A couple of weeks ago, I wrote about choosing between a defined benefit and a defined contribution retirement plan. This fall, millions of Americans will face a more common choice of which health insurance plan to choose during their employer’s annual open enrollment period. Let’s take a look at some of the questions to consider when making this decision:
What are the premiums? This may be the first thing you notice and is the only expense you know for sure you’ll have. However, the plan with the lowest premiums won’t necessarily cost you the least overall so don’t stop there.
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What are the differences in coverage? Make sure the plan you choose actually covers your needs. If you want to keep your primary doctor and other providers, check to see if they’re in-network. Otherwise, you may end up paying more for their services. See the extent to which any procedures or prescription drugs you’re expecting to need over the next year are covered as well.
How much might you have to pay out-of-pocket? Co-pays are what you would need to pay each time you visit the doctor or fill a prescription. You may also have a deductible, which is what you would have to spend before most of the insurance benefits kick in. Once you reach your deductible, the coinsurance is the percentage of costs you would have to pay for additional medical costs under each plan. Finally, the out-of-pocket maximum is the most you would have to pay for the total of all of the above each year, with the rest covered by insurance.
Is there an HSA option? Like a health flexible spending account (FSA), a health savings account allows you and your employer to contribute pre-tax to an account that you can use tax-free for you, your spouse and any tax dependents you have. However, you have to be enrolled in an eligible high-deductible health plan in order to contribute to an HSA.
Unlike an FSA, you can keep the full amount of whatever you don’t spend in the account and even invest the HSA (which you should only do for money you won’t need to use within the next few years). At age 65, you can withdraw the money for any purpose without penalty and tax-free for health care expenses, including premiums for Medicare (but not Medigap plans) and qualified long term care insurance. For this reason, you may even want to consider paying for health care expenses with other savings and letting your HSA grow tax-deferred (and potentially tax-free if used for future health care expenses). In that case, be sure to keep your receipts because you can reimburse yourself from your HSA tax-free at any time.
There are a couple of ways of valuing the HSA. If your employer is contributing to it, that’s free money that can help to offset those out-of-pocket costs since your employer is essentially putting some of that money into your pocket. (Your HSA is your money so you can take it with you when you leave or retire.) If you plan to contribute to the HSA, calculate how much you can save in taxes. (You can get the same tax benefit by contributing to an FSA for health expenses, but the contribution limits are lower and you probably won’t want to contribute as much since the FSA is mostly “use it or lose it.”)
Put it all together. As a real life example, I spoke to an employee on our Financial Helpline who was trying to decide between a traditional PPO plan with a $1,000 family deductible versus an HSA plan with a $2,600 family deductible. The coverages would have been similar for her, but she was concerned by potentially having to spend so much out-of-pocket under the HSA plan.
However, the PPO plan premiums would cost her an extra $49 a month or $588 a year. In addition, her employer would contribute $2,000 to her HSA. The total of both of those savings ($2,588) already exceeded the difference in her deductibles. So even if she spent the whole $2,600, she’d still be ahead under the high deductible plan. In addition, if she decided to max out her HSA (an additional $7,000 for a family contribution in 2019 plus another $1,000 since she’s over 55), she would save another $1,920 in federal taxes at the 24% tax bracket (not including the tax savings on any future earnings in the account).
Of course, your numbers will be different and your decision may not be such a slam dunk. The important thing is that you’re looking at all of the factors, not just the premiums and the deductibles. In particular, don’t overlook the value of the HSA, both now and in the future. If you’re still not sure what to do after weighing the options, consider consulting with an unbiased financial planner with an expertise in health insurance and HSAs. Your employer may even offer free access to a financial planner familiar with your particular health insurance plans as part of a workplace financial wellness program.
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