How much in taxes do I really save by choosing an HSA plan and account?

UnderstandingHSAs
People often talk about the tax advantages of an HSA account, but most of the time the calculation of the actual savings is left to the individual to figure out on his or her own.  The tax savings available would entice many more people to choose HSA plans at open enrollment if they did the simple math before choosing a plan.  So let me help you through it.

In a previous post I pointed out that according to the Kaiser Family Foundation/ HRET survey in 2014, the average family HSA plan costs nearly $2,900 per year less than the average HMO plan and $2,800 less than the average family PPO plan.  If you are self employed that savings is all yours, but even if your employer picks up 70% of the premium cost, that means your cost would decrease about $70 per month.   Better yet, if you redirect those savings into an HSA account, you would have nearly $855 in reserve to pay day-to-day medical expenses and save another $250 in taxes on that deposit if you are in the 25% federal tax bracket and 5% state income tax bracket.   Account for the tax savings and you have $1000 in reserve in addition to what your employer may deposit on your behalf.

This only counts the savings from the premium difference alone.  In 2016, people with self-only HSA qualified coverage can contribute up to $3,350 and those in HSA family plans can contribute up to $6,750.  Accountholders who are 55 or older can add another $1,000 catch-up contribution.  This does not affect the amount you can save in 401(k) plans or IRAs.

So what are the tax savings for the average HSA accountholder?  According to the 2014 Devenir Year End research report, the average HSA account receives about $1,600 in total contributions.  The tax savings from this activity accrues to the accountholder, regardless of whether an employer or someone else makes the deposit.

If we do the math, the average tax savings by bracket is as follows:

Table 1

Even at today’s low average contribution levels, the average HSA accountholder is receiving somewhere between $20 and $40 per month in tax savings.

Let’s stop and think about this for a minute.  How much difference in premium lies between the options your employer offers you?  If you factored in $20 to $40 per month in extra tax savings, would that make a difference in which option you would choose?

How about if you plan to max out your HSA contributions?

Now the table looks like this for 2016:

Table 2

By maxing out your HSA contribution, the tax savings become substantial in relation to the premium decision at open enrollment. For the average family, the difference is between $85 and $160 per month.  For those in the highest tax bracket, the tax savings are over $2,500 per year or $222 per month.  For those 55 years old or more, you can add another $396 to that total.
So before you decide which plan makes the most sense for you, don’t forget to do the math on the tax savings afforded by an HSA plan option.  This simple act may make all the difference in your decision.By maxing out your HSA contribution, the tax savings become substantial in relation to the premium decision at open enrollment.  For the average family, the difference is between $85 and $160 per month.  For those in the highest tax bracket, the tax savings are over $2,500 per year or $222 per month.  For those 55 years old or more, you can add another $396 to that total.

Todd Berkley2 jpeg

Todd Berkley is an HSA industry veteran who runs AskMrHSA.com, and is the author of the HSA Owner’s Manual.

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