Opinion: Higher deductible plans can have benefits such as having an HSA

Kenny Gott

It may be tempting to choose health insurance that covers everything with little or no out-of-pocket expense, but you probably already know you’ll pay a potentially much higher monthly premium for that luxury. There’s another consideration that doesn’t get talked about as much, which we’ll address in a minute. 

At the other end of the spectrum are plans with high deductibles, and often high co-pays and other out-of-pocket costs. These price for these plans tends to be much lower. 

Whether you buy insurance through an employer, or in the individual market, choosing your deductible structure is tricky. Weigh these factors:

• Cash flow: Will your budget allow higher monthly premiums for that lower deductible? Do you have enough emergency savings to cover the high deductible when needed? Plan for both ends of this equation.
• How healthy are you? If you rarely need care, a higher deductible may be the right choice. If you expect to need lots of services, a lower deductible may make sense. List services you expect to access over the next year, and the cost of each under a high-deductible or low-deductible policy. Add everything up, including a year’s worth of monthly premiums of course, to see which comes out better.
• Are you willing to put in time and effort to shop prices for medical services, or even haggle with providers for price breaks? If you have a high deductible, it may be worth the trouble.

Now here’s the part many miss:

Some employers offer high-deductible insurance plans, sometimes called consumer-directed health plans because they tend to cause people to focus more on the actual costs of medical services and perhaps shop more carefully. The definition of high deductible is very specific in the IRS tax code and varies over time. If such a plan is available at work, or even if you buy a high-deductible plan on the individual market, then you can also open a health savings account, known as an HSA. Business owners should seek professional guidance to learn whether you qualify under IRS rules.

An HSA lets you set aside income, up to IRS-defined limits each year, for out-of-pocket expenses like deductibles and copays, and for the monthly policy premiums. You can adjust your contribution yearly as your needs change.

Why do it? Because an HSA is four “tax plays” in one.

1. Tax play 1. The HSA lets you save pre-tax money at a participating financial institution such as a bank. This reduces your taxable income, and your resulting tax burden.
2. Tax play 2. The money grows tax deferred – you don’t pay tax as you normally would on interest and dividends earned, or capital gains (the growth in an investment account). And if you play your cards right …
3. Tax play 3. The money comes out of the account totally tax-free – as long as it’s used for qualified medical expenses. If you spend it on anything except qualified medical expenses before age 65, you’ll face a stiff penalty, in addition to income tax.
4. Tax play 4. Any money remaining in your HSA after age 65 can still be used tax-free for qualified medical expenses, and if you use it for other expenses, it will behave like an IRA from a tax perspective – you’ll pay ordinary income tax but no penalty. So, if you add more to your HSA account than you end up needing for medical expenses, you’ve still benefitted from the first two tax advantages, and in addition may have given an indirect boost to your tax-deferred retirement savings portfolio. In fact, once you reach an IRS-specified amount in your HSA, you are allowed to invest more broadly than just bank savings, for more growth potential.

So, if you’ve reached your IRA contribution limit and wish you could contribute more for after-65 retirement needs, and you have a health insurance plan that meets the definition of high deductible in the tax code, consider maximizing contributions to an HSA.

As always, seek professional guidance if needed to sort through your many options. Revisit the process yearly as your household circumstances and health change over time.

Certified financial planner Kenny Gott is president at Piatchek & Associates and author of the book “Bottom Line Financial Planning.” He can be reached at kgott@pfinancial.com.