If I’ve heard it once, I’ve heard it a thousand times: “I like HSAs, but they’re just not priced right.” As someone who sells health savings accounts for a living, I respectfully disagree.
An HSA is a tax-advantaged account that allows individuals to set aside pre-tax dollars to use for eligible medical expenses. The only catch is that you must have a specific type of health plan, called a high-deductible health plan (HDHP), in order to set up and contribute to an HSA. Don’t let the name fool you — the deductible isn’t really that high; in fact, it’s often lower than the deductibles on traditional PPO plans.
The real difference between an HSA-qualified plan and a traditional plan is that with an HSA, the policyholder can make copayments before their deductible is met. Instead, the member pays the contracted rate — the amount the insurance company has negotiated with the provider.
That’s the bad news. The good news is that the member actually gets credit toward the deductible for such services as doctor visits and prescriptions that were previously covered by a copayment — a pretty good deal, since copayments typically don’t count toward the deductible or out-of-pocket maximum on a PPO plan.
Do the math
So how much of a discount do we need in order to make the numbers work? Not as much as you might think. While it’s true that your clients will pay more for routine services under a high-deductible health plan, premium savings will help offset this increase – they’re buying less insurance with an HSA, and therefore will pay less for it. Since the average American spends about $500 per year on medical services, even a modest premium savings may be enough.
And best of all, your clients can pay for covered services with tax-free dollars — a significant but often overlooked benefit. For someone who earns between $34,000 and $82,000 per year ($68,000 to $137,000 for couples), for instance, the federal income tax rate is 25 percent. That means that an individual who contributes the IRS maximum of $3,050 to their HSA could save as much as $762 in federal income taxes plus an additional $233 in Social Security and Medicare taxes (7.65 percent) if they make those contributions through payroll. Together, that’s almost $1,000 in tax savings.