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SOURCE:  HSAEducator.com Defunct

In order to make this whole HSA thing a bit clearer, here’s a real world scenario (complete with vivid and exciting characters). The health plans we compared are real plans, as quoted directly from the folks over at eHealth Insurance.

Joe Six-Pack is your average family man—a wife, two kids, a dog, and pretty good health. Joe likes his job, at which he makes about $40,000 a year. His wife works part time and brings in $25,000.

Joe has always had a traditional family-coverage insurance plan through work. But in his recent employee benefits meeting, Joe finds out that the premiums for his insurance plan are going up again next year, to a total of $650 each month. Joe’s traditional plan looks like this:

  • A $650 per month premium
  • A $500 deductible
  • A $35 doctor visit co-pay
  • A $30 prescription drug co-pay
  • 80/20 coinsurance after the deductible (which means that Joe pays 20 percent of all costs after he’s paid out-of-pocket for $500 worth of healthcare costs)

Joe groans. The new increase in the premium is really going to squeeze the Six-Pack family budget. Frankly, that’s a lot of jack for the privilege of seeing a doctor for “$35”.

However, Joe’s employer is offering a brand-new option called an “HSA Plan.” The High Deductible Health Plan under this option costs only $180 each month. The insurance part of this option looks like this:

  • A $180 per month premium
  • A $5,000 deductible
  • No co-insurance: 100% coverage after meeting the deductible
  • No co-pays

On the surface the $5,000 deductible is a little scary, but Joe finds that lower premium mighty appealing. Plus, his employer is talking about this tax-advantaged Health Savings Account, which sounds interesting (Joe’s no dummy). After doing his homework, Joe elects to take the HSA-based health plan, and decides to contribute $416 each month to his HSA—meaning that he’ll contribute an even $5,000 by years end.

Joe’s Outcome

So does Joe score or fumble? Well, in the next year, Joe’s family is in good health, and all together they have about 7 doctor visits. Under their new plan, there’s no co-pay for the doctor’s visits, so each doctor’s visit costs about $90. Joe’s son requires a prescription antiviral for a bout of the flu that costs $150. And Joe’s wife takes a regular generic prescription for her allergies that costs $10 a month from their discount pharmacy—$120 a year. All total, that’s $900 in medical expenses.

Let’s break down the Six-Pack Family Healthcare Budget, and compare it to what would have happened if Joe would have stuck with that miserable old traditional plan.

  Traditional Plan HSA Plan
Annual Premiums $7,800 $2,160
Annual HSA Contributions N/A $5,000
Doctors Visits $245
(7 visits at $35 co-pay)
$630
Prescription Drug Costs $30
(1 prescription at $30 co-pay)
$150
Budget Prescription Costs $120
($10 budget Rx for 12 months)
$120
Total Pre-HSA Healthcare Costs $8,195 $8,060
Out-of-Pocket Medical Expenses Paid with HSA N/A – $900
HSA Tax Savings (at 25% tax rate) N/A – $1,250
Total Healthcare Costs After HSA Savings Still $8,195 $5,910
 
Amount Remaining in HSA After Paying Expenses N/A $4,100
($5,000 minus $900)
Total Money Spent on Healthcare, Never to be Seen Again All $8,195
gone forever
Only $1,810
gone forever

As you might imagine, Joe’s feeling pretty good about his decision. He made a generous contribution to his HSA, and that turned into a $1,250 tax savings–-bringing his total healthcare budget to $5,910 versus almost $8,200 he would have spent with his traditional plan.

 

But here’s the kicker, and the thing you’ve got to keep in mind when thinking about HSAs. Joe put $5,000 in his HSA over the year. If he paid his family’s $900 of medical expenses with his HSA, Joe still has $4,100 in his HSA, and this is earning tax-free interest in his account. With the traditional plan, Joe would have spent the $8,200 and he’d have absolutely nothing to show for it, except for an empty wallet. With the HSA plan, Joe really only spent $1,810 on his healthcare—he’s still got $4,100 in the bank!

Now, just for comparison sake, let’s say the Six-Pack family had a rough year instead. Let’s say Joe hurt his ankle sliding into second playing on the softball field with his team from work, and had to have surgery to fix it. We’ll spare you the gnarly details, but let’s say that the total medical bills from this incident came up to $7,500.

 

  Traditional Plan HSA Plan
Annual Premiums $7,800 $2,160
Annual HSA Contributions N/A $5,000
Out-of-Pocket Medical Expenses Before the Deductible $500 $5,000
Co-Insurance Fees $1,750
(20% of $7,000)
N/A
Total Pre-HSA Healthcare Costs $10,050 $12,160
Out-of-Pocket Medical Expenses Paid with HSA N/A – $5,000
HSA Tax Savings (at 25% tax rate) N/A – $1,250
Total Healthcare Costs After HSA Savings Still $10,050 $5,910
 
Amount Remaining in HSA After Paying Expenses N/A $0
Total Money Spent on Healthcare, Never to be Seen Again All $10,050
gone forever
Only $5,910
gone forever

If Joe pays for his $5,000 in out-of-pocket medical expenses with the funds he contributed to his HSA, he ends up paying $5,910 for his healthcare—versus a whopping $10,050 he’d pay with a traditional plan! Why such a difference? Because Joe pays $5,600 less in premiums, saves $1,250 in taxes, and his HDHP gives him 100% coverage after his deductible is met. Joe uses all his HSA funds to pay for his surgery this year, but next year he has the opportunity to start saving all over again. And the $5,000+ he saved by not going with the traditional plan definitely doesn’t hurt! His ankle is banged up but at least he feels pretty good about his decision.