Healthcare Soundoff. Tracking Today's Vital Issues.

Health Savings Account Calculator (5/9/2007)

If you’ve read our previous postings and done the calculations and estimates suggested, you have an idea of what you actually spend in total for health benefits.  By adding your health insurance premium costs to your estimated out-of-pocket expenses, you now have your total out-of-pocket pre-tax health care costs. 

Now it’s time to calculate whether you could save money by opening a health savings account, and perhaps raising your deductible so that you can pay a lower premium cost.  .

Health Savings Accounts, or HSA’s, were legalized in 2003.  Here are the basics about these types of accounts that you should know:

• It allows you to save for qualified medical expenses (diagnosis and treatment of disease, including prescription drugs).You own it and, similar to your IRA, it goes with you if you change jobs.

• An HSA can only be created if you have a qualified high deductible health insurance policy.  Co-pays and prescription drug benefits are not allowed because you pay these expenses from the Health Savings Account.

• The qualified high deductible health insurance policy must have a minimum deductible of $1,100 per individual and $2,200 per family.  Contributions to the HSA may be 100% of the deductible up to a maximum of $2,850 for an individual and $5,650 for a family.

• Both you and your employer can make contributions to your HSA.  Employer contributions are non-taxable and employee contributions are made on a pre-tax basis; that is, you can’t be taxed on them.

• Investment earnings on an HSA accumulate tax free just like an IRA.  HSA distributions are also tax free if used for qualified medical expenses.  Upon death, HSA ownership may transfer to a spouse on a tax-free basis.

Health savings accounts are the vehicle that the government is sponsoring to put us in charge of how we spend for our routine healthcare.  The hope is that once we are in charge of our routine expenditures, we will change our demand for medical services, only selecting necessary care.  The co-pay we currently pay at the doctor’s office does not assist us in discerning between necessary and unnecessary health services or expenditures.  Therefore, we believe that someone else’s money is paying for our health services—not our own.

Right now, the only control we have over our health expenditures is limited to whether or not we seek to have a particular healthcare service (see a doctor, have an x-ray, etc.).  We do not even have influence over the prices charged for healthcare services rendered.  It’s no wonder why Explanation of Benefits pages (EOBs) are so confusing!  HSAs are intended to put us in control and in the know.

You can use the formula below to assist you in determining whether an HSA is right for you. Go through these steps for a traditional benefit plan, and then a qualifying higher deductible plan and compare the costs side by side.  Of course, for the traditional plan there is no HSA contribution so skip the steps concerning HSAs when calculating your costs for those plans.  Here is how:

1.      Calculate your premium—the amount that is deducted from your paycheck each month for health benefits.  If you are comparing a traditional lower deductible plan and a higher deductible HSA plan, you need to know both premium amounts.  List these amounts in your notes side by side.  (Use annual expenses.)

2.      Estimate the amount of medical expenses you expect for the coming year.  We have given you a guide on how to estimate this in previous columns.  Remember, since no co-pays are allowed for routine medical visits and prescription drugs in HSA plans, your medical expense estimates should be higher when looking at an HSA.  For traditional plans, use the co-pays listed for doctor visits and prescription drugs in the benefit schedule of our previous column.

3.      Total these two figures.  This is your pre-tax out-of-pocket medical expense.

4.      Calculate the contribution to the HSA and multiply that by your tax bracket (Find your bracket by determining your net income from last year’s tax return and seeing what tax percentage is paid on that net income in the tax tables of the 1040 instruction book available at most post offices or online at the IRS website).  As a guide, most people generally contribute the difference between the amount of premium they would pay with the traditional lower deductible health benefit and the premium they will pay with the higher deductible HSA premium.  (Again, use annual contributions.)

5.      Calculate your tax savings.  Do this by multiplying the total in Step 3 above with your tax bracket. 

6.      Calculate your after-tax cost for medical care.  To do this, subtract the tax savings you calculated in Step 5 from the pre-tax medical expense from Step 3 above.  This is what it actually cost you for medical expenses and coverage for the year.

7.      Lastly, if you have an HSA, subtract whatever your balance is at the end of the year from your after-tax cost in Step 6 above.  The balance in your HSA is the contribution you made in Step 4 above minus the estimate in Step 2 above. Do this because this money has been saved and sits in your HSA account for use in ensuing years.

By comparing your costs with an HSA to what you would pay by purchasing more traditional lower deductible coverage you can see what savings, if any, you would achieve by going the HSA route.  If that savings is high enough you probably will be better off with an HSA.   If the savings falls in a grey area you may feel the risk of having to pay more out-of-pocket is too great and revert to the traditional coverage. This posting was first published at www.healthcentral.com.

Deciding whether you benefit from using a health savings account is complicated.  Hopefully the formula above will help you—email any questions you might have to info@healthcaresoundoff.com.  There are a number of online HSA calculators as well—the best one we’ve seen is at www.ceresgp.com/HSA.