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I have done more digging on HSAs and opted to go with a traditional health plan instead. Here's one of the articles that I read:

http://www.cbpp.org/9-26-06health.htm


To me the biggest concern about health costs are the rising price of health insurance premiums. And generally health insurance premiums are not considered to be an eligible medical expense for HSAs (the exceptions are if you are covered by COBRA or are drawing unemployment insurance). So for me, it would be better to put this money into an alternate investment vehicle (Roth IRA, taxable savings) that would afford me more flexibility in how I spent the money. YMMV
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Next week I'll get the materials for open enrollment, and I'll be able to see how much more it will cost me to have the traditional low-deductible PPO option compared to the HSA option (those will be the only two options this year). I also don't know what the deductible will be or how much possible employer contribution is out there. I suspect the numbers will tell me to go with the HSA, but I can'tt be sure yet.

By the way -- did you know that if you fund your HSA with payroll deductions -- making it a Section 125 cafeteria plan -- the HSA contributions are not only pre-federal income tax but also not subject to Social Security and Medicare taxes? On the other hand, 401K contributions are subject to SS and Medicare taxes. So putting a dollar into an HSA instead of a 401K can actually save you 7.65 cents in payroll taxes.

I could see that as a potential tiebreaker in some situations. For sure I'll start with the 401K up to the company match, and if I go with the HSA option I'll probably max that out (not sure how much that needs without knowing the employer contribution) and then work toward the 401K and Roth IRA again.

#29
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Next week I'll get the materials for open enrollment, and I'll be able to see how much more it will cost me to have the traditional low-deductible PPO option compared to the HSA option (those will be the only two options this year). I also don't know what the deductible will be or how much possible employer contribution is out there. I suspect the numbers will tell me to go with the HSA, but I can'tt be sure yet.



Yes I am in the same boat. It is open enrollment and my company is only going to offer two options (down from 6) a traditional HMO and an HSA option. I already received all of the enrollment documentation, so I know how much my employer would contribute to HSA. I have compared the potential costs of both (based on 2007 health costs). Even with The HMO would be somewhat cheaper. I still might have gone for the HSA strictly for the tax free savings. What I was going to do is to not draw on the HSA whenever I had medical expenses intead just rollover and let the funds grows for future. But as a potential early retiree, I just don't like the pre-65 restrictions on HSA savings.

Also I didn't like the potential hit to my budget. In my case treating an HSA as savings requires me to not only fund the HSA but also outlay money out of pocket for all medical expenses (including Rxs) until I meet the deductible. The HMO option doesn't have a deductible.

By the way -- did you know that if you fund your HSA with payroll deductions -- making it a Section 125 cafeteria plan -- the HSA contributions are not only pre-federal income tax but also not subject to Social Security and Medicare taxes? On the other hand, 401K contributions are subject to SS and Medicare taxes. So putting a dollar into an HSA instead of a 401K can actually save you 7.65 cents in payroll taxes.

Good point!
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>> What I was going to do is to not draw on the HSA whenever I had medical expenses intead just rollover and let the funds grows for future. But as a potential early retiree, I just don't like the pre-65 restrictions on HSA savings. <<

Yeah, there is that. But I think I have enough in my traditional/rollover IRA (from my first job) and my current 401(k) that I wouldn't need the HSA for retirement income until 65 anyway. Of course, someone who is just getting started in retirement savings might not be in the same boat.

Plus, the way I look at it, if I have HSA money left at age 65, then we'll be fortunate since it means health care expenses didn't break us by the time I'm that age.

>> Also I didn't like the potential hit to my budget. In my case treating an HSA as savings requires me to not only fund the HSA but also outlay money out of pocket for all medical expenses (including Rxs) until I meet the deductible. The HMO option doesn't have a deductible. <<

That's when you have to look at the difference in out-of-pocket premiums and how likely you are to rack up significant medical expenses. If I had to guess, I'd imagine the difference between the standard PPO and the HDHP option might be as much as $250 a month for us, maybe closer to $300, based on the numbers last year and envisioning a considerably more expensive PPO this year. That's at least $3000 a year I could put in the HSA for the same amount of money out of my paycheck, *plus* the employer contribution to the HSA (which I know is a minimum of $500 plus other "opportunities" during the year, of which there is already a possible $225 more for next year if we both take the wellness assessment).

So at least in our case, I can easily see getting $3725 in an HSA this year without any extra expense than taking the PPO option, maybe more with the same out of pocket premium costs as the PPO. The question is: what will the deductible and out of pocket maximums be for us? If the out of pocket max isn't much over $5000 a year, the HDHP/HSA would seem to be the obvious choice based on the odds and the ability to self-insure a hit of up to $1275 a year should a significant medical issue arise. But if it's closer to $10,000 we may opt for the security of the PPO to avoid a potential $6275 hit.

For us, the prescriptions might be an issue. My wife is on three medications which would currently cost about $300 a month if we paid full price (but they now cost us $75 total, with three $25 co-pays). However, as I research more, one of her medications has a very similar drug on the market which has a generic option which might work, and one of her medications can be safely and effectively pill-split, so we might be able to cut that total payout in half or better. Prescriptions aren't currently a big issue for me -- not just because I don't use any now, but because I'm a member of an Indian tribe which uses gaming revenue to cover its tribal members with prescription drug coverage (they pay whatever is left to pay after insurance through its tribal pharmacy).

I'll report more on the details and the considerations we have to go through; I think that might be instructive for others in the same boat (trying to decide between HDHP with HSA and a traditional low-deductible plan). I'm assuming the HDHP will be the better option for us, but the devil will be in the details. I know the company is going to want to steer us in that direction, so I'd be surprised if they didn't make it the better deal overall.

#29
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By the way -- did you know that if you fund your HSA with payroll deductions -- making it a Section 125 cafeteria plan -- the HSA contributions are not only pre-federal income tax but also not subject to Social Security and Medicare taxes? On the other hand, 401K contributions are subject to SS and Medicare taxes. So putting a dollar into an HSA instead of a 401K can actually save you 7.65 cents in payroll taxes.


Greetings, ziggy29, to further clarify on this, do you know of any reason why it would be more advantageous to accept payroll deduction for HSA funding rather than have the employer make an outright payment as an employer contribution? Looking over IRS Form 8889, it seems like either action is an option for receiving HSA proceeds so long as the employer is funding the HSA.

Assuming (which is a risk, I know) that one's salary would have to be grossed up if deductions were made from payroll to equate to a direct employer contribution, it seems to me that I would put ceilings at risk that are tied to AGI (or MAGI) and that I could be in danger again of crossing over into Highly Compensated Employee territory. I will also cross-post this on the Tax Strategies and Health Savings Accounts boards in hopes of any responses. Thanks in advance!

xraymd
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