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How to use a high deductible health care plan to build wealth

hdhp health care hsa insurance Nov 14, 2019

The fall is often when many of you, like us, are eligible to change your healthcare plan for the following year, and this week's blog focuses on one option that could help you in your wealth-building process.

If you're like us, even though you work in healthcare, thinking about health plans is not very exciting.  This is especially true if you're blessed to be healthy and never need to see a doctor.  However, deciding which type of plan to choose can lead to significant benefits down the road as you work to build significant wealth.

While there are many options to explore when selecting a health plan, we would argue, a high deductible health plan (HDHP) combined with a health savings account (HSA) is one of the best options to consider.  In this blog we'll break down how this plan works and the benefits to selecting such a plan.

What is an HDHP?

Healthcare.gov defines an HDHP as:

"A plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself before the insurance company starts to pay its share (your deductible). A high deductible plan (HDHP) can be combined with a health savings account (HSA), allowing you to pay for certain medical expenses with money free from federal taxes." 

At first this may not seem like a desirable option because "you pay more health care costs yourself", which could mean more out of pocket dollars.  Who wants to pay more? 

This isn't an issue if you're healthy and go to the doctor infrequently, but if you have many visits each year this plan can still make sense.  Let's look at an example of how this could still be a good choice.

We live in California and found the following health care plan costs using Covered California, but if you don't live in California you can do a similar comparison on Healthcare.gov.  You could also do a comparison with a company sponsored plan.

The first benefit you will notice when comparing a HDHP to a traditional PPO plan is the difference in monthly premiums.  When comparing our current HDHP plan that costs $1,095 per month for a family of four, a similar PPO plan costs $1,495.  This results in a $400 per month or $4,800 per year savings in premium costs.  If you're healthy and rarely need to visit a doctor the choice is a no-brainer.  Select the lower cost HDHP!

An argument could also be made if you're not very healthy a HDHP could also be a good choice.  Scott is a perfect example of how if you have high healthcare needs a HDHP can also be financially beneficial. 

He has myasthenia gravis and routinely needs IVIg infusions that can run over $4,000 a dose.  With a PPO plan he would pay a percentage of each infusion cost (upwards of 40%), but with a HDHP once the yearly deductible ($5,900 in his case) is met, typically in the first month of the year, the rest of the year all health care needs are covered 100% with no additional out of pocket expenses.

Using healthcare plans to build wealth.

So how can you build wealth based on the health care plan you select?  Perhaps the greatest benefit of a HDHP is being able to use it in combination with a health savings account (HSA). 

A HSA is only available if you have a plan that qualifies as a HDHP. 

Under the tax law, HDHPs must set a minimum deductible and a limit, or maximum, on out-of-pocket costs.  According to healthcare.gov, for calendar year 2020, these amounts for HDHPs are:

 
  Minimum deductible (The amount you pay for health care items and services before your plan starts to pay) Maximum out-of-pocket costs (The most you’d have to pay if you need more health care items and services)

Individual HDHP

$1,400

$6,900

Family HDHP

$2,800

$13,800

If your plan is eligible for an HSA, you can take full advantage by contributing the maximum allowed each year. In 2019 the contribution limit is $3,500 if you have individual health coverage, or up to $7,000 if you’re covered by a family plan. 

There is, however, one big trap with an HSA: If you take money out before age 65 for reasons other than a qualified medical expense or reimbursement, the distribution will be taxed and you’ll incur a hefty penalty from the IRS equal to 20 percent of the amount withdrawn.

The good news is that, after age 65, you can make withdrawals without the penalty, although non-qualified withdrawals will still be taxable as ordinary income. In this way, it operates just like a pre-tax individual retirement account or 401(k) plan after age 65. It’s always best to keep good records, and to earmark your withdrawals toward eligible expenses for tax-free withdrawals.

Using it as a tax-efficient way to help pay for the inevitable cost of healthcare in retirement, an HSA has three specific tax advantages:

  1. The money you contribute to your HSA account is tax-deductible, meaning you can deduct the amount you put into an HSA from your taxable income in that year (this may happen automatically through an employer plan).
  2. Once your money is in your HSA, you can invest it — and you don’t have to pay taxes on your capital gains and dividends.
  3. As long as you use the money on qualified healthcare expenses, you don’t pay taxes on the money you take out of an HSA, either.

So if you can…

  • Contribute to an HSA account now
  • Invest those contributions
  • Leave that money in the account and let it grow until you get into your retirement years

…then you could get a tax break today, a tax break on your investment earnings, and have access to a pool of tax-free funds to use on healthcare when you’re likely to need it most-in retirement.

HSA = big money!

Let's finish with a quick example of what you could have in your HSA nest egg if you leave it untouched until you reach retirement age.  We would suggest that many of you as high earners could do as we do and pay for healthcare needs out of pocket with after tax dollars, and let your HSA money grow until you need it in retirement.

The great thing is as long as you have documented expenses you can always take from your HSA regardless of when the expense occurred, assuming the expense happened while you had the HSA active. 

For example, you may have had the need for a surgery that costs $5,000 that you paid cash for in 2017.  Just because that year is gone and past doesn't mean you can't take the money out of your HSA today in 2019.  As long as you keep documentation on what you've paid you can take from your HSA at any point in the future without any penalty.  However, we'd suggest just leaving it be and growing it for future needs when you may no longer have an income.

Doing some quick math, if you and your spouse contribute the maximum of $7,000 each year (this is likely to keep going up in the future as well) for 30 years and invest the money in a simple total stock market fund such as VTSAX (Vanguard total stock market index fund) you would end up with $589K (assuming a 6% annual return).

And that, future debt-free millionaire doctors, is how you can use healthcare to build future wealth!

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