family coverage for 4 (2 toddlers) and fortunately do not have to pay premiums (employer paid fully).
Option 1: HSA with 3500 person/7000 family deductible and 5000/10000 out of pocket max. After deductible 20%.
Option 2: Traditional (but even higher deductible/max?) 5000 person/14,7000 family deductible and 5600/147,00 out of pocket max. Office visits $45/$90. Tests/hospitalizations 30%.
Harry Sit says
It sounds like under Option 2 you don’t have to meet the deductible first for office visits but under Option 1 you will. It may be the case for prescriptions as well. Please confirm with your employer. If the healthcare services you consume will be predominantly office visits and prescriptions, not labs or hospitalization, Option 2 can still be better, but do the math with your estimated expenses under each option.
Greg says
I’m having trouble understanding how to fill out the three tax rate fields at the top (premiums, FSA and HSA). Can you give guidance on how to derive these rates?
Harry Sit says
The premium you pay through payroll is exempt from federal, state, Social Security, and Medicare taxes. Add all those up if you are paying premiums through an employer. Use zero if you are buying insurance on your own.
If your employer offers a healthcare FSA, the money you put into the FSA is also exempt from federal, state, Social Security, and Medicare taxes. Add those up if your employer offers a healthcare FSA. Use zero if your employer doesn’t offer a healthcare FSA.
If you contribute to the HSA through payroll, again it’s exempt from federal, state (except in a handful of states), Social Security, and Medicare taxes. Add those up if you are contributing to the HSA through payroll. If you contribute to the HSA on your own, only include federal and state (except in a handful of states).
John Doe says
If my employer pays my premium for the medical insurance and I am looking for tax advantages. Healthy couple. Maybe a baby this year. is there any reason I should get HDHP over a regular PPO plan?
Harry Sit says
If the HDHP doesn’t cost you any less, you are weighing the tax savings on the HSA contributions against the increase in out-of-pocket expenses. If you are healthy, maybe the increase in out-of-pocket expenses isn’t much anyway. If you have a new baby, maybe you will hit the out-of-pocket maximum either way. It depends on the specifics of the two plans.
Jonathan says
Great article and great spreadsheet workup.
Looking at 2020 Open enrollment, any significant changes coming through that change the inputs or calculations for this?
Seems like my employer is pushing us towards the HDHP w/ HSA, since it is a better deal (for me) at all 3 critical points – zero medical spend, reaching deductible, and reaching out-of-pocket max. I’m not complaining because I prefer the transparency of the HDHP anyway.
MG says
How do we fill out the spreadsheet if we live in CA? I’m not sure I understand how to fill out the spreadsheet. Would it be possible to add some instructions for us less spreadsheet literate?
Denise says
Thank you for the great information here! As many have said, very timely!
L.H. says
I have read that the fees and roi on an HSA eat away at the benefit over time compared to other investment accounts. Can you comment?
Harry Sit says
Not if you have your account at the right place. Even if the HSA provider through your employer has high fees and poor investment options, the money stays there for maximum one year before you can move it to a better place. See The Best HSA Provider for Investing HSA Money.