Is the HSA right for doctors with young children?

It's October. That means it's open season for employer benefits enrollment. Today's question is a darned good one, about health insurance and HSA's...

Question:

We're debating the merits of the health insurance options at work, and wondered if you could weigh in on what you think might be best. We currently have the best first-dollar plan available to us through our employer, I believe.

With small children, I do spend a fair amount of time in the doctor's office in the winter. Our co-pays are currently $30/visit. So far, this year, we've paid about $5K out of pocket, due in large part to an unexpected hospitalization for one of our children who had pneumonia last winter and the cost of medications. In the past, we've had some elective medical expenses and anticipate more before the end of 2011. Not sure if an HSA covers those. There is a possibility for more elective expenses in 2012. I feel like we shouldn't be paying as much out of pocket as we do, but perhaps I'm just not certain.

What do you think?

Answer:

There's a ton of confusion around HSA's so let's start by defining some terms. The Health Savings Account is just a bank account (sometimes a brokerage account) that has nice tax benefits. But you can only contribute to the HSA if you're covered by a High Deductible Health [insurance] Plan (HDHP).

When you're deciding to go with a traditional first-dollar plan or to do the HSA/HDHP combo, you're making a cost/benefit decision. So you have to ask yourself, "Does the benefit outweigh the cost?"

What's the benefit?

First, there's a tax benefit. Here's how you can figure it:

  • The maximum HSA contribution for a family plan in 2012 is $6,250.
  • Many physician families pay taxes in the 35% marginal bracket, and the highest state bracket, so let's call that 40%.

This means contributing to an HSA will save you about $2,500 in 2012 (40% of $6,250).

Next, the HDHP insurance coverage may cost you less than the first-dollar coverage if you yourself have to pay for your coverage. If your employer pays for all of it, then there's no benefit here.

Finally, some medical practices will also contribute cash to your HSA. Check your employee benefits booklet to see if yours does.

What's the cost?

The obvious cost is the added out-of-pocket expense for medical care, above and beyond what you might pay for first-dollar coverage (like co-pays, etc.).

The less-than-obvious cost comes from that nagging feeling you get every time you start to feel sick but you hesitate to go to the doctor because it costs money. We're not talking about that funny insurance company money anymore though. It's real money--because it's yours--and you might really not go, or you might go later when your symptoms are more severe. Ouch.

Though it's not a true financial cost, you might as well include the added headache of managing one more account--your Health Savings Account that is.

The answer depends on your family situation.

To find the exact answer, I think you'd need both a crystal ball and a degree in actuarial science. But you can easily rule out the HSA/HDHP combo if you or someone in your family has a chronic health issue or you expect higher health expenses due to elective treatment in the coming year.

In this particular case, the HSA/HDHP combo is probably not the best choice. But remember, you can (should) make this decision every year during open enrollment season. If you get the wrong answer this year, you can try again in October of 2012.

Use your HSA to defer taxes.

If you do go with the combo, don't spend your HSA money on medical expenses (yet). This may sound like odd advice but you have to remember that HSA money grows tax-deferred forever practically, and you can spend it on medical expenses decades from now without paying taxes, so it's one of the best tricks you can use to trim your tax bill. Instead, pay your health expenses from your checking account, and tell yourself that its just like writing a check to your HSA.

By the way, I'm working on a column for the November/December issue of Ophthalmology Businessfocused on tax tips just for physicians, so keep your eye out for it (no pun intended).