Why a Health Savings Account is a Secret Weapon in Saving for Retirement
by Kevin Moss | Originally posted on GovExec.com
Federal employment has an extra perk hiding in plain sight, but it’s often overlooked. The Federal Employees Health Benefits Program has many different plan types, but one gives federal employees an additional way to save money for retirement. Contributions to health savings accounts offered by high deductible health plans are not taxed initially, grow tax free and can be used for out-of-pocket medical expenses while you’re working as well as after retirement. They can also be used for non-medical expenses after age 65 without penalty, except for the same tax obligations that apply to withdrawals from other retirement accounts, such as those in the Thrift Savings Plan.
Here are the basics of high deductible health plans, the savings you can potentially realize by switching to one, and how to save for both your retirement and future health care expenses through an HSA.
How High Deductible Health Plans Work
HDHPs encourage plan enrollees to be mindful health care consumers because of their high deductibles. Before the deductible, you’ll pay the full amount allowed by the plan for health services, and after the deductible—like all health insurance plans—you’ll generally pay a percentage of billed expenses, usually 5%-20% depending on the plan.
To help you out before the deductible is met, all HDHPs provide free preventive care within the plan network, which includes annual physicals, mammograms, well child visits and immunizations.
All HDHPs for federal employees also fund an HSA to help with out-of-pocket expenses, either as they are incurred or to use for reimbursement in the future. The contribution amount varies by plan and enrollment type and ranges from $750 to $1,200 per year for self-only enrollment and from $1,500 to $2,400 annually for self-plus-one and self-family enrollments. The plan contributions to your HSA are spread out over the year and are deposited monthly into your HSA.
You may make additional voluntary contributions into your HSA, but there are Internal Revenue Service limits in place. In 2022, for self-only enrollment, the combined contributions from the plan and the enrollee cannot exceed $3,650. For self-plus-one and self-family enrollments, the combined contributions cannot exceed $7,300. These limits are set by the Treasury Department and are increased every year based on inflation. Voluntary contributions can be made as paycheck deductions or as a lump sum into the account.
The HSA will be managed by a financial services company, and you’ll have the same investment options as you would with an individual retirement account and many more options than you’d have for the Thrift Savings Plan. Any unused funds in your account will roll over to the following year, and there is no rollover cap. Your HSA is owned by you, the enrollee, which means it’s fully portable and if you leave federal service or switch FEHBP plans, you’ll always have access to your HSA.
Cost of Health Care Services in a High Deductible Health Plan
HDHPs do not provide cost information for health care services before the deductible in the official plan brochures or other marketing materials, leaving federal employees to wonder what a service’s full allowed amount is, and how to calculate a percentage of the amount after the deductible if the service does not have a fixed co-pay. Of course, this information gap ends when services are provided and you receive the bill. But advance information will often be very important for financial planning or even for deciding whether you want to incur the cost of a particular procedure.
While inconvenient, there are two workarounds that can reduce this problem: Call the plan or call the provider. If you call the plan and ask how much it costs for a primary care visit or urgent care visit, the plan will provide that information, allowing you to better predict the out-of-pocket expenses you’ll face. Also, the doctor, or staff, will presumably know what the charge will be and should know what other expenses may be required before or after the procedure (x-rays, drugs, follow-up visits, etc.).
High Deductible Health Plans Available to Federal Employees
There are a handful of high deductible health plans available nationwide—GEHA HDHP, MHBP HDHP and Aetna HealthFund HDHP. In the Washington, D.C. area you’ll also be able to enroll in CareFirst HDHP, HealthKeepers HDHP (VA only), and United HDHP. Outside of the D.C. area you’ll find the Humana HDHP available in many parts of the country.
The plan websites do an excellent job describing how the HDHPs work and you can learn more about available HDHPs at Consumer Checkbook’s Guide to Health Plans for Federal Employees and the Office of Personnel Management plan comparison tool.