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Evaluating an HSA/HDHP as a Consumer

Guidelines for when HSAs and HSA-compatible Plans Are Beneficial for Consumers

Health Savings Accounts and High Deductible Health Plans offer consumers an additional option beyond traditional health plans.  The HSA/HDHP combination provides greater control over how consumers spend their health care dollars.  Several key attributes differentiate HSAs/HDHPs from traditional health plan options:

  • Premium costs – HSA-compatible HDHPs generally have lower premiums than traditional plans.  The premium savings can be used to fund the HSA.  As opposed to premiums, which are fixed and sunk costs however, funds in an HSA can be rolled-over for future use or invested for long-term savings.
  • Deductibles  - As their name suggests, HDHPs generally have higher deductibles than traditional plans.  This means that consumers are responsible for a greater portion of their initial, and potentially only, healthcare costs each year.  These initial costs, however, may be offset by lower premiums and can be paid with pre-tax HSA funds, greatly reducing the burden.
  • Tax-advantaged Dollars – In addition to using pre-tax or tax deductible HSA funds to pay for the increased deductible, these funds can be used for a broad range of services that are not covered by either traditional plans or HDHPs.  Certain elective procedures, over-the-counter medications, contact lens, and other products and services can now be funded with pre-tax dollars.  This benefit is available through flexible spending accounts (FSAs) and health reimbursement accounts (HRAs), but with greater limitations and greater risk (due to “use it or lose it” provisions).
  • Savings and Investment – HSA funds roll over each year, allowing consumers to save funds for future medical costs or retirement.  Please see our goal calculator to see how an HSA may help consumers meet their savings goals.

Case studies - three scenarios

Only consumers can decide if an HSA/HDHP is right for them.  Consider how the consumers in these three examples use their HSAs. (These examples are for illustrative purposes only.  Actual results will vary.)

Judith has a family and needs money for health expenses now

Judith is 38 years old and has a high-deductible health plan for her family.  Judith has 3 young children and has a chronic, minor health condition.  She knows she will have a substantial amount of health expenses during the year, so she contributes $200 per month to her HSA to help cover her expected expenses.

Jim is single and saves for the future

Jim is 32 years old and has average health expenses.  He contributes $175 per month to his HSA.  He is a conservative investor and thus keeps his money in the FDIC-insured deposit account, allowing it to grow with minimal risk.  Jim is making modest withdrawals from his account each year, leaving the remaining contributions and interest earnings in the account to grow for his future qualified health expenses.

Kevin invests for retirement

Kevin is a 45-year-old with a family plan who is beginning to think about retirement.  Kevin contributes his annual maximum in 2009 ($5,950), and plans to contribute that same amount each year.  He chooses to invest his money (once his minimum balance requirement has been met) in mutual funds designed for growth.  He plans to keep most of his contributions within his HSA for a while, allowing him to take advantage of compounding income.

  Judith Jim Kevin
HDHP Annual Deductible $2,400 $1,400 $2,600
Average Annual Qualified Medical Expenses $4,000 $500 $1,500
Annual HSA Contribution $2,400 $2,100 $5,950
Qualified Medical Expenses Paid by HDHP $1,280 $0 $0
Withdrawals Made from HSA to Cover Out-of-Pocket Qualified Medical Expenses $2,400 $500 $0
Estimated Tax Savings on Qualified Medical Expenses Paid from HSA this Year (assuming 28% tax bracket) $672 $140 $0
Estimated Tax Savings on Qualified Medical Expenses Paid from HSA for 25 years (assuming 28% tax bracket) $16,800 $3,500 $0
Total Estimated Tax Savings on Tax-Deferred HSA Contribution this Year (assuming 28% tax bracket) $672 $588 $1,666
Total Estimated Tax Savings on Tax-Deferred HSA Contribution for 25 years (assuming 28% tax bracket) $16,800 $14,700 $41,650
HSA carry over each year $0 $1,600 $5,950
Potential Long-Term Growth on Annual HSA Contributions N/A 1 yr – $1,6321
5 yrs –$8,493
10 yrs – $17,870
25 yrs - $52,273		 1 yr – $6,1882
5 yrs – $34,190
10 yrs – $77,826
25 yrs - $295,311

1Assuming a 2% average annual rate-of-return

2Assuming a 2% average annual rate-of-return on the HSA deposit account balance and a 5% average annual rate-of-return on the remaining balance in mutual fund investments

Benefits breakdown

Judith’s Benefits

In this scenario, by using her HSA to pay for her qualified health expenses, Judith could realize tax savings of almost $700 next year and almost $17 thousand over the next 25 years.  Additionally, this amount does not include the savings Judith could realize from the lower premiums associated with her high deductible health plan.

Jim’s Benefits

In this scenario, Jim contributes $2,100 per year to his HSA, providing a potential tax savings of almost $600 per year or almost $15 thousand over the next 25 years.  Additionally, his net savings, after qualified medical expenses, could be $1,600 per year.  At this savings rate, based on his conservative investment style, Jim has the potential to save and earn almost $8,500 in 5 years and over $50 thousand in 25 years (based on a 2% average rate-of-return).

Kevin’s Benefits

In this scenario, Kevin contributes almost $6,000 per year to his HSA and does not withdraw any for medical expenses.  This contribution could yield over $1,600 per year in tax savings, or over $40 thousand over 25 years.  Additionally, Kevin could potentially have saved and earned almost $35 thousand in 5 years and almost $300 thousand in 25 years (based on a 2% rate-of-return on his deposit balance and a 5% rate-of-return on his mutual fund balance).

 

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ARCUS Financial Bank and its affiliates are not providing tax advice through this website and we cannot respond to specific tax questions.  Tax issues are often very dependent on the specific facts.  Clients are encouraged to seek their own tax advice.


The assumed annual average rate-of-return (investment and interest calculations) is for illustrative purposes only. The above examples are not intended to imply or guarantee any specific investment return. Investment earnings will vary depending upon investment selection and length of investment time. Fees may reduce your account earnings.


*INVESTMENTS IN MUTUAL FUNDS ARE NOT INSURED, ISSUED, OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION; NOT DEPOSITS IN OR OTHER OBLIGATIONS OF ARCUS FINANCIAL BANK AND ARE NOT GUARANTEED BY ARCUS FINANCIAL BANK; BUT ARE SUBJECT TO INVESTMENT RISKS, INCLUDING FLUCTUATIONS IN VALUE AND THE POTENTIAL LOSS OF THE PRINCIPAL AMOUNT INVESTED. INDIVIDUALS INVEST AT THEIR OWN RISK.  FUND RATINGS REPRESENT PAST PERFORMANCE AND ARE NOT A GUARANTEE OF FUTURE RESULTS.  INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE AND INVESTORS’ SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.

Account holders should carefully consider a mutual fund’s investment objectives, risks, charges and expenses before investing.  If they wish to invest in a mutual fund, they will be provided with a prospectus, which contains this and other important information.  They should read the prospectus carefully before investing.  Mutual funds are offered through Devenir, LLC, which is not affiliated with ARCUS Financial Bank.  Devenir, LLC is a registered broker-dealer and member, FINRA and SIPC.

Attention:

Due to the pending closure of ARCUS Bank, access to website content, online banking and online bill pay has been removed. If you have questions or concerns about your ARCUS HSA, please contact us prior to July 15th
at 1-877-373-9859.
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