Health Savings Accounts (HSAs) have become an increasingly popular tool for financial advisors and their clients due in part to the ‘triple tax savings’ they offer: tax-deductible contributions, tax-free growth, and non-taxable distributions for qualifying expenses. However, HSAs require individuals to be covered by a High Deductible Health Plan (HDHP), which has tradeoffs compared to traditional health insurance plans. Which means that financial advisors, with their knowledge of clients’ personal and financial circumstances, are uniquely positioned to evaluate these tradeoffs and help clients balance healthcare costs and savings to align with their financial plans.
While HDHPs are often expected to come with higher deductibles than traditional plans, these deductibles may be higher than they appear. For instance, HDHP deductibles and out-of-pocket limits apply only to in-network coverage, with out-of-network care subject to higher maximums. Additionally, HDHPs typically apply deductibles to nearly all medical services (except preventative care), unlike traditional health plans that often feature fixed copays for prescriptions, specialist visits, and emergency room care. Many HDHPs also use aggregate deductibles, requiring the entire family deductible to be met before coverage begins for any individual – which can lead to higher out-of-pocket costs, particularly when one family member incurs most of the expenses.
Traditional health plans, on the other hand, often provide features that make them more attractive for individuals with moderate or predictable medical costs. For example, traditional plans often come with separate out-of-pocket maximums for prescription drugs and other medical services (while HDHPs typically have a unified maximum) or offer tiered health networks that provide discounts for specific in-network providers. Furthermore, because HSA eligibility requires coverage exclusively under an HDHP, clients nearing Medicare age or those with other disqualifying coverage may need to weigh the benefits of HSA contributions against other health plan options.
While the ‘triple tax savings’ of HSAs is one of their most attractive features, those with traditional health plans can also benefit from tax-free premiums, which may result in greater tax savings compared to HDHPs with lower premiums. Clients with traditional plans can also take advantage of Flexible Spending Accounts (FSAs), which allow for tax-free contributions and reimbursements (though, unlike HSAs, any unused funds remaining in the FSA are forfeited at the end of the plan year). Combined with the potential cost savings from lower deductibles and total out-of-pocket costs – which could be invested in taxable accounts – clients with higher medical expenses and in lower tax brackets may find that traditional health plans offer a better balance of savings and healthcare coverage.
Ultimately, while HSAs offer significant tax advantages, advisors can play a key role in helping clients weigh these benefits against the potentially higher costs of HDHPs. By aligning healthcare and financial planning, advisors can demonstrate their ongoing value to their clients by helping them choose the plan that best supports their goals – and their peace of mind – while maximizing both annual and long-term cost savings!
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