Switching out of an HSA?

[ShahMD]

So I have a HSA with HDHP. My wife and I are currently considering having kids next year and our plan's options are going to be changing soon I believe.

Our new company HDHP will make us pay the first $7k then pay 20% of the fees up to a total of $10k. Our old plan was significantly better.

I was considering switching out of the HSA and going to regular insurance (costs aren't out yet as they are currently being negotiated) but the deductible would be $5k with 20% up to $8k. The monthly contributions are TBD as described above. The switching out of the plan is in November so I have time to think about it.

If I stayed with the HSA, I'd pay any medical costs straight out of pocket and continue to use my HSA as another retirement vehicle but this leaves me a bit hesitant with costs coming up in the future.

If you were in my shoes, would you stick with the HSA or going to the regular insurance plan? If not the HSA, I'm a bit confused what happens to the 2 years that I've maxed out the HSA. Does it become an IRA and I lose my ability to do backdoor Roths? An explanation would be greatly beneficial. Thanks so much.

 

[thomashackett]

I'm not sure about what is the best option for you going forward between the HDHP and the non-HDHP. I think you'll need to run the numbers on expected healthcare costs more.

For our family, we have my spouse and one child with higher medical costs on a non-HDHP, and my other child and myself on a HDHP. This provides us the best of both worlds. Most of the healthcare costs for my wife and son are covered by health insurance, and the parts that aren't are able to be covered by our HSA contributions, which we are able to do the max family contribution.

I haven't yet pulled any funds from our HSA to cover medical costs, but I likely will in next year or so, but that will still leave a healthy chunk in the HSA.

The HSA doesn't convert into an IRA, though it functions like a traditional IRA for you after you turn 65. No impact on your ability to do a backdoor Roth IRA.

[jfoxcpacfp]

thomashackett wrote:

 

The HSA doesn’t convert into an IRA, though it functions like a traditional IRA for you after you turn 65. No impact on your ability to do a backdoor Roth IRA.

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Good comments except this last point needs clarification. A HSA functions like a Roth IRA as long as you use distributions for qualified medical expenses, no matter your age. After 65, you can use the dist's for anything you want w/o a 10% penalty and they will be taxable so, in that situation, it does function like a TIRA.

@ShahMD, agree that you need to run the numbers not just for next year, but into the future. Will you be able to change back to the HSA in the next year if you want? Your CPA or financial planner should be a big help in making the best decision for your family. And, of course, the options may be different than you are currently projecting since the new plan has not yet been implemented.

[Josh0731]

I went through the same calculations this past year and was surprised to find that the HDHP was not as expensive as I would have guessed, so I wound up keeping it so I could continue  saving in my HSA.

HDHPs obviously have higher deductibles and OOP maximums, but the differences were only a few thousand dollars.

But the HDHP had cheaper premiums, and the tax deduction for the HSA contribution almost made up for the higher OOP expenses.  Then on top of that you have to consider the years of tax-free compound growth in the HSA - you can estimate this with calculators online - and this is more valuable the younger you are.

So I kept the HDHP and just added to my emergency fund to have a little more cash on hand for healthcare expenses. Not saying everyone should do this, but don't toss out your HDHP without thinking it through.

[RogueDadMD]

It's also a gamble predicting how much healthcare people will use to make the math.  I'm on a HDHP but has only a $3k deductible and $5.5k out of pocket max (for family).  With the $800 my employer puts into my HSA, the math worked out for me to put my entire family onto the HDHP (wife + multiple kids). My employer charges me a penalty because my wife has healthcare available as a fulltime employee (different employer) and even with that penalty per my math it is neutral at worst for us all to be on the HDHP (if we max out our usage) and if we don't max it out or barely use it I come out way ahead by maxing out the HSA.

Your regular insurance plan doesn't sound much better than the HDHP they are offering -- while I can't make a solid recommendation without more details (such as premium costs), the HDHP still seems like a reasonable option despite the increasing costs.

[Raster]

Don't forget to apply your marginal tax rate when comparing deductibles.  When this was considered, our HSA option had a LOWER deductible than the other choice.

 

[PNWskindoc]

I signed up for a HDHP when I started my job in August 2016 but I'm considering changing to a traditional plan now that we're going to try for a second child. Would I be able change plans at the beginning of 2017? Or do I have to wait a full calendar year from the date I enrolled (8/2016). Finally, if I want to be eligible to contribute the full $6750 into our HSA for our family, do I have to hold on the the HDHP for a full calendar year as well? Thanks!

 

 

[jfoxcpacfp]

PNWskindoc wrote:

I signed up for a HDHP when I started my job in August 2016 but I’m considering changing to a traditional plan now that we’re going to try for a second child. Would I be able change plans at the beginning of 2017? Or do I have to wait a full calendar year from the date I enrolled (8/2016). Finally, if I want to be eligible to contribute the full $6750 into our HSA for our family, do I have to hold on the the HDHP for a full calendar year as well? Thanks!

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You'll need to check with your benefits department to find out the times for open enrollment. You may qualify for a mid-year policy change for certain "qualifying events".

Since you enrolled in the HDHP in 8/2016, you have 2 choices for 2016:

• You can contribute for the full year for 2016 if you will remain enrolled a full year beyond 12/31/16. If you do not remain enrolled during that period, your excess contributions for for 2016 will be taxable and you will owe a 10% penalty.

OR

• You can contribute a pro-rata amount for the number of months you were eligible in 2016. You are counted as eligible for a month if you are eligible on the first day of that month.

If you drop coverage during 2017, your contribution for 2017 will be prorated based on the number of months you participate. If you are eligible to participate on the 1st day of any month, you can count that month.

[PNWskindoc]

Thanks Johanna. As for my HSA contribution for 2017, can I contribute as early as 1/1/2017? or is there a waiting period as well?

 

[jfoxcpacfp]

PNWskindoc wrote:

Thanks Johanna. As for my HSA contribution for 2017, can I contribute as early as 1/1/2017? or is there a waiting period as well?

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Yes, you can contribute as soon as you are a participant in a qualified health insurance plan. In addition, you have until 4/15 of the following year to contribute for the previous year.