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Finding Your HSA Sweet Spot

Finding the HSA Sweet SpotWe all know that health savings accounts can help you save money on your healthcare costs by doing great things like lowering insurance premiums, reducing your taxable income, and helping you put aside money for healthcare both before and during retirement.  But we’re here today to discuss one of the lesser-known HSA strategies; a strategy we’re calling the “HSA Sweet Spot”.

The HSA Sweet Spot is the definition of healthcare Zen.  It is unique to health savings accounts, and when you find it, can completely change your perspective on how you both spend and save your healthcare dollars.
 
So, what is this HSA Sweet Spot?  Its "technical" definition, is when the balance in your health savings account grows to the point at which it completely covers your annual maximum out of pocket on your high deductible insurance plan.  That was a mouthful, and it contained a fair amount of “industry jargon”, so what does that mean to the average person? 
 
It basically means that you’ve got enough money in your HSA to fully cover any major medical event that may come up in the future, effectively freeing you of the monetary stress that goes along with having to deal with whatever healthcare-related issues are at hand.  In short, it simply means peace of mind.  Let’s take a look at a couple functional examples to help paint this picture clearly.
 
In order to have an HSA, you must first have an HSA-qualified high deductible insurance policy (HDHP).  For an individual in 2013, an HSA-qualified HDHP would have a minimum deductible of $1,250 and a maximum out of pocket of $6,250.

 

2013 DEDUCTIBLES & CONTRIBUTIONS

Insurance

HSA Contribution Limits *

Coverage
Minimum
Deductible
Maximum
Out-of-Pocket
Regular
Catch-Up

Individual

$1,250
$6,250
$3,250
$1,000

Family

$2,500
$12,500
$6,450
$1,000
*If insurance is effective after January 1 and you deposit the contribution limit, you must maintain your qualified insurance coverage through the end of the following calendar year to avoid possible taxes and penalties on part of your contribution.

 

This range of numbers relates to the amount of money you’re required to pay before your insurance kicks in.  So in the event of an emergency or catastrophic event, the minimum you’d be required to pay is $1,250 and the maximum you’d be on the hook for is $6,250.  But…how does this relate to the HSA Sweet Spot? 

Simple.  Let’s say you’ve got a $2,500 deductible, with a health savings account.  When you have a balance of $2,500 or more in your HSA, congratulations!  You’ve hit the HSA Sweet Spot.  If at this point something were to happen to you or your family (Heaven forbid), you’d be completely covered with zero liability.  You could simply write a check for your entire deductible straight from your HSA (in this case $2,500), and your insurance carrier would pick up the rest of the tab so you can focus on getting the healthcare treatment you need, without having to worry about how you’re going to pay for all of it.
 
Once you’ve gotten to the HSA Sweet Spot, a new world of opportunities opens up with both your health savings account and the rest of your finances.  Consider the following strategies and scenarios:
 
Shifting to Investments
 
HSA Investments
For starters, any additional money that goes in on top of your policy’s maximum out of pocket could simply be put into investments.  You’ll always be earning interest on the funds sitting in your HSA, but since you’ve got your maximum out of pocket covered for the year, you could choose to invest any additional funds to earn some extra money.  Our account holders have access to over 6,000 different stocks, bonds and mutual funds to choose from when investing their HSA dollars.
 
Tending to Other Financial Needs 
HSA Freedom
 
Is money a little tight these days?  We’re all aware that today’s economy isn’t the greatest.  But remember, you’ve already got your healthcare bills covered for the entire year (if you even need it), so you may want to think about spending some of the funds that would’ve gone into your HSA on something else.  Groceries, college funds, home improvements, or whatever comes up.  Although it’s a great strategy to sock away the annual maximum contribution ($3,250 for an individual in 2013) to reduce your tax liability, you may simply just need to use those funds elsewhere, and you have the freedom to do that with your potential healthcare costs totally covered.
 
"Deductible Walking" 101
 
HSA Deductible Walking
 Ok, we’ve saved the best for last.  Have you ever heard of “deductible walking”?  No?  We’re not surprised, we’re pretty sure we just coined the term.  This one’s more of a long-term strategy, but bear with us here and you could save some serious money over time.  Let’s say you’ve got a $2,500 deductible, as we’ve used as a previous example. With that $2,500 deductible, let’s say your monthly premiums on your HDHP are $250.  You’ve got more than $2,500 saved away in your HSA, so your potential healthcare costs are covered…  Here’s where it gets creative.
 
Next year when you’re looking to renew your insurance policy, think about bumping up your deductible and maximum out of pocket.  This will lower your monthly HDHP premiums (saving you money) and all you need to do is bump up the balance in your HSA to match the new maximum out of pocket.  You could even use the savings in premiums to do it!  Once you’ve done that, you’re back to your HSA Sweet Spot with your new HDHP, and you’re saving money every single month on the premiums.  Take a look at the chart below to see a visual example of what we mean:

 

"Deductible Walking" - 2013 vs. 2014

2013 Figures

2014 Figures

Deductible
$2,500
Deductible
$3,500
Monthly Premium
$250
Monthly Premium
$150
Savings
n/a
Savings
$100 (Deposit to HSA)

 

“Walk” up your deductible and “walk” down your premiums each year, and you’ll be building a bigger balance in your HSA while simultaneously saving money on premiums every time you renew your policy (all while being fully covered in the event of a large healthcare event).  You can increase your deductible all the way up to the indexed annual maximum (for an individual in 2013, that would be $6,250) to save the most money you possibly can on your premiums and subsequently use those savings to max out your HSA each year, effectively reducing your tax liability, and saving for retirement and future healthcare expenses.  It’s a bit of a long-term, advanced HSA strategy but it’s definitely a win-win!
 
Contact Us with Questions
 
That’s it for our summary of the HSA Sweet Spot, but as always, please reach out and contact us if you have any questions!  Some of these topics can get a little convoluted, and as much as we try to steer clear of industry jargon we understand sometimes all these acronyms can make your eyes glaze over.  Luckily HSAs are the only thing we focus on, so we eat, sleep and breathe them.  We’re always happy to answer any questions anyone may have.  Until next time, have a wonderful day!

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Posted by HSA Admin at 5/7/2013 4:33:00 PM
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