HSA Study--How I Saved Thousands Switching To An HSA

I used to attend "Broke University" where most of my financial decisions were short-sighted, based on what I could afford today and ultimately resulted in a poorer me. I couldn’t see past what I needed right now. It was survival mode always and I often borrowed from Peter to pay Paul. There was no room for optimization or cost/benefit analysis in this lifestyle. I was stuck in the bottom level of the Mad Fientist's Hierarchy of Financial Needs. As an attendee of Broke University, I didn't really think about an HSA (Health Saving Accounts). The only experience I had with them was with one particular employer who funded my HSA. I thought it was okay since I was given money to use towards my health care expenses. But, I can tell you what I was NOT thinking about:

1. Tax optimization
2. Maxing it out
3. Investing the HSA money

This is why, in stark contrast, the following cost/benefit analysis regarding my healthcare is so doggone amazing. When you're not living paycheck to paycheck and you're not a slave to any lenders, you can think about things a bit differently. Although I have a pretty good health care plan, I thought there might be room for more optimization. My boss is generous with many things, healthcare being one of them. While he buys a high deductible plan from a carrier ($6,550) he pays the first $1,000 of my deductible, then splits the next $4,000 50/50 with me, and then pays the final $1,550. Oh, and he pays 100% of the premium. My maximum potential yearly medical exposure is $2,000 and that is only if I have $5,000 in claims. Not too bad, eh? Now that I'm investing and looking for ways to get to FI quicker, I want to max out all of the tax-deferred accounts I can get my hands on. HSAs are stellar investment accounts as they are the only vehicle in which you can contribute pre-tax dollars and pull the funds out for qualified medical expenses, without paying tax. Furthermore, certain HSA accounts allow you to invest the funds into low-cost index funds rather than just using it as a savings account. 

The Word On the Street Regarding HSAs:

1. Contribute the annual maximum to an HSA account (for 2018 -$3,450 single/ $6,850 family)
2. Invest the HSA in low-cost index funds
3. Pay cash for medical expenses and allow the HSA account to grow tax-free
4. Save all receipts (electronic copies) for qualified medical expenses
5. Withdraw the money in early retirement using the above receipts
6. If all else fails, withdraw the money at age 65 for non-qualified medical expenses and pay the tax

Sounds like a great plan! There is only one problem for me--being that my boss pays the first $1,000 of my deductible, I don’t qualify to open an HSA. So this got me to thinking...what if I ask my boss to allow me to be responsible for the first $1,350 of the deductible making me HSA qualified.

My Plan

Because I didn’t want to make a foolish offer, I did the math. Let's consider the two health care options I am facing:

• Option 1: $1,350 deductible HSA qualified plan. My annual max out of pocket is $1,350.
• Option 2: Current plan (Boss pays first $1,000 of my deductible, then splits 50/50 of next $4,000 and pays final $1,550). My annual max out of pocket is $2,000.

First thing I did was take an average of how much my boss has paid for me in medical claims over the past five years:

	Claims Boss Paid For Me Over Last 5 Years
Annual Average Claims over five years	2017	2016	2015	2014	2013
$1,041.98	$924.22	$347.27	$243.79	$1,532.41	$2,162.20

Next, I wanted to do a cost-benefit comparison of two investment strategies over the next five years concerning the two different healthcare options:

• Option 1: Open an HSA account and max it out ($3,450)
• Option 2: Stay on the current plan and invest the average amount of claims my boss is paying for me annually ($1041.98)

Option 1: invest $3,450 of my HSA funds in low-cost index funds the first year and subsequent 4 years with a 7% rate of return:

Compound Interest Calculations of HSA Investments over 5 Years
Initial Investment	$3,450.00
Annual interest rate	7.00%
Compounding periods per year	12
Years	4
Additional contributions	$287.50
Additional contributions type: 0 - at the end of the period 1 - at the beginning	1
Balance	$20,526.33

Option 2: invest $1,041.98 (average amount my boss pays for my claims) in low-cost index funds the first year and subsequent four years with a 7% rate of return:

Compound Interest Calculations of Investing Average Claims (that boss will pay)
Initial Investment	$1,041.98
Annual interest rate	7.00%
Compounding periods per year	12
Years	4
Additional contributions	$86.83
Additional contributions type: 0 - at the end of the period 1 - at the beginning	1
Balance	$6,199.42

There are few more things to consider with option 1 to get a full picture:

5 Year Tax Savings	$2,600.00
5 Year Deductible (Worst Case where I spend $1,350 annually on medical claims)	-$6,750.00

Final Numbers:

Option 1		Option 2
Investment Balance After 5 Yrs	$20,526.33	Investment Balance After 5 Yrs	$6,199.42
5 Year Tax Savings	$2,600.00
5 Year Deductible (Worst Case)	-$6,750.00
Sum	$16,376.33		$6,199.42
$ Difference	$10,176.92
% Difference	164.16%

Okay, that proves option 1 is a big win for me!!

Is This a Good Deal For My Boss?

While this is a good deal for me, I also had to calculate if this is also a good deal for my boss. Especially since he's taking on more liability for me with option 1. With option 1 my max out of pocket is $1,350 where with option 2 it is $2,000. Being that this is employer funded under a $6,500 deductible plan, my boss has $5,200 in max exposure for me with option 1 where he only had a maximum exposure of $4,550 on option 2.  At first blush, option 1 is more attractive to my boss since I am paying first dollar coverage. He doesn't start paying claims for me until I meet my $1,350 deductible. However, let's dig deeper. Remember how I looked at the claims he paid for me over the last 5 years? I needed to show him how much less he would have paid for me if I had option 1 over the last 5 years.

Year	2017	2016	2015	2014	2013
Ms. FI-ology's Total Claims	$924.22	$347.27	$243.79	$2,064.82	$3,324.40
Boss Paid with Option 2	$924.22	$347.27	$243.79	$1,532.41	$2,162.20
Ms. FI-ology Paid	$0.00	$0.00	$0.00	$532.41	$1,162.20
Boss Would Have Paid With Option 1	$0.00	$0.00	$0.00	$714.82	$1,974.40

 

Total Amount Boss Paid For My Claims Over 5 Years With Option 2	$5,209.89
Total Boss Would Have Paid For My Claims Over 5 Years With Option 1	$2,689.22
$ Difference	-$2,520.67
% Difference	-48.38%

The above analysis hinges on the premise that my next five years of healthcare usage will be similar to my last five. Since we can only look in the rear-view mirror (and that is what we do with our clients), this proves to my boss that option 1 is a deal for him!

In Conclusion

This turned out to be a win/win scenario. Worst case I will have a net gain of $10,176.92 over five years and my boss has a potential savings of $2,520.67. His savings will increase if I remain healthy and decrease if my health fails. I am happy to report that he said yes to this experiment! He is willing to take this small amount of risk for me when I showed him his potential savings. And, of course, he is the boss and can re-evaluate this each year. Broke me wouldn’t have had the brain power to conduct such an analysis. Not because I wasn’t smart enough to calculate it, but because I couldn’t fathom taking on a $1,350 annual risk for a greater future return.   However, Ms. FI-ology can take on a little risk now in return for a greater reward later. This analysis was so rewarding for me in many ways. I never want to forget where I came from as it keeps me grateful and hopeful of how we can all transform. Related Articles

• How An HSA Fits With Your FIRE Plans
• Investing Inside Your HSA: Healthcare's Best Kept Secret