Budget Cuts: Medical Insurance (Revisited)

So, about a month ago I had a post titled Budget Cuts: Medical Insurance. In there I detailed some of my analysis for trying to save money on our medical insurance by getting a private policy. I determined that the $2,700 savings was not enough to risk the higher deductible needed to acquire the savings.

Of course, that was before the open enrollment notice from my employer last week. Our family medical insurance will be going up almost $80 a month (an additional $960 a year). That would bring my total savings up to over $3,600 for the year. That's an extra $300 a month in my pocket. Of course, to be safe, that should probably go in savings in order to pay for expenses should they occur.

All of that thinking got me to take a deeper look at my company's HSA option. If you are not familiar with an HSA plan (as I wasn't), it is essentially a combination of a high deductible PPO plan, with an attached flex spending account. The big difference is that, unlike your flexible spending account, the dollars do not expire at year end. The purpose is to have money in your HSA Checking account to pay for your annual deductible and any non-covered expenses that you might have payed for previously from you FSA.

Confused yet? I was for a while also. I put together a basic spreadsheet to see what my annual cost would be on either plan. I assumed we would spead approximately the amount of an individual deductible and that my FSA expenses would be about the $2,600 that we have in the budget (still paying for braces along with glasses, contacts and prescriptions).

This shows that I could save about $500 a year by going with the FSA. There are some other details of this as well.

1. My employer reimburses $500 of the $1,000 deductible for the PPO plan. So, that means the savings disappears. But wait, they deposit $500 in the HSA account for you. That money belongs to you no matter what. You don't have to spend it first to be reimbursed!
2. We could pay more or less towards deductibles. Either one of those deductible numbers could double for the family amount and we'd have to come up with the extra money.
3. If I go with the PPO plan, and don't spend my $2,600 from my FSA account next year, that money disappears. I don't think that will be an issue as glasses, contacts and my braces alone will be $2,000 this next year. However, I can pay for those same expenses from the HSA account (though they won't qualify for the deductible) and if I don't spend all $2,600 the money is still mine to keep. I can even roll that over to another HSA plan if I choose to leave and I am on another plan later.
4. One other benefit of the HSA is that once the account has a minimum of $2,000 (the amount of the individual deductible) I can choose to invest the remainder in mutual funds and the capital gains can be used for medical expenses at a future date.

The base HSA checking account does earn some minimal interest as well. There are also some tax implications if I choose to withdrawal money from the account or use it for non-approved expenses (10% penalty similar to withdraw from a 401(k).

If you want some more detail of what is and is not allowed as expenses (for this or an FSA) or for the tax implications, check out IRS Publications 502 and 969 respectively.

I think this is going to be the best option for us at this point. I like the idea of a higher deductible and using the extra savings to pay the deductible should I need to. I also like that the money stays separate so I don't have to manage it myself. It can all come out pre-tax, so I will also reduce my taxable income for the year as well. Plus, I don't feel like I'm throwing money away with my insurance. I still have a portion of it if we don't need it. Should I roll some over to the next year I can reduce how much I am taking out that year and stock that away, or continue at the current rate and invest it within the plan.

While it may not appear to be as large a savings as going with a private plan, it also reduces my risk of large out of pocket expenses and it helps me take full advantage of tax benefits for now.