The Investment Scientist

Who Should Use HDHP with HSA

Posted on: September 17, 2018

hdhp-300x180.pngIn my last newsletter I wrote about how a Health Saving Account (HSA) is the best retirement saving vehicle with triple tax benefits. However, not everybody can have a HSA – you must have a High Deductible Health Plan (HDHP.) Those of you who have traditional PPO/HMO health insurance are not eligible.

This begs the question, who should use the HDHP with a HSA? Here are the simple answers followed by a discussion.

  1. High income folks especially those in top three tax brackets of 32%, 35% and 37% should use a HDHP.
  2. Healthy folks should use a HDHP.
  3. Low income folks who are frequently sick should stay with PPO/HMO.

The HDHP is defined as a health insurance plan with a minimum $1350 deductible for individual or $2700 deductible for family. For high income earners, these are not burdensome amounts, especially since you can pay those with pre-tax dollars. A couple with a combined marginal tax rate of 40% can save $2760 in income tax if they contribute the maximum amount of $6900 to their HSA. The tax savings are enough to pay for the full amount of deductible. This is an indication that whoever wrote the legislation knew math: even if you get sick and  burn through your deductible, you will still be financially ahead if you are able to contribute the maximum amount to your HSA.

Healthy folks who rarely see a doctor should definitely go for a HDHP since the premium cost is much lower than the traditional PPO/HMO and the deductible will not be  an actual cost if they don’t get sick.

People in lower income brackets may not have the money to contribute to an HSA. On top of that, the $2700 deductible they would have to pay when they are sick is much more burdensome for them . It would thus be more advantageous for them to stay in a PPO/HMO where they are subsidized to some extent by healthier folks.

If you are a business owner, what type of health insurance should you adopt for your business? Let me just say this, a HDHP will be good for your business since it will be more cost effective, and it will be good for you for the first reason I listed above assuming your business is successful enough to put you squarely in the top brackets. However, you may want to take into account how many of your employees don’t earn much and are not very healthy. They may not be able to shoulder the burden of a HDHP.

The best approach would be to do what the country’s biggest employer, the federal government, does. It offers its employees both PPO/HMO and HDHP plans and let its employees choose according to their health and income status.

(Feel free to share if you find it insightful.)

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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