As we implement more HSA compatible plans at our clients, the question, “is an HSA right for me?” has become very common when employees have the ability to choose between HSA compatible and traditional plans. I would argue that the answer lies more in art and personal preference than science, but there are definitely some things to consider before making this important decision. For me, it’s a combination of math, risk tolerance, interest in tax savings, cash flow, and known upcoming medical expenses.
Math
The math for the HSA compatible plan has to make sense. Let’s look at an example. Employer X pays 75% of the premium for a single person for their more traditional $1000 deductible plan and the same amount toward the HSA compatible plan. Here’s how the math shakes out:
- Single rate for $1000 plan: $450
- Single rate for HSA compatible plan with $2000 deductible: $350
- Employer contribution: 75% of $450 or $337.50
- Employee cost for $1000 plan: $112.50/month or $1350/year
- Employee cost for HSA compatible plan: $12.50/month or $150/year
- Employee savings to move from traditional to HSA compatible: $1200/year
The numbers above are real, but modified from a current client.
If an employee chooses the HSA compatible plan, he or she will save $1200 in premium and expose himself or herself to an extra $1000 in deductible. This doesn’t sound like a bad tradeoff, but recognize that EVERYTHING goes to the deductible with the HSA plan. As such, the deductible is much more likely to be used.
In this case, the math makes it a reasonable discussion, but it’s not a “no brainer.”
If the employee plans to make contributions to the HSA, he or she will save tax dollars too. This has to be taken into account when thinking about the math. If the employee pays 25% in taxes, a $1000 contribution to the HSA would increase his overall savings by $250. The more the employee plans to set aside pre-tax, the more compelling the case for the HSA plan becomes.
Risk Tolerance
Some people are risk averse, some are risk takers, and there are some that are in between. People that have a greater risk tolerance are better candidates for the HSA plan than those that are risk averse.
Interest in Tax Savings
Most people would prefer to pay less taxes than more taxes, but some are passionate about minimizing taxes. If tax savings is important to an employee, the contributions to the HSA account will help them reduce taxes as noted above. For these people, the HSA becomes more attractive.
Cash Flow
If you enroll in an HSA plan, you will have a fairly substantial deductible before the plan pays anything except for preventive care. Would your personal cash flow allow you to easily cover your deductible if a large expense was incurred before you had time to save money in your HSA account? If not, the HSA plan might not be the right plan for you.
Known Upcoming Medical Expenses
Employees with no known upcoming medical expenses are better candidates for an HSA plan than those that have known medical expenses in the upcoming plan year. Existing or planned pregnancies, scheduled surgeries, or ongoing serious medical conditions are examples of conditions that might give an employee pause before enrolling in an HSA compatible plan. The more upcoming medical expenses are known, the less attractive the HSA plan will be.
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