Health care savings are not something you can afford to ignore. It may be helpful to understand how HSAs and high-deductible plans work.
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One of the oldest principles of personal finance is to save money for unexpected expenses, such as replacing a roof or major car repairs.
Today, however, there is a major expense that many working people have not considered: Out-of-pocket medical expenses.
Why? Why? Because most employers had health insurance plans that covered the majority employees’ medical expenses for the last decade.
It’s not anymore.
Many employers are shifting more of the rising cost of health care to their employees due to its spiralling costs. Traditional health care plans used to cost around $600 per month. These plans often have an annual deductible — money that you must pay out-of-pocket for medical expenses before the plan covers most of the cost.
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Many companies offer high-deductible plans (HDHPs) because most employees cannot afford them. These plans are so widespread! HDHPs were enrolled by 51% of U.S. workers in 2019.
HDHPs are the best option for people who don’t have health insurance at work. They offer the lowest premiums among all plans in the state and Affordable Care Act insurance markets.
But, you may need to get medical treatment for an injury, or major illness, one day. You may be surprised at what “high-deductible” really means if you aren’t financially prepared.
There are three types of expenses
- Deductibles
The HDHP might state that there is a $4,000 annual limit. This means that you will need to spend $4,000 of your own cash to pay for any medical treatment before the plan covers some of the cost. You might be skeptical that you will have to spend this much. The average cost of a replacement knee was $35,000. $110,000 for spinal fusion. Are you thinking of having children? After all expenses for pre-natal care, delivery, and post-partum are accounted for, it could cost you up to $4,500.
Participating in an HDHP has made me feel the pain of healthcare. Last year, I was in good health for the majority of the year. However, the cost of one visit to an outside-state emergency room and follow up appointments took out my $2,800 deductible.
- Co-payments
You pay a fixed amount out of pocket to co-pay for your health care expenses. The amount you pay will depend on whether or not you have met your deductible. If a procedure costs $500, and your copayment is $20, then you will only pay $20 if you have paid the maximum deductible. If you don’t pay the maximum deductible, you will have to pay $500 out of your pocket.
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- Co-insurance
Co-insurance is an additional expense that can be added to your medical bill. This is a percentage of the covered services that you might still need to pay for on your own, even if you have exhausted your deductible.
Let’s suppose your plan has a 25% coinsurance requirement. If your deductible has been met and you have a procedure that costs $1,000 or more, $250 will be due out of pocket.
When does it end?
The IRS has established maximum annual limits on total out-of pocket medical expenses for HDHPs. This limit will be $7,050 for individuals, and $14,100 to families in 2022. Your HDHP will fully cover any expenses exceeding this amount.
- These limits are reset each plan year, but keep in mind.
- Health Savings Accounts are a lifesaver
This scenario has one positive side: Many employers who offer HDHPs also offer Health Savings Accounts.
An HSA allows you to make pre-tax contributions from your paycheck into an investment account. This account allows you to withdraw earnings and contributions tax-free in order to pay qualified health care expenses.
HSA Benefits That You May Not Be Using
You can also use your HSA for medical expenses such as prescription and over-the counter drugs, medical equipment, and physical therapy. Your HSA can also be used to pay long-term-care insurance premiums.
The maximum amount that you can contribute for 2022 is $3,650 per person ($7,300 per couple), with $1,000 additional “catch up” contributions per person for people 55 years and older. To offset these out-of pocket expenses, some employers make periodic contributions to HSAs for employees.
Portable and completely portable
HSAs are great because you don’t have to withdraw any money. You could choose to pay your medical bills with your savings, and then use your HSA money to cover your retirement health care expenses. You can’t contribute to an HSA once you have signed up for Medicare.
You can transfer your assets from an old HSA to a new HSA if you are starting a new job at an employer with an HDHP or HSA. You can transfer assets from your existing HSA to a HSA offered by financial services companies if they don’t offer one. You can’t make any additional contributions to your HSA if your employer doesn’t offer a HDHP or you don’t sign up for one. An HSA can reduce the stress of out-of pocket medical expenses, but only if you contribute.
There are other ways to reduce your health care costs
Although this may seem like a difficult situation to love, the less family members you have covered by your plan will likely result in lower premiums and out of pocket expenses. Your HDHP covers your adult children, but they work for a company with its own health plan. It might be time for them to learn the “joys” of managing their own healthcare expenses. You will have to make them do it because they’ll eventually be too old to be covered under your plan. This is generally around age 26, but may be higher in some states.
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Compare the monthly premiums, deductibles and co-pays for HDHPs. You may want to consider switching to the less expensive option if both options allow you to use your existing primary care doctors and specialists. If you are considering having a procedure, it is worth looking at the total cost in your area.