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Choose the High Deductible Health Plan

November 8th, 2007 at 03:34 pm

Many companies are now offering the choice of a “traditional” health care plan or a high deductible health plan (HDHP). Often, the employees are only told that the HDHP costs less (usually by 20% - 30%) and has a higher deductible. The deductible for a family “traditional” plan is often at least $500 per individual and $1,000 for the family. For a HDHP the family deductible is often as much as $3,000.

If your traditional plan costs $200 per month and the HDHP costs $160 per month (20% less) you might be believe that the $40 per month ($480 per year) savings is not worth the risk of possibly paying $2,000 more in deductible expenses. This would be true, if you do not take advantage of the tax free Health Savings Account (HSA) that can be matched with the HDHP.

However, if you are in at least the 25% federal income tax bracket and deposit the family policy maximum of $5,650 into your HSA, the cost of an HDHP will always be less than a the cost of using a traditional plan.

If you are in the 25% federal tax bracket, the $5,650 HSA deposit will provide a federal income tax savings of ($5,650 *25%) = $1,412.50.

Next, using your HSA for medical expenses lets you pay for them with tax-free dollars. The $3,000 deductible can be paid with these tax-free funds. This reduces the $3,000 cost by your 25% tax bracket to a cost of $2,250 on an after tax basis.

Let’s add up the after tax costs of each plan. The traditional plan costs $480 more and saves you ($2,250 - $1,000) = $1,250 on after tax deductible costs, for a net “savings” of ($1,250 - $480) = $700

However, the HSA deposit of $5,650 has an income tax saving of $1,412.50. When the income tax savings is included, the HDHP plan costs ($1,412.50 - $770) = $642.50 less than the “traditional plan, even when your health care costs “max” out the $3,000 deductible.

If you only use $1,000 in medical expenses for the year, the savings with the HDHP is $2,142.50. This represents the sum of the insurance savings ($480), the HSA tax savings ($1412.50) and the savings from paying the deductible with funds that are never taxed ($250).

If you are in a higher tax bracket and/or if you pay state income taxes, your savings with an HDHP are even greater. Plus, the funds remaining in the HSA continue to grow tax free and can be used for future medical expenses tax free.

The bottom line is that, if you are in at least the 25% federal income tax bracket and your company offers an HDHP, you will come out ahead with the HDHP, as long as you contribute the maximum amount allowed to your HSA.

4 Responses to “Choose the High Deductible Health Plan”

  1. scfr Says:

    Thanks for the post. I recently selected a new health insurance plan for my husband & I. I chose the highest-possible deductible and will be fully funding our HSA. I was really confident that I had made the best choice, but it is nice to have confirmation from a pro.

  2. fern Says:

    OK, here's what's gonna sound like a dumb question about deductibles. My health insurer is a well known, large insurance company. My plan has a $1,000 deductible. Now doesn't that mean that i have to pay the first $1,000 of medical expenses before the plan will start picking up the tab?

    I ask this becus here it is late in the year, i've had various reasons to see a doctor, get prescriptions, etc., and on my statements i still hadn't been charged for any deductible, that is, until October it finally seemed to have kicked in and it is clearly recorded on the statement.

    Is this some sort of error on their part or am i misinterpreting how an annual deductible works?

  3. finabguide Says:

    Deductibles do not always apply to everything that your medical policy covers. Examples of this can include prescriptions, doctors visit with a co-pay, annual physicals and certain types of tests. I suspect that before October, you were using services that were not included as part of the deductible.

    However, to be sure, call your insurance help line and ask what changed in October.

  4. gordon Says:

    Your example assumes a $5640 deposit to the HSA but a deductible of $3000, but aren't you limited to a deposit to the HSA of the amount of your deductible? thanks

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