My Insurance Analysis: Health Savings Accounts + Health Reimbursement Plan

In attempting to combat the rising costs of insurance, I have chosen to employ an HSA account combined with a high deductible health plan — AND a HRA plan.

The result:  This will save ~$1,000 off my taxes and allow me to invest an extra $3,300 in a tax sheltered IRA-like account, give me protection in case of a major medical event while saving on premiums, and the cherry on top — allow me to pay for 100% of my medical expenses tax-free as they occur, while I have the option to leave 100% of my HSA funds untapped to compound and grow.

Steps/Strategy: I analyzed the health plans available and chose a slightly more expensive HSA plan that gave me access to the best hospital – what’s the point of having catastrophic coverage if when you need it you’re going to a budget hospital?  It cost $240/month ($2880/yr, $1900/yr after tax savings) with a $6300 deductible/max out-of-pocket.

Next I looked for the best HSA custodial/investment options.  I chose Vanguard’s only HSA custodian, hsaadministrators.info. Many others abound but they are all riddled with fees; and when they aren’t showing you account fees, they are making their money on hidden mutual fund expense fees – which kills the power of compounding growth.  I invested my HSA account in a no-load, super low expense Target Retirement stock/bond index fund.  I can invest $3,300 a year into this tax sheltered account.  I estimate it will grow to an inflation adjusted $300,000 by the time I’m 60 and $650,000 by the time I’m 70.

AND IN A UNIQUE WRINKLE IN THE LAW, if the HSA is funded directly from a payroll deduction (instead of later from your checking account), it doesn’t get hit with FICA tax (15%), saving an additional $495/year!  In total, HSA tax savings amount to $1,420/year.  In a little over 2 years the tax savings alone fund the entire entire $3,300 contribution.

While the “health funds” are fully invested in an index fund, how does one pay for expenses when they come up?  Using a “Health Reimbursement Arrangement” with my business, 100% my medical, vision, and dental-related expenses are reimbursed.  An HRA is a document you create and store in a file cabinet that directs your business to repay all allowed medical expenses.

This HSA+HRA straddle strategy allows 100% of the HSA funds to be invested and growing while simultaneously providing the option of paying for 100% of medical expenses tax-free without tapping into the HSA investment account unless I want to.

If I didn’t have a business, I would simply pay the medical receipts personally, and then reimburse them from my HSA account AFTER a nice stock market run up (the IRS has no time limit placed on when you pay back health expenses).  Waiting and using the gains from a stock market rally to pay medical expenses makes them effectively free!

As a final perk, after age 65, the HSA funds can be withdrawn for any reason, including retirement, not just medical-related.

This is my current best analysis for a a healthy individual seeking health insurance.  This plan will become effective 4/1/2014.  So there is time to adjust if there is a better approach.  I welcome any critique or other analysis.

Responses so far:

From a CPA and former IRS agent: “Actually, it’s one of the best I’ve seen…”

From an insurance agent and the wealthiest person I personally know:  “Jared…..agree with this approach.   The HSA account gives an otherwise healthy person the best options to get benefits for illness and investment of money that an grow to hedge large deductible losses.   The use of low cost stock funds to invest is a good long term play for someone like yourself with a long term time horizon for investment and retirement.”