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Written by WCI Columnist Ricky Racera, Ph.D.
My wife couldn't have been more excited. She just accepted an anesthesia position with no phone calls, no weekends, and no holidays. The only downside is that the surgery centers served by Anesthesia Group require crossing some of the busiest bridges in the country (if not the world), which sometimes necessitates commuting to larger cities. It was to become. But most of her work was done at a surgical center on this side of the bridge, just a 30-minute commute away. I was excited for her because she would be spending more time with the kids and me.
But I was just as excited about another aspect of her job: HSAs. (I'm a physician finance geek, which is why I write a column for WCI.)
What's not to like about an HSA?It's actually the only true 3x tax-advantaged retirement vehicle in existence. White Coat Investor takes a closer look at the benefits of this potential “stealth IRA,” and I used it to take a portion of my wife's pre-tax income, compound it tax-free, and then… Withdraw tax-free. While our HSA was growing, we saved receipts for medical expenses we paid out of pocket. That money is never taxed!
However, when we analyzed the financial benefits compared to the situation before accessing the HSA, we found that the benefits may be modest. When you join an HSA, you lose access to other benefits, have higher premiums for family coverage, and end up paying high out-of-pocket medical costs. When choosing a High Deductible Health Plan (HDHP) to access your HSA, it's important to be aware of the potential benefits you may be giving up.
Below are some of the pitfalls my wife overcame in making the decision to access an HSA.
Pitfall #1: You can’t contribute to both a Medical FSA and an HSA.
As I excitedly set up my wife's HSA for automatic pre-tax contributions, I realized I might need to check whether it's kosher to have both an HSA and an FSA. We had a health FSA at work, and I learned that my wife was excluded from contributing to the HSA for the calendar year. Oh, and I avoided an IRS violation.
However, the Health Finance Agency used pre-tax funds to purchase many over-the-counter health products, cover the remainder of medical costs and deductibles, and help fund the cost of prescription drugs. We were maxing out our medical FSA because our son with ADHD was attending expensive therapy sessions not covered by insurance, and my wife had a torn ACL (a classic skiing accident). Ta.
The Medical Financial Services Agency is a benefit that you can use whether you use it or lose it, but I always end up using it all by the end of the year. In 2024, the maximum amount you can contribute to a health FSA is $3,200 (increasing to $3,300 in 2025), leaving us with the highest taxes in New Jersey. The combined state and federal marginal tax rate is about 50%, so you can save about $1,600 with a health FSA. If you use an HSA, you lose your health FSA, but you can earn up to $4,150 before taxes (approximately $2,075 in pre-tax benefits). What's more, you can grow your money and withdraw it tax-free at any time if you present proper medical expense receipts. It is not limited to the end of the year like the Financial Services Agency.
My workplace also allows you to do a limited FSA that covers vision and dental expenses. Considering our finances, it makes sense for my wife to take an HSA. Of course, that's only if she stays healthy and doesn't tear her other ACL or more.
Then we encounter the next pitfall. . .
Click here for details:
7 Reasons Your HSA Should Be Your Favorite Investment Account
Do I need to get an HDHP just to use my HSA?
Pitfall #2: Choosing an HSA when you become seriously ill.
Your health insurance shouldn't be at the mercy of your HSA taxes. If you have a chronic illness and continue to prioritize HDHP copays, the choice is clear. Do not register with HDHP. What's less obvious is the answer to the question of whether you should take an HSA if you're healthy and free of chronic illnesses, like my wife is. There is no correct answer to this question. Make sure you know what financial risks you are taking if you get sick or injured.
Look at my wife who suffered a torn ACL last year. The cost of surgery and rehabilitation easily exceeded her current HDHP deductible of $2,500. If I had chosen HDHP that year (if it had been an option), I would have lost money. However, now that my wife's treatment is complete and I have made the decision to quit the sport of skiing, I am aware that there is always a slight risk of another injury, given that my wife is in very good health. So it makes sense for us to take on HDHP. More importantly, given our high income and emergency fund, we could easily cover the $2,500 deductible expense. Paying a high HDHP deductible is not a big financial blow to us. This is the most important hurdle to overcome when choosing an HDHP.
Keep in mind that if you choose an HDHP over a non-HDHP, you may be at risk of sustaining an injury or illness that year that prevents you from advancing. I say “maybe” because there is the following pitfall. . .
Pitfall #3: Your HDHP may be able to provide you with sufficient coverage to exceed your deductible.
You cannot limit the computation to only the deduction amount. You should include how much medical services will be covered after you meet your deductible. Since my wife is covered by my insurance, she was able to receive treatment at the hospital where I work for free. With the benefit of this incredible group of “friends and family,” my wife always received care from hospital system-affiliated providers. For in-network care outside of my hospital's system, there is a $1,000 family deductible that covers 80% of services. Out-of-network providers have a $2,000 deductible, after which they only pay 50% of the cost.
The HDHP my wife has has health coverage similar to the in-network benefits listed above after meeting the deductible. So if my wife has a chronic illness, an HDHP is not worth it because she would be seeing a provider within my hospital system. But what's interesting is that she had other health insurance options, including a non-HDHP, and after meeting that low deductible, the coverage was really terrible. It was a PPO plan with a $500 deductible, but only 50% of medical services were covered after that. Yes, because it's a PPO, there were more choices for in-network providers, but if my wife had a chronic illness and had to choose between HDHP and PPO, HDHP would have a higher deductible. You may choose to pay the amount and then get the income. – Network provider with 30% more service coverage compared to non-HDHP PPOs.
This can quickly become surprisingly complex, and further complexity becomes the next pitfall. . .
Click here for details:
How I built my 6-digit HSA (and what I plan to do with it)
Pitfall #4: Not knowing your insurance premiums
When you signed up for benefits when you were first hired, you may have been told about your health insurance options and the premiums associated with these choices. Once you sign up, you may have done a data dump like I did and forgotten how much you pay for health insurance. This may also include premiums related to coverage for your spouse and children. My health insurance costs $575 a year to cover my wife, but her workplace's HDHP is completely free (premiums are paid entirely by her employer). It's quite a good deal!
This gave rise to the following question. Should my kids and I follow my wife's plan to double our HSA contributions?The answer was no because of the premium costs. Her HDHP costs $1,600 per month to cover her spouse and two children. That's $17,200 per year. It's not worth it compared to the $1,800 a year I pay to cover myself and my children with my current employer's health insurance. Rather than all of us jumping into her HDHP, the kids and I keep our health insurance, which saves us over $15,000 a year.
The choice is simple, but you'll find that you need to know the premiums you'll pay before you can fully decide if HDHP is the right choice for you.
Pitfall #5: Not saving receipts for all medical expenses
In Episode No. 365 of the WCI Podcast, my esteemed WCI columnist Dr. Tyler Scott and WCI founder Dr. Jim Dahl asked a question that led to a discussion on the pros and cons of HSAs. Tyler incorrectly believed that only medical receipts for members enrolled in an HDHP could be used to withdraw funds from an HSA. Jim corrected that any medical receipt, including that of a spouse or dependent, can be used as long as the member is registered at the time the medical expense is incurred.
In fact, I was informed that the same thing applies to the Medical Financial Services Agency where I work. The HR representative told me that even though my wife and children had separate insurance, I could use my FSA medical benefits for medical expenses. So if you have an HSA, keep receipts for all medical expenses for your spouse and dependents. Also, know that if you have an FSA rather than an HSA, you can still use FSA funds to pay for your spouse's or children's medical expenses. Even if they don't have insurance.
Click here for details:
How I failed and then mastered a backdoor Roth IRA.
ONE PORTFOLIO BETTER THAN YOU
where we stand now
Ultimately, my children and I will continue with our current health insurance plan and my wife will work for an HDHP. This makes sense since my kids and I only pay $1,800 a year in premiums with full coverage from our in-hospital system provider, a $1,000 deductible, and 80% in-network coverage. I plan to waive my FSA medical benefits (but keep the limited FSA benefits from my job). My wife has no insurance, a $2,500 deductible, and 80% coverage from in-network providers, but she also has access to an HSA.
Everyone's situation is different. With an HSA, you should consider the factors outlined above to make sure you're in a good financial position.
If you need extra help planning for your retirement, or
If you have questions about the best way to save money in a tax-sheltered account, reach out to WCI's vetted experts to help you figure it out.
Did you miss anything when deciding on an HSA? Have you ever encountered a more complicated situation when deciding to use an HSA? Have you decided not to use your HSA to keep your life simple? Comment below!
