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Estimate Your Savings With an HSA Plan

Here are some handy worksheets to help you see how an HSA can benefit you financially. Beginning around the middle of the page, there is an example using Jack and Jill's hypothetical family that will help you see how the HSA can help a typical family. You can use the blank worksheets at the top of the page to enter your own information after seeing how the calculations work for Jack and Jill's family.

Traditional Plan

STEP 1 Enter current annual premiums  
STEP 2 Subtract annual tax savings:  
  a) Premiums paid (100% for self-employed)  
  b) HSA contribution
-0-
STEP 3 Net premium cost (Step 1 - Step 2)  
STEP 4 Add any additional out-of-pocket expenses
(deductibles, co-pays, non-covered costs, etc.)
 
NET Annual Cost (Add Step 3 + Step 4)  

 

HSA-qualified High Deductible Plan

STEP 1 Enter HSA-qualified plan premiums  
STEP 2 Subtract annual tax savings:  
  a) Premiums paid (100% for self-employed)  
  b) HSA contribution (deposits x tax rate)  
STEP 3 Add Step 2(a) + Step 2(b)  
NET Annual Cost* Step 1 - Step 3  

*From this total, do not add medical expenses paid directly out of the HSA savings account.  With an HSA, you are saving dollars to use for future medical expenses that may, or may not, ever occur.  Plus, you are getting an "above the line" tax-deduction for every dollar saved, regardless of whether those dollars are ever actually needed for medical expenses.

Don't make this mistake!   

The biggest "mistake" people make in "comparing" a traditional plan to an HSA plan is that they mischaracterize money deposited into the HSA savings account as an "expense."  But these are dollars truly being saved.  The law allows a 100% tax-deduction for each dollar saved.  You are saving in advance for future medical expenses that may never occur, and you are getting an instant, 100% tax deduction for the money deposited into the savings account each year.  If $60 is withdrawn to pay a doctor's bill, it is fundamentally incorrect to characterize that $60 withdrawal as an "extra out-of-pocket" expense that year, in view of the fact that the money has already been set aside for this very purpose. What is correct is to say that Uncle Sam is effectively subsidizing your medical care, because you are able to pay medical expenses with "discounted dollars."

Here's a working example

Let's use Jack & Jill's hypothetical family to help illustrate the math.  Their traditional PPO plan with Acme Ins. Co. costs them $7,500 a year in premiums (soon to be raised by over $1,500 per year, but we'll just use the current premium to be more conservative).  Their new HSA-Qualified policy will cost $3,200 in premiums.  They plan to deposit only $4,300 into their HSA account. (Note that this is the exact amount they are saving in premiums. What they should do, of course, is contribute the maximum amount they're eligible for--$5,800 a year.)

To this, Jack & Jill would need to add any additional out-of-pocket costs, such as co-pays, co-insurance, deductibles, and expenses not covered by insurance.  Let's assume they have a good year, incurring only 6 doctor's visits (retail price $60 each) and one emergency room visit for $850 (assume they have a policy deductible of $2,500, with an additional $100 emergency room "fee").  They have a $30 co-pay per Doctor visit and must pay the entire $850 for the emergency room visit.

Traditional Plan

STEP 1 Enter current annual premiums
7500
STEP 2 Subtract annual tax savings:
 
  a) Premiums paid (100% for self-employed)*
2100
  b) HSA contribution
-0-
STEP 3 Net premium cost (Step 1 - Step 2)
5400
STEP 4 Add any additional out-of-pocket expenses
(deductibles, co-pays, non-covered costs, etc.)**
1030
NET Annual Cost (Add Step 3 + Step 4)
6430

*Tax savings on premiums paid: (7500 premiums x 28% tax bracket = 2100 tax savings)
**Out-of-pocket expenses: (co-pays 180; deductible for ER visit 850 = 1030)

Compare to HSA-Qualified Plan

HSA-qualified High Deductible Plan

STEP 1 Enter HSA-qualified plan premiums
3200
STEP 2 Subtract annual tax savings:
 
  a) Premiums paid (100% for self-employed)*
896
  b) HSA contribution (deposits x tax rate)**
1204
STEP 3 Add Step 2(a) + Step 2(b)
2100
NET Annual Cost* Step 1 - Step 3
1100

* tax savings on premiums paid: (3200 premiums x 28% tax rate = 896)
**tax savings on HSA deposits (4300 in deposits x 28% tax rate = 1204)

Some Observations

In order to receive the $1,204 tax-savings, Jack & Jill contributed $4,300 to their HSA savings account.  Thus, at the beginning of the tax-year, they have a balance of $4,300 in the account (discounting any interest earned).  If they incur the same medical expenses as above ($1,120 for ER visit and 6 Dr's visits), those funds will come directly from their HSA account, and not "out of their pockets."  It is true that the dollars are no longer in their original pockets, but the money still belongs to Jack & Jill--it has been saved for future use in a special tax-sheltered savings account.  Ordinarily, money must be spent in order to qualifiy as "out-of-pocket" expenses. (Think about that--it's a HUGE difference!)

HSA balance even after paying expenses

HSA balance at beginning of year
4300
Less: medical expenses incurred
- 1120
Net balance (carry-over to next year)
3180

Bottom line:  Jack & Jill have $3,180 left-over after paying all of their health insurance premiums and medical expenses for the year.  To this, they will add another $4,300 next year, and the next, etc., each year receiving another 100% tax-deduction for making those contributions.

The HSA really soars in a "best case scenario"

It is also worth noting that if Jack & Jill had experienced a really good year and incurred no medical expenses, their net healthcare costs would have been $5,400 (net premium cost under traditional plan) compared to $1,100 (net premium cost under the HSA plan).  Plus, they would have saved $4,300 to use for future medical expenses, money which will help them at retirement if it is not needed toward medical bills along the way.

The numbers don't lie folks

But sometimes, people do get some bad advice from misinformed folks. You are always welcome to call my direct office line (see "contact" link in the olive menu bar at the top of any page). Nobody has been doing this longer and nobody better understands the concept. I'll be glad to take all the time you need to be sure you completely understand how a health savings account plan can save you some BIG bucks.