November 19, 2009

Should You Enroll in an HSA Insurance Plan?

Most of us have the option of picking a High Deductible Health Plan (HDHP) insurance plan with a health savings account (HSA). But it can be difficult to decide if an HSA plan is the right choice. You're often faced with confusing jumble of deductibles, premiums, co-insurance rates and out of pocket maximums. One way to figure if an HDHP with HSA or a traditional premium health insurance is your better option is to compare the minimum and maximum annual costs.

Figure your minimum costs for both plans

Your minimum costs would be what you pay for the monthly premium plus any known costs you may have. If you have no existing health conditions then your minimums may be nothing more than the monthly premiums. But many of us have some sort of minor or major ongoing health condition which has some known ongoing costs.

So basically: Minimum costs = Your monthly premiums + minimum known costs

Lets compare an example traditional plan and a HDHP/HSA plan.

Start with your monthly premiums. These should be stated in your plan literature.
Traditional plan = $450 a month premium = minimum cost = $5,400
HSA plan = $75 a month premium = maximum costs = $900

Then add any minimum known costs. Say for example that you take a prescription for an existing ailment which costs $50 per month. With the HSA this cost would be out of pocket but it for the traditional plan you may only pay a $10 co-pay. However for the HSA one detail is that the cost is coming out of pre-tax dollars so to figure your after tax rate you multiply by 1 - marginal tax rate. So in other words if you are in the 25% tax bracket then you would multiply your cost by 1 - .25 = .75. This is because you're really paying with pre-tax dollars so to compare that with after tax dollars you'd take out the tax equivalent amount.

Traditional plan = $10 x 12 = $120 after tax
HSA = $50 x 0.75 after tax rate x 12 = $450 after tax

Total minimum costs:
Traditional = premiums of $5,400 + prescriptions of $120 = $5,420
HSA = premiums of $900 + prescription of $450 = $1,350

Figuring Maximum Costs

The maximum costs could be more tricky to figure or might be pretty easy. If your plan documents a 'maximum out of pocket' cost then that is your maximum costs. Otherwise you can figure your maximum costs by adding your premiums, deductibles and any co-insurance up to its stated maximum.

Generally for maximum costs you'd have :
Maximum costs = Your monthly premiums + deductible + maximum co-insurance -OR - your stated maximum out of pocket costs.

Looking at the traditional plan you may have just : Traditional = premiums + deductible

Premiums of $450 a month = $5,400 plus a $900 annual deductible = $6,300

For the HSA it may have a documented 'maximum out of pocket' limit. That gives you a straight forward maximum cost for the plan. Again your HSA funds are pre tax dollars so you could figure your after tax rate by applying your marginal taxes to it.

HSA = stated maximum out of pocket = $6,000
Maximum of $6,000 pretax or x 0.75 = $4,500 after tax

Traditional maximum = $6,300 after tax
HSA maximum = $4,500 after tax

Look at both minimums & maximums

For the example plans here we have minimum and maximum costs of:

Minimums: Traditional = $5,420, HSA = $1,350
Maximums: Traditional = $6,300, HSA = $4,500

In this example the HSA is the cheaper option for both the minimum and maximum cases. Since the HSA wins in both cases its the better option.

Blog Widget by LinkWithin