Women's Money Wisdom

Episode 188: Understanding Health Savings Accounts with Melissa Joy

• Melissa Joy, CFP®️ • Season 4 • Episode 188

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Ever wondered why a Health Savings Account (HSA) is often described as the holy grail in personal finance? Co-hosts Melissa Joy and Melissa Fradenburg  discuss the nuts and bolts of HSAs and high deductible health plans in this episode of Women's Money Wisdom Podcast. We're delving into the potential savings from lower premiums and employer contributions, and the importance of striking a balance between present and future medical costs. We also talk about the unexpected out-of-pocket costs that may catch you off guard if you’re more familiar with traditional health plans.


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Speaker 1:

Welcome to the Women's Money Wisdom Podcast. I'm Melissa Joy, a certified financial planner and founder of Pearl Planning. I'm Melissa Freidenberg financial advisor.

Speaker 2:

We dive deep into topics like work-life balance, financial planning, personal growth and the intricacies of the sandwich generation.

Speaker 1:

Tune in for money conversations that every woman needs to have.

Speaker 2:

Hello and welcome to the Women's Money Wisdom Podcast. This is Melissa Freidenberg, and this week we've got Melissa Joy on the podcast with us as well. Melissa welcome. Hi, melissa, it's so nice to have the two of us back on our newly rebranded podcast. I'm excited to record with you and this is a topic that continues to come up health savings account. Who needs them? What are they? Why are they good? We're going to cover all of that today. Melissa has all the answers for us.

Speaker 1:

We under that pressure but at least have some of the conversation bullet points.

Speaker 1:

I think it is such an important topic it is misunderstood.

Speaker 1:

I think the HSA is because it's relatively recent that we have these available. It is a topic that many of you will be deciding in the next couple months whether you're doing a traditional medical plan or a high deductible plan, in which case you may be eligible for an HSA, a health savings account, which, in this conversation, we are going to include calling them HSAs that's just a short name for them is a type of investment account that you can do if you are participating in a high deductible health plan. High deductible health plans often have just what they sound like a higher deductible and sometimes more carrying costs than traditional medical plans or lower deductible plans. In this case, they come with a type of investment account where you can not only use during any given calendar year, kind of like your cafeteria plans or flexible spending accounts, but you also have the opportunity to either save funds for future years and or invest those funds for future years. It turns into not only a savings vehicle that is short term, but a longer term potentially investing vehicle.

Speaker 2:

Somebody's listening and they're maybe not participating, but they have the option through their employer. What are the key advantages of doing a high deductible plan and an HSA that they may want to consider?

Speaker 1:

Well, a high deductible plan will almost always have lower premiums than the traditional plans that have more immediate benefits. In some cases those get passed through. Those premiums get passed through to you with your employer, or maybe you're in the marketplace and you're choosing your health insurance yourself. There would be lower premiums with these types of plans. There are also trade-offs, though. I guess you asked me the advantages, but I think we need to get into the seesaw of advantages and disadvantages. You're probably, if you go to the doctor regularly, you're going to have more out of pocket costs. You are going to be paying more until you get to your deductible and that can have a sticker shock. But if you're a lower consumer of healthcare or you're really doing a lot of things where you're like it's paid for, so I'm going to do it but you don't need those things, it can be more efficient and economical to have these types of plans.

Speaker 1:

Many people are concerned about the cost of healthcare and retirement, and these health savings account vehicles that we're talking about today can be used both now and in the future. They can turn into a really great vehicle for saving in retirement. They help you address a problem for the future. I will get into it in a second about how they work and why they're so good. There are tax advantages too, which geeks like us like to think about, but there may be more money in it from you right off the bat, because your employer may want to drive you to something that costs them less. They may even give you some pre-funding or match into your HSA.

Speaker 2:

Health insurance costs for both employees and employers have been going on year after year quite dramatically. Chances are you're feeling that pain in your paycheck when you're paying for, if you're not doing, a high deductible plan. The cost of a PPO is going up as well and other plans that are out there. What you were saying, melissa, if I understand, is that the savings right off the bat would come from a lower per paycheck expense in most cases for these plans.

Speaker 1:

Everybody's different. So I'm generalizing here. But for example and small employers like I'll use Perl planning as an example I get to decide how we do healthcare and what we end up doing is we pay for the high deductible plan for our employees and then, if they decide to do a plan with the lower deductible with more kind of benefits right off the bat, then the difference between the high deductible cost and the other plan cost is passed along to the employee, and so the advantage of an employee when they're considering in our small business case for an employer under 20 people, is that in this case you could get your healthcare paid for for you as an individual if you choose the high deductible plan, or at least your premiums for insurance, and then you pay more for the lower deductible plan and you have the opportunity to do an HSA with the high deductible plan. So there's, you know both. You get access to the savings vehicle that you do not have access in the other option and you get your insurance premium paid for. So there's less taken out of your paycheck.

Speaker 1:

Every employer is different. So University of Michigan, the biggest employer in my county, washtenaw County they are for the first time offering a high deductible health plan this year. They are paying for insurance on both sides of things, but you end up having the opportunity to. They will put a check in if you choose a high deductible plan. So they're kicking in some money to the HSA. If you choose that as a sweetener, to pick a plan behind the scenes, that is in all likelihood costing them a lot less money when you aggregate employees.

Speaker 2:

Wow, that's really exciting. That's a nice little perk there for people to consider, so I would imagine some of our listeners may be in that position where they're considering that option in the University of Michigan.

Speaker 1:

That's right and it is a perk. I will tell people, though even people that have a ton of cash set aside that it's kind of sticker shock when you've been used to having. You know, oh, I just have a $10 copay or I don't have much at all, and then you open, you start to get bills for you know, office visits or different things where it's like $100 here or $200 there. It can really feel more expensive when you start to write those checks. So you need to be prepared, and if you're someone who you have enough to pay for medical expenses, but you don't have a lot of extra, you really got to think about it. Are you going to be ready for that kind of difference in terms of how you pay? There's some psychological as well as just, you know, bottom line differences there.

Speaker 2:

You mentioned, there's two separate things. There's your health insurance plan and then, with the high deductible, then that enables you to be able to do an HSA in order to kind of help ease those sticker shocks. If you have more visits than it usually do or anticipated, you can use the money from your HSA in that given year in order to pay with.

Speaker 1:

Yeah, a lot of times when you have an HSA account, the HSA provider will even send you a debit card so you can just run the card. When you swipe the card when you go to the doctor's office you can put. Sometimes the employer puts in money, but you also can put in your own money and that money lowers your taxes. So that's a tax deduction, which is, you know, sometimes you're limited on how many tax deductions you get when you're a more highly compensated employee. So really nice perk there to lower your taxes with that money that's set aside. Typically, an HSA starts out as a savings account. It's just cash that's ready for you, whether it's an hour later, and most people end up using that money kind of as you go. Only 7% of account holders for HSAs actually invest their account, so that's very low usage.

Speaker 2:

Wow, that is shocking. So people are opening up an HSA, putting money in there and not taking advantage of the ability to invest that money.

Speaker 1:

That's right Because it's replacing something that they've had in the past where it's like I need to use up my flexible spending account by the end of the year, use it or lose it, and they also it's kind of an extra decision and most of these plans require you to have the first $1,000, kind of, in cash and then you can choose to invest after. It's one extra login and blah blah blah, but it ends up being an underutilized kind of option.

Speaker 2:

Okay, so you touched on the tax advantages. Talk about what that means. This money that's going into the HSA is pre-tax.

Speaker 1:

Well, okay, so we like to call this the most tax advantage type of account Really that there is out. There is triple tax advantage. So you get a tax deduction when it's your money that's going into the account. When you put the money in, it is also growing tax free. But you take the money out and as long as you're doing it for medical expenses, you don't pay taxes there either. So it acts like a Roth IRA when you take it out. There's no other accounts that have both that upfront tax deduction, that tax exempt growth, and then tax free when you take it out. So this is really sweet deal when it comes to how the HSA is taxed. And let's say you're a very unique person who has no medical costs later in life and you end up not ever needing the money for your medical costs. You can take the money out as a retirement kind of paycheck and you do pay taxes, but it just works like it was 401K. So you still got that upfront tax advantage and that tax deferred growth.

Speaker 2:

So a lot of flexibility and a lot of advantages You're getting that tax deferred growth and if you're investing it, compounding interest on that growth. Whatever you don't use, it's not like the flexible spending where you lose it, so you're letting it compound year over year.

Speaker 1:

The other thing is like, let's say you're an early retiree, you retire at 55, you're going to be on Medicare at 65, and you have 10 years where you could enroll in a high deductible plan through the marketplace. You could still be making contributions. It's one of the only deductible contributions that you can make, so that's another consideration. That's nice is it doesn't in any other retirement-ish account. You need earned income, and you do not need earned income for the HSA. You just need to be enrolled in a high deductible plan.

Speaker 1:

If you're listening to this, though, and you're on Medicare, nick's that you cannot put money into an HSA when you're on Medicare. It's actually a big mistake if you do so. Do not do that. You may want this to be a backstop savings vehicle and you're like yeah, yeah, I think I can swing it, but I'm just not sure. You know, there could be a big expense that comes up, and this would be the first money I'd want to look to when I'm setting that money aside.

Speaker 1:

Well, if you keep your receipts for medical costs, but don't collect it as you go, you could even go back years later and say, hey, I had a hospital bill of $2,500 back in 2023, and now it's 2028. I would like the money from the HSA now in 2028 and that would be kosher. So as long as you have something where you have documentation, then you can go back and get it. So it offers some flexibility. Where you're like, yeah, I can swing it now, but you know, there may be a point in time where I'm not employed or I need emergency funds. There's even that type of flexibility.

Speaker 2:

I think there are a lot of people out there who have been thinking or toying with the idea of doing high deductible plans. They can have an HSA and the one thing holding them back is like what if I have an off-year where there's a big medical expense? Yeah, so that really is interesting, that you can go back, let it grow and then if you need it to cover a big expense, it's there.

Speaker 1:

Yeah. Or think about if you're a family that is planning to have children but it's not this year. You could build up some reserves because there's probably going to be medical bills in that year and that can help ease kind of the suffering of some gaps in income with something like a maternity or paternity leave or if you have an elective surgery that you could still be able to be covered. You could kind of set some money aside in there. So there's a lot of different considerations and while I'm talking, I want to make sure that I explain to you that in these examples your contribution limits for an individual this year are $3,850 and $7,750 for a family. Next year it's going to be more than $4,000 for an individual and $8,300 for family coverage. When you are over $55,000, you get a $1,000 catch up. But let's say you're doing a family contribution and you're both over $55,000 in a couple, then you can actually get $2,000 catch up, one for each of you. So that's called a baby HSA catch up. So there's a lot of money when you kind of compound that out and think about the tax breaks you get as well as the growth that you could end up setting aside. I think it's a great strategy for people who plan to retire early, because those expenses really go up in the last few years before you get to Medicare age. It's really just interesting and it's important to kind of understand it.

Speaker 1:

I would also mention these. The thing that I don't love about these accounts is the administration of the accounts. There's like ticky-tack fees that are associated with them. Like hey, every quarter there's going to be a $10 cost or something like that. If you think about it, the banks and institutions that set these up have a lot of little bitty accounts and unfortunately, financial institutions don't like huge amounts of little bitty accounts, so they end up just having pain in the butt administration and you just got to like kind of suck it up and deal with the admin, consolidate the accounts if you end up with them all over the place and you know kind of search for a provider that you think will work best for you. So I'm warning in advance that the bureaucracy is worth it but can sometimes not be ideal.

Speaker 2:

Good morning, Ben. When you're going to open up the HSA, do you have options with your employer to go to different providers?

Speaker 1:

It just depends. So if the employer is sponsoring one and they're like here's where we're going to put your match, then you don't. But sometimes you do. So sometimes it's just up to you to figure it out. So again, it just depends and I'm just giving kind of general information, not for one specific plan. A lot of times the employer will be like hey, here's where we've got it already set up and that works great, now what kind of investment options should people consider within these accounts?

Speaker 1:

They're going to have a menu, kind of like a 401k in most cases, and I recommend considering how much money's in there. How soon might you need it. If you're someone who's like I was able to put aside $1,000 out of the $4,000 I saved last year, but I needed the other three to pay as I go, keep it more conservative, because you might need even a little more than that in the current year, this year, and I would make it more moderate. There should be options like conservative, moderate, aggressive. You could put it all into like an index or something like that. But do consider if you're thinking, oh, I'm going to need this money soon or you know you're going to need it, then cash is king, kind of the fixed options. And if you're really like, unless something completely unexpected comes up, I have emergency reserves and I'm really planning to use this in retirement. Longer term money is more appropriate for riskier or more stock like investments.

Speaker 2:

Imagine some people may open these, but they have the cash flow to pay for medical expenses currently and they may want to save this, as you alluded to, for retirement medical expenses Right, in which case they may be able to be a little more aggressive with their investment.

Speaker 1:

Exactly that's what I'd be thinking. It's personalized and if you're working with a financial planner like us Melissa, like these are conversations we're having we want to know, for your net worth statement, how much do you have in the HSA? And we put it into our software and assume we talk about what year we'll be using this money in retirement. It really makes your financial picture better because inflation is higher. For example, as a small employer, our medical plans will increase in costs by 7% this year, so your medical costs tend to go up much higher than average inflation, although that might be the inflation rate at the moment as well. So, yes, it's a really great vehicle for those early retirees and if you work with a financial planner like us, we can give you specific personalized recommendations of how much should be this, how much should be that as a rule of thumb. I'd look at how much you use it last year and if you can't change that, then keep that amount in cash and then plan to put more aside for investing over time.

Speaker 2:

And shameless plug time. If you are listening and you're considering a high deductible plan and opening an HSA and you're not currently working with a financial planner, we at Pearl Planning would be happy to talk with you about your specific case. If you're feeling like you want to talk to somebody about how to invest that or maybe how to use it to fully take advantage of those tax advantages, please do reach out to us. Give us a call. I will link Melissa's contact info in the show notes below and you can, of course, find us at pearlplancom.

Speaker 1:

Yes, and we'll include some links, like I have a great guide to when is my HSA distribution tax and penalty free, so we'll include that guide in our links, in the show notes and just in general. We've got a couple of things coming up. We've got a presentation in terms of what's going on in the market, which I know people are thinking about, the unfortunate war in Israel and just the economy in general, and so that is available. We'll be live on Wednesday. We always put our replay on YouTube. Go under pearlplancom slash events and then we are in November. We're going to be doing our year in financial and tax planning webinar, which is always popular, and we will be hitting on HSA's and that. So join us for both if you can.

Speaker 2:

Follow our podcast at women'smoneywisdomcom. It'll link you to all the episodes. We also will have an episode coming up on general open enrollment, since that's coming up. So if you have questions on other potential benefit changes, you have to follow our podcast in order to see what episode comes out each week. So we would love if you would do that.

Speaker 1:

So good to be back in the room with you.

Speaker 2:

I know I love recording with you. This is so helpful, and thank you so much for sharing your wisdom on health savings account today with us. Melissa Joy, thank you for listening to the women's money wisdom podcast. If you found value in our conversations, please take a moment to like, follow and subscribe. Wherever you're tuning in from. It helps us continue to bring these valuable insights every week. Head over to women'smoneywisdomcom. There you'll find tools, tips and a supportive community to help you gain financial confidence.

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