To HSA or not to HSA, that is the question

[Opus 17]

Demographics:Single, over 55.  Typical out of pocket medical expenses are $3000.

Insurance options:

A. High deductible plan that is HSA-eligible.

B. High deductible plan that is not HSA eligible because it includes a $600 HRA (health reimbursement arrangement) and FSA option.

The premiums and deductibles for plan A and B are identical but the stop-loss for plan A is slightly higher because the IRS keeps increasing it. 

I have been taking plan B.  The HRA covers $600 of my out of pocket expenses (free money from my employer) and I have a $2400 FSA, so my other expenses are pre-tax, but I don't accumulate anything.  If I switch to plan B in 2025, I could contribute $5300 to an HSA.  I lose the $600 in free money, but I would accumulate $2000 per year in an HSA that I could keep after retirement.  However, age 65 is only about 8 years off, so my maximum holdover HSA would be $16,000.  In order to get the extra pre-tax $3000 to contribute to the HSA (over the $2400 I already put in an FSA) I would have to reduce my Roth IRA contribution by $2100 per year.  

Every time open enrollment comes around and I think about this, I always decide that the $600 of free money and putting extra money in the Roth IRA is better than accumulating an HSA, especially given the short time frame.  Do you agree, or am I missing something?

[dmertz]

As long as you eventually use all of the HSA funds for qualified medical expenses, the HSA contribution might be better, assuming similar investment options.  $5,300 in an HSA contribution saves the income tax on the $2,700 difference between $5,300 and $2,400 put into the FSA.  If your combined federal and (assuming you are not in California) state marginal income tax rate is greater than 600/2,700 or about 22.2%, you will save more in taxes than the $600 that you lose by not having the HRA.

Timeframe is irrelevant.

[AmeliesUncle]

Adding to dmertz's answer ...

The difference between the HSA and FSA is $2900, which makes the threshold closer to 20%.  But that 20% also includes Social Security and Medicare (usually 7.65%).   That means if your combined Federal and State income tax is over 13%, your tax-savings will be over the 'lost' $600.

With that being said, many employer-based HSA accounts have fewer investment options than IRAs, which could possibly hinder the long-term growth.

And don't forget to factor in the added 'risk' that Plan A has a higher maximum.

[dmertz]

AmeliesUncle, thanks for the math correction.

[Opus 17]

Thanks for your thoughts.  There is an additional factor that I forgot to mention (although it could have been inferred) -- I have the option of contributing pre-tax funds to a 403b (I'm not maxed out yet). Making the same total contributions,

Making the same net contributions and same investment assumptions (assuming the HSA at least has an index fund option, and making the Roth after-tax contribution to have the same net effect on take-home pay)

Plan A with HSA	Plan B with FSA and pre-tax 403b
With $3000 out of pocket expenses, contribute $5150 to HSA	With $3000 out of pocket, $600 covered by HRA, contribute $2400 to FSA and $2750 pre-tax 403b
Saves income tax and employment taxes on $5150	Saves income taxes on $5150 and saves employment taxes on $2400
Tax savings relative to Plan B is $210 per year
With $2150 unspent each year, projected value of HSA at age 65 is $24,706	With $2750 invested, projected value of 403b at age 65is $31,601
Withdrawals are tax-free if spent on medical care, taxable if withdrawn for other purposes after age 65	Withdrawals are taxable
$210 per year savings now, and $24,000 non-taxable in retirement if spent on medical	No current savings and $24,000 after taxes (estimated)

So there is still a difference but not huge.