Tag Archives: hsa

HSA Account in California – Worth It?

December 2, 2017 Joy 3 Comments

As I mentioned in my recent post, I’m currently looking into what health insurance to select for next year. I have the options of Anthem HDHP, Anthem PPO, Anthem HMO and Kaiser HMO.

Typically, as a healthy-ish young adult, I’d select the HDHP. I’ve always been a proponent of HSAs, but now I’m not so sure – especially living in California, one of the two states in the country that doesn’t recognize HSAs as pre-tax income. It’s actually a rather complicated tax situation in CA that no one explains well… and I’m unsure if even I’ve been filing my taxes right with my HSA all these years!

What is an HSA?

An HSA is a supposedly tax-free account for healthcare costs. If you have an eligible health plan, you can contribute up to a certain amount per year (~$6900 for a family next year) which is put into the account pre-tax* and then you can invest that money and whatever it grows to you can take out tax free if used for qualified medical expenses at any point in your life. It sounds like a really good deal… and it is… except HDHPs have “high deductibles” and, even more troubling, HSA plans typically have very high fees that eat into any growth you see unless you are a wise investor (AND have access to good investing options, rare in typical employer-sponsored HSA accounts.)

*HSA Rules in California

What makes matters worse, California (and New Jersey) doesn’t recognize the HSA at all. So, any money you put into it is taxed as income. That seems to be handled automatically via the W2, since the employer makes those contributions on your behalf. But then you also (and I didn’t actually know this until yesterday) are supposed to pay taxes on dividends and any interest earned in the account annually. My HSA account is relatively small (it’s now about $7000) BUT I have to go back and amend returns likely if I have any earnings on the account each year. I did actually merge two accounts which, since both accounts did not have the same funds, required selling all of my funds to roll them into the other account last year. I’m guessing that will hit my 2017 taxes — and I’m not clear yet if gains will be taxed as long term capital gains or income. Not one HR person has explained this or mentioned this in all my years working… probably because they aren’t allowed to give tax advice… but it seems like something they should mention.

“Depending on what kind of annual statement the financial institution sends out, it could be extremely difficult to figure out how much HSA income account holders should report on their California tax return each year.” – SF Chronicle

Yup. I don’t recall ever getting annual notices regarding my HSA account’s tax information. The good news is that now that I’ve transferred all of my old funds to HSA Bank, I at least will have my records in one place – for this year. Well, sort of. I have two months worth of HSA funds at my new employer – though I’ve heard they’re actually using HSA bank now and transferring to a new system. I should probably check on that, since I have no idea where my new HSA funds are at the moment. Next year it will be a different bank that apparently provides fewer investment options in “funds.” This may still be worth it for the federal tax savings (over many years, as a retirement health account) BUT it’s troublesome that California is refusing to provide the tax treatment that the rest of the country (except NJ) offers. This state really is an expensive place to live.

HSA Account Math, Family of 2 (Example)

Family Out of Pocket Max: $9000
Monthly Cost (Annualized): $1030(*with employer coverage and contribution)

Max Out of Pocket Family of 2: ~$10k

HSA contribution: $6900
HSA contribution, 3% growth, in 30 years: $16,748

Value of tax deduction, federal: $2415 (35% bracket)
Value of tax deduction, state: $0 (or, -$897)

So, you pay $897 (state tax) + $5650 investment + $10k today = $16547 to have $16,748 in 30 years (*WITHOUT FEES ADDED)

(someone please check my math.)

Now, that doesn’t really work either – because unless you’re invested in TIPS (treasury funds that are tax advantaged), you’ll be taxed on any dividends earned by that investment every year, like it was a taxable account, for state purposes only. That will cut into your growth a bit.

Then, you also have to pay HSA bank fees, which are very high and also cut into your “savings.” Example fees include:

Maintenance fee and Service Fee: $66 per year (if your bank account balance / non-invested funds – is under $5000)
Monthly Investment: $21.00
Using your HSA Card: $2 per transaction (!)
Access Funds Through Internet Withdrawal: $2 per transaction

In any case, I’m not sure I know enough to call the HSA a sham, but it sure looks like a way for the bank to charge a lot of fees. And, just like any other screwed up government-created account (screwed up due to people in government not agreeing on anything and not giving a shit about the people of this country), the HSA which is supposed to be this brilliant tax free way to save for future healthcare needs is ACTUALLY just a way for banks to make money off of people who likely don’t even realize it.

It’s pretty crazy that there is a $2 fee to even use funds in the account EACH TIME YOU TRANSFER FUNDS OR USE YOUR CARD. This administrative fee might be necessary to cover the cost of running an HSA account, but if that’s the case, is it even worth it?

Now – if you can invest the funds in the market and do better than 3% a year, it gets a little more interesting. Still, because you’re investing in the market, what goes up can come down. As a long term investment it’s probably safe – which is why young people are wise to consider HDHPs and HSAs. However, none of this is discussed in open enrollment meetings. AND, most people consider an HSA just a larger FSA, and put their money in the account pre-tax and then spend their funds down over the course of the year. While there’s nothing wrong with this, per se, you are now paying $2 per doctor’s appointment to use your card. If you go to the doctor a lot, let’s say 20 times a year per family, you just spent $40 on going to the doctor in fees. For someone in a lower tax bracket who isn’t seeing that much in tax savings via a HDHP (since you only save the money from your top tax bracket), it may actually be a scam.

Let’s not forget that in the event of death, your HSA is taxable to your heirs entirely as income at their income tax bracket. While it can be used to pay off qualified medical expenses of the person who died and owned the account, anything left over is taxed as income. However, after 65 an HSA account owner can take out funds for non medical expenses without a 20% penalty. BUT, those funds will be taxed as income, just like a 401k.

So as much as I’m tempted to go the HDHP route next year (assuming we’ll spend the full $9000 out of pocket max) just to get those $6900 in federal funds in to an HSA pre tax, I’m really not sure it’s worth it.

PPO Costs in Comparison…

Family Out of Pocket Max: $5k
Monthly Cost (Annualized): $3k

FSA contribution (*is recognized as pre-tax in CA) = $2650 ($1272 tax savings)

Total Costs including FSA savings: $6728

PPO vs HDHP Costs Today

PPO: $6728 ($9819 remains to invest in post-tax accounts)
HDHP: $16547 (*includes $6900 investment)

PPO vs HDHP investments in 30 years (at 3% interest) – WITHOUT FEES ADDED

PPO: $23,883
HDHP: $16,748

IF USED FOR QUALIFYING MEDICAL EXPENSES (TAXED OR NOT TAXED)

PPO: $19945 ($3937 in cap gains tax, CA)
HDHP: $16,748 (minus fees and state taxes – which could be significant over the years)

So, if my math is correct there, the PPO actually ends up being the BEST plan long term anyway, with taxable investments, at least in the state of CA (and probably in other states, although it might look a little better without state tax.

What About if I Don’t Hit My Out of Pocket Max?

Ok, so for arguments sake, let’s look at a more typical HSA scenario. You’re a healthy 20 something with 40 years until retirement. As a single person you can put $3450 into your HSA. You’re smart, so you plan to invest this month over the next 40 years vs spending it from this account. You have a HDHP and your annual out of pocket plan cost is $840. Your employer contributes some money, let’s say $1000, so you’re already ahead, paying -$140 (*minus CA state tax, I’ll get to that in a bit) — so your annual costs are negative, before you start using your account.

You scrounge up the funds to put in the $2400 ($200 per month) into your account this year, which will be augmented by the employer’s contribution up to your max of $3400.

You don’t get sick often, so you don’t hit your medical deductible or out of pocket max. Let’s say you spend $1000 on a few office visits and blood tests due to a scare, but nothing major – no ER visits, no recurring specialist visits. So, now your total cost of healthcare this year is $2400 and you’re getting a federal tax savings on your $2400 investment (but paying state income tax on this.)

Your federal tax savings, since you’re in a lower tax bracket (in your 20s, we assume) is 15% (if you make up to ~$38k.) So your tax savings on this is $360 (if you make $38k-$93k, you’d save $600.) You still have to pay state tax on this income – let’s say that’s $3400*8%=$272 for the sake of simplicity.

So, adding up all the numbers with HDHP, $1000 medical spend and $3400 annual investment as per the rules above

Healthcare cost = -$140 (annual premium) + $1000 (medical expenses) + $2400 (investment) + $272 state tax – $360 tax savings = $3172

In 30 years (to compare to other couple above) you have:

HDP: $8252 – $3172 initial cost = $5080 (gained, as long as it’s used for healthcare)

Now, let’s say this same person used a standard PPO.

The math is tricky because we don’t know how the deductible and coinsurance will play out, but let’s say they have a $250 deductible but a higher monthly fee. It’s a $1080 fee for the year, but with the lower deductible instead of $1000 in healthcare spending, it’s more like $350 due to the low deductible and co-insurance.

Annual healthcare spend = $1430

But we’re not done yet…

Since this person didn’t spend $3172 on healthcare this year (including the $3400 investment), they have $1742 left to invest in taxable accounts.

With the PPO, they have $4228 in 30 years at 3% growth ($2486 taxable at investment gains rates) = 2486-696 = $1789
With the HDHP, they have $5080 (gains) in 30 years at 3% growth

In this case, the HDHP appears to win (significantly.) Even if they take out the HDHP money for non healthcare use and pay the 20% fee in 30 years and income tax on this amount (Let’s say 25% income tax plus 13% state) = $2387.60 you are still ahead of the $1789 if you invested in a taxable account.

This isn’t taking into account HSA fees over the years, which add up and might make both worth a similar amount. AND you’re taking on the risk in the HDHP that you won’t need to use the full out of pocket max ($4500) which clearly makes the math reverse. Very quickly.

So IMO HDHPs and HSAs are only good for young, healthy individuals who have a low chance of needing to use their health insurance each year beyond a few routine doctors visits. Otherwise, I’m not sure they offer better savings than a lower deductible account and saving that money to put into the market. What isn’t covered here is that your investment options will be much broader in a non HSA account, and fees will be much lower (or at least you can choose if you want a higher fee account.)

Is all of that worth ~$600 in gains (per year) — which is probably more like $450 per year after fees? This is if you don’t use your actual health insurance much… one trip to the emergency room and your numbers suddenly won’t look so good.

This is why I’m leaning towards thinking the HSA is a scam for everyone. It’s too risky for the minimal reward you get for investing in it vs a PPO and investing any remaining funds in a taxable account.

Does anyone disagree?

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My 2009 Health Spending and HSA Account Report

December 23, 2009 Joy 2 Comments

This was the first year I had an HSA Account along with a high deductible health insurance plan. It’s worked out ok, though to be honest I’m still unsure if I’m doing this all right. I made some last-minute transfers from my account to reimburse myself for medical spending and glad I did it today, because I found out that I can only transfer $500 per day and I needed to take out the same $2000 that I just transfered in.

The biggest stumble with my HSA this year was my accidental over contribution (excess contribution), as I transferred $2000 into the account completely forgetting that my work would be putting in another $100 before year end, putting my account $100 over the legal limit for the year. Oops.

I’m still not sure how that is going to pan out… I’ll probably just be extra taxed on that $100 which sucks but it will be a few bucks (hopefully) and I know better for next year.

My medical expenses this year beyond what was covered by insurance were pretty costly…

Vision

$134.95 eye exam

$429 13 month supply of contacts

Dentist

$761 deep cleaning 4 quadrants and oral cancer screen

Mental Health

$710 — group therapy 1 month, one psychiatrist appointment, one career counselor appointment, 2 individual therapy (group screening) appointments

Acupuncture

$250 — 2 visits and herbs

Gynecologist

$200? — ultrasound to see that yes, I still have many cysts on my ovaries and office visit to discuss this (all during my supposedly “free” yearly checkup

Foot Problems

$195 — this was either for my one visit to the podiatrist or the xrays, I’m unclear which but I probably owe more.

Monthly Health Deduction: $20 (x 12 = $240)

Total Health Costs this Year: $2919.95

– $1200 (employer contribution to HSA)

My Approx 2009 Health Expenses: $1719.95

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Reimbursing my HSA Account Before Dec 30

December 11, 2009 Joy 1 Comment

This is my first year with an HSA account and I’ve yet to use it properly. The basic premise of the HSA is that you can pay for medical expenses (including dental, vision, and even acupuncture and herbalists) with pre-tax dollars. Or, well, they’re post tax and then untaxed dollars, depending on how you do it.

The limit this year for an HSA account is $3000. Since I don’t have a 401k and I max out my Roth IRA, it seems like the next logical step would be to max out my HSA. My company puts in a bit of money each month so I have $2000 left that’s on me for the year. My plan now is to transfer $2000 into my HSA account before the end of the month. Nothing like waiting until the last minute.

I’m currently awaiting my HSA account to hook up with my bank account. They need to do that take out a few cents from your account so we know you’re legit and you can tell us what happened on your account thing before connecting with my checking account. Hopefully that won’t take too long.

Then I have to transfer $2000 to the HSA account, which I’m told can take up to 5 days. Then I have to, right away, transfer most of that $2000 BACK to my checking account to reimburse myself for all the medical expenses that I’ve had this year. I think there might still be a nickel or so left in my HSA account by the time I’m done with all the reimbursements.

How much am I really going to save on this? Well, I guess that $2000 extra income is shielded from federal tax (as long as I use it for a qualified medical expense). Since I’m probably in the 25% tax bracket this year, I’ll save $500? I think? Because California is a douche, that money still has to be taxed via the state’s 9% (?) rate. I’m extremely confused what that is going to look like come tax time. I’m guessing I have to pay 9% on $3000, or $270. I guess I’ll find out when I get on my Turbo Tax account and see what they have to tell me about my HSA account. I’m hoping I’ll understand it a bit more for next year.

Have any of you used an HSA account before? Is it a total hassle come tax time?

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My Expensive Right Foot

October 8, 2009 Joy 1 Comment

Let me start out by saying I have no idea how much my podiatrist visit yesterday is going to cost me. Granted, I try to not really include my HSA dollars in my networth, but I do, because it’s my replacement 401k. But I think I just spent my entire deductible ($1500) in one day, thanks to some foot problems I’ve been having.

Doctor’s aren’t educated in how much things cost, and I think they need to be. Especially with the ways HSA’s work. There should be a clear menu of pricing for various treatments. It’s really unfair to expect the consumer to pay for everything without clearly letting them know how much it’s all going to cost, or to order expensive xrays that may not be necessary without even mentioning that they will cost $500 or more.

Even now, I don’t know how much yesterday’s visit cost. I’m guessing I met my deductible with that one visit. I received a consultation, cortisone shot for a bone spur / nerve on my foot that was causing the problems, and a full set of xrays for my lower back to see if my sciatic pain and leg numbing problems are caused by any issues with my spine. On top of that, I got the ultrasound to check out my polycystic ovaries on Wednesday at my otherwise covered yearly checkup at the Gyn. In other words, after an entire year of not spending a penny on my healthcare, and saving in my HSA for retirement, I’ve likely spent it all and then some.

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PPO versus HSA: A welcome decision

January 8, 2009 Joy 4 Comments

It has been a long time since I’ve had the luxury to ask myself whether I should enroll in an HSA or PPO. In fact, I’ve gone without health insurance for the past year. Now that I’ve finally been offered a full-time gig, I’ll be getting health benefits a long with it. Boy, am I glad the day has finally (almost) come.

Now, I just need to decide if I should go with the HSA or the PPO. I’m leaning towards the HSA. My company contributes $100 a month to it, and it has a $1.5k deductible. Apparently my max yearly contribution is something like $3k for an HSA account. So *if* I could go a year without needing to go to the doctor for anything other than my regular exams (which are covered by this plan) I could theoretically save $3000 tax deferred per year for retirement.

My goal for the next year is to save 15% of my income, or at least $9,000 of my income for retirement. I’ll max out my Roth IRA, but that has a $5k limit. Then where do I put the rest of my money? I was thinking of opening up a SIMPLE IRA, but now that I’m going to be an employee, that’s out of the question? There has to be some way to put more money away for retirement tax deferred if your company doesn’t offer a 401(k)…

Anyway, the HSA really makes the most sense. I know myself, and I know that I hardly ever go to the doctor, even when I should. Last year when I was sans insurance I had something bad going on with my stomach and I finally went to the Ob-Gyn to get it checked out. Cost a small fortune.

The PPO is attractive because the company pays 90% of it per month. My monthly payment, then, would prob be $50. So I could pay $600 per year for a PPO *or* I can do the HSA (which prob costs something but less than the PPO) and get $100/month – $2.95 monthly admin fees – $15 one time set up fee put into my HSA account. And put more money into that as well.

They say HSAs are good for us youngins but I’m also not the healthiest of young people. Then again, with an HSA I could still go to the doctor, I’d just have to decide if it’s worth dipping into potential retirement income. Hmm.

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Almost maxed out my Roth IRA, now where do I put my savings?

March 4, 2008 Joy 2 Comments

By now, I’ve read plenty to scare me into investing as much as possible for retirement as soon as possible. Last year I maxed out my Roth at $4000 (put some of my savings into that, since my income didn’t allow pulling from that) and this year I’m already up to $3300 of my $5000 limit. I’m trying to put in $300 a month, which will get me to my limit in a few months.

Ok, so the question is, after I max out my Roth IRA, where do I put my money?

*I am a freelancer so I don’t have access to a 401(k).

I’m diversifying my investments away from my Roth right now as the case may be, but I’m not sure if that’s the ideal situation. I’ve got about $1300 in my Sharebuilder (non roth) account which kind of seems foolish. What seems more foolish is my heavy investment in the GLD (gold) ETF, since, despite it making nice gains, is a terrible play for long term. Ok, so I should have researched this before investing in it, but I recently found out that GLD, because it’s investing in gold bullion and not the gold mining companies, actually counts as a collectible after a year, which means it gets taxed at 28 percent instead of 15 percent if you hold it long term.

Well, at this point Sharebuilder is starting to seem like a huge rip off. I do like the idea of dollar cost averaging, and I am using up all of my six “free” investments each month, putting $300 a month into my sharebuilder account as well.

My question is… while I could max out my Roth IRA sooner by skipping over my Sharebuilder account altogether, I’m definitely on track to max out my roth one way or another (yeay) and then… what should I do with the rest of my savings? What’s the smartest place to put it for growth and tax purposes?

Here are some options I’ve recently discovered and am considering. Let me know if any sound like a brilliant idea because at this point I’m completely confused.

1) 529 Plan
Part of me wants to go to grad school one day down the line, although I’m not sure of this, and putting savings into a tax advantaged 529 plan would make sense if this were the case. Worst scenerio, one day I probably have kids and they get to take advantage of my 529 plan that never got used, since it can be transferred within the family. Not a bad idea, I guess. Worst, worst case scenerio, I never have kids and someone else in my family gets the money. But this won’t help me save for a house/condo, which is really want I want to be saving for right now, as grad school is a maybe and house is a definite sometime in the next 10 years.

2) HSA
I still need to open my HSA account, as my health insurance IS HSA eligible. While I can’t withdraw that money until retirement (so it’s less flexible than a Roth) I can use it to invest. And there are some tax advantages (that I don’t entirely understand) available for the HSA as well.

3) Prosper
I’ve had great success with Propser in the few months I’ve been using it thus far. I’ve only put in $200 and lent to 4 people ($50 each), but the first three at least are paying on time and I’m getting my 8% return, for now anyway. Of course I’ll have to pay tax on all that, but it’s still a nice return. I just worry about my borrowers defaulting, since one default will take out a huge chunk of the money I’m lending. With $200 in loans, it’s not that scary. If I start lending out lots of money, it could get scary.

4) CDs
I already have $12k tied up in CDs that are ending over the next six months. I’m considering putting $5000 of that into my Roth IRA for 2009 when the time comes, but that still leaves $7000 plus whatever savings I manage to make over the year. Where do I put that? Back in a CD? CD and savings rates are so crappy right now (thanks economy!) so it seems like a bad idea for the short term.

5) Put extra savings into my ING Direct high interest savings account and put it into a Roth IRA next year, and the year after, and the year after that. Don’t touch it for anything else.

That leaves me with…

6) Keep the money in Sharebuilder and grow my non roth ETF investments. Figure out what the deal is with my GLD investment taxwise and sell before it moves into the higher tax rate. Probably break even on that if it performs as well as it might. Oh boy. What a bad investment! I wanted to hold it long term, but now it seems silly given what a high rate it will be taxed when it take it out. So I plan on focusing my Sharebuilder account on emerging market ETFs. Either they’re do awful and I’ll lose all that money or over the years they’ll do well and with a low fee percentage, I might make some money. It will be taxed when I take it out, sure, but at least it will be a way to grow my savings after my Roth is maxed out. I might sell off my three individual stocks too. I’m a bit confused on dividends, but it seems that if they’re going to get taxed each year and then be reinvested and my stocks keep losing money, that’s a bad situation for me, no? I don’t have that much money invested in individual stocks at the moment (about $300 in three stocks, the largest holding being MCD, and all three of these stocks have gone down since I started investing in them, yet I still owe tax on the dividends).

I like investing in Sharebuilder because it gives me a chance to learn all this. Still, if I want to buy a house one day, I need to be somewhat careful. I know I’m young now and I can take changes, but there’s no reason to be stupid about things.

So, faithful readers, help! What should I do with my savings after I max out my Roth IRA?