Over the many years of blogging here and elsewhere I've chronicled my adventures in health insurance and the occasions when we've had HSA eligible insurance. Generically, HSAs are probably the most important account you can contribute to. Yes, getting an employer match to a 401k makes the most economic sense but the flexibility of an HSA is hard to beat.
Contributions can be deducted from your income and you can take money out without tax or penalty for qualified medical expenses. A big benefit that doesn't get talked about enough is that there is no time limit to take money out for a qualified medical expense. Here's an example of what I mean. About three years ago, I got my colonoscopy. My insurance back then was such that I paid out of pocket for the test, about $1500. I have that receipt. At any point in the future, I can take $1500 out of our HSA and set it off against that receipt from early 2021.
We had an HSA for many years starting with either the first or second year that they came to exist. A higher deductible has always worked for us, thankfully and we were able to sock away a decent amount of money for something like 10-12 years until HSAs stopped making economic sense for us. They became insanely expensive for whatever reason, expensive relative to other insurance plans I mean and I never understood why.
I hadn't looked in a few years but I did this year when the 2024 Marketplace emails started going out a couple of weeks ago and this year some things changed, pretty sure I investigated last year and it was still a bad deal but either way 2024 looked promising as I mentioned in a blog post a few days ago.
The biggest change in my opinion is the extent to which much higher incomes can have the monthly premium subsidized. Subsidies used to stop at $70,000 of income and while I knew that threshold was going up, it apparently went way up. The plan that we chose costs $1920/mo, I plugged in what I expect my income to be and it told me that we could get up to $950 off in subsidies. I was shocked.
We were all set with catastrophic insurance at $770/mo and $10,000 deductibles. With the change to the Marketplace HSA we are paying $1175/mo so $4900 nominally more expensive for the year. With the HSA contribution we save $2000 in taxes. We also save about $1000 in taxes for writing off a larger insurance expense, so factoring those in, it is now $1900 more expensive. Will it be worth it?
The subsidy is based on what I think I will make. I plugged in a number and was told I could max out with a $950 subsidy but I dialed it back (a feature of the Marketplace) to just $750. If I maxed out the subsidy then we'd be paying something like $975 and it would be a no brainer. If I make exactly what I estimated, then I will get more money back, enough that it would more than eat up the $1900. I am actually expecting my income to be less however. Due to some things related to how the old firm wound down, my income was sort of artificially high in 2023. This actually has not been resolved yet (it's a weird story that I'm not going to get into) but if my income stays artificially high, inline with my estimate then I will get a little money back and if my income corrects to what it should be, I will get a lot of the premium back. If my income somehow ends up being more than I expect then I have the $200/mo subsidy I'm not taking as a buffer but eventually, a high enough income (very unlikely) then I'd have to go out of pocket.
I appreciate that is confusing and I probably did a bad job articulating it but between the HSA contribution, the other tax savings and the way I am using the subsidy, it is very likely that we come out ahead with the nominally more expensive HSA
Being self employed, the HSA is our priority for socking away money in tax deferred accounts. The employer match for my 401k would come from me, it's not free money. We'd fund the HSA first, probably in January. Then later in the year we'd fund my 401k. The last account to fund would be my wife's spousal IRA. The logic there is the deadline to contribute to a solo 401k is December 31st and the spousal IRA is April 15th so if there is some circumstance where we'd like the extra three and a half months, we'd have it.
Hopefully the HSA will make sense all the way through to Medicare in 2031 but I'm not holding my breath. Putting $9300/yr or more until then would be enough to add meaningfully to our HSA account balance.
A follow up to a point I made a while back on this is how cheap Marketplace insurance might be for people close to my age, 50's through to mid-60's, who find themselves out of work unexpectedly possibly forced to retire. If we had to get by on little to no income for some reason, this is something I refuse to be complacent about, then health insurance might be free or at least close to it. That is a fantastic out for anyone who ends up needing it. Note that I am not talking about the quality of insurance in terms of what is covered or not or anything like that. It is still up to us to do all we can to not need the healthcare system. Taking up a few good habits is within our control and can be the difference maker for many of us and a little good luck is ok too.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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