Open Enrollment Time? Here's What You Need to Know about HSAs.

Want to earn hundreds of dollars for an hour's work? Study your options at open enrollment.

For nearly half of all working Americans and their families, autumn signals more than falling leaves, crisp mornings, and early sunsets. It's open-enrollment time - the one period during the year when workers can add, drop, or alter their medical coverage and other employee benefits.

Most Americans spend more time watching a single Seinfeld rerun than they do studying their benefits options. That's unfortunate. Even if the company's menu of benefits hasn't changed, the price that employees pay probably has. And employees' family, financial, medical and job situations often change over time in ways that require careful consideration of optimal medical coverage.

If you're facing open enrollment, you may see an HSA-qualified medical plan among your options. If you're not enrolled on this coverage, it's time to take a second look. When you consider it holistically - both medical and financial implications - you may find that it's your optimal coverage. If you study it thoroughly and find it's not the best coverage for you and your family, you can achieve the satisfaction of knowing that you've made the right decision for the right reasons.

Understand the Total Cost of Coverage

When companies offer more than one medical plan, many employees remain enrolled in the same coverage year-after-year, even as their circumstances change. The optimal plan when you were 28 and single may not work best when you're now 35 and married with one child and another on the way. Similarly, the plan that worked best when your three kids were growing up may not be optimal as you head into your late 50s and are facing a medical challenge.

It's important to review your medical coverage annually. You don't have to, of course. But spending two hours to find that the plan that works best will save you $1,000 in premium payroll deduction or in out-of-pocket costs equates to an hourly wage of $500. Is anyone else paying you that much money for those two hours?

When reviewing coverage options, first look at three important variables:

1. Your portion of the premium (payroll deductions). Your company pays a large chunk of the premium. But you are responsible for a portion. You need to quantity that portion as an annual figure.
2. Your out-of-pocket exposure. You're responsible for copays for some services. Other services are applied to the deductible, which means that you pay the full negotiated price. After you meet the deductible, you may be responsible for a percentage of every bill, up to an annual limit. Understand your potential responsibility.
3. Special financial opportunities, such as an employer-funded Health Reimbursement Arrangement that pays a portion of your out-of-pocket expenses or an employer contribution to your Health Savings Account and tax savings on your contributions. Factor in any tax savings that you realize from funding a Health Savings Account or Health FSA.

There. Now you have a good financial picture of your coverage.

Example: Your company offers two plans:

1. An HMO with monthly payroll deductions of $600 ($7,200 annually) and a deductible of $2,000.
2. An HSA PPO with monthly payroll deductions of $450 ($5,400) and a $3,500 deductible. The company offers a $900 Health Savings Account contribution.

Many of your co-workers will automatically enroll in the HMO because the deductible is lower. But HMO enrollees pay $9,200 (premium plus deductible) before most services are reimbursed by the insurer. HSA PPO enrollees pay only $8,900, less the employer's Health Savings Account contribution, or only $8,000 net, before the insurer begins to reimburse claims.

Once you've done this analysis, you overlay your expected medical expenses. If you're a low utilizer, the HSA PPO plan is your better option financially. If you're a high utilizer, the way that the HMO covers your claims may be preferable. Only you can decide. But you can't make that decision without first understanding the two plans.

Disqualifying Coverage

Before you make a final coverage decision, make sure you're eligible to open and fund a Health Savings Account. If you're a working senior (someone over age 65, like me) and enrolled in any Part of Medicare (I'm not), you can't contribute to a Health Savings Account (I can - not to brag). If your spouse participates in a general Health FSA at work, you can't open and fund a Health Savings Account. If you're a veteran and carry TRICARE as secondary coverage, you can't contribute to a Health Savings Account.

The HSA-qualified plan still may be your optimal coverage option based on payroll deductions for premium and the out-of-pocket financial responsibility given your health. But understand that if you're not eligible to open and fund a Health Savings Account (and not able to accept an employer contribution), the numbers change.

Employer Contributions to Your Health Savings Account

Employers aren't required to add deposits to your Health Savings Account. Many do. When employers do contribute, they typically deposit an average of between $800 and $900 annually - typically more for family than self-only coverage to reflect differences in out-of-pocket financial responsibility. Across the industry, employees contribute, on average, about twice the amount that a company deposits on their behalf.

Companies that don't contribute directly often reduce your payroll deduction for premiums, freeing you to deposit the difference as your contribution without reducing your take-home pay. You should use this opportunity to begin to build a balance to pay the inevitable expenses that you will incur at some future point.

Your Annual Contribution Election

The header to this section is designed to trick you. You don't make an annual binding election to fund your Health Savings Account, as you do a Health FSA. You can adjust your contributions through pre-tax payroll deductions as often as monthly (check with your company to learn how), just as you can with your workplace retirement account. You can start or stop contributing, or increase or decrease your payroll deposits, at any point during the year. You don't need a life event, as you do with a Health FSA, to change your contribution level.

Personal Contributions

To optimize tax savings, contribute via pretax payroll deductions. That way, the money is deducted from your pay before federal income and payroll taxes and, if applicable, state income taxes, are applied. A typical Health Savings Account owner saves nearly 30% in federal taxes (a 22% marginal income tax rate, plus the 7.65% payroll tax) on top of any state income tax savings (except that residents of California and New Jersey don't receive a deduction from states income taxes for their contributions).

You can also deposit personal (after-tax) funds at any time. You can then deduct that amount when you file your personal income tax return. You receive the deduction even if you, like about 90% of Americans, take the standard deductions rather than itemizing mortgage interest, charitable donations, state and local taxes, and other deductions.

The shortcoming of personal contributions outside your company's payroll system is that you pay the 7.65% federal payroll tax. Paying that tax may (or may not) marginally increase your future Social Security benefit. It definitely will reduce the tax savings associated with your contribution.

Your best bet is to contribute through your company's Cafeteria Plan so that you avoid payroll taxes. The option to make a personal contribution may be relevant if you receive your annual bonus or sales commission in, say February or March, and want to deposit a portion into your Health Savings Account as a prior-year contribution. You can fund your Health Savings Account for 2024 through the due date of your 2024 federal income tax return (typically April 15, though later if the IRS has granted an extension due to extreme weather or another emergency).

Limited-Purpose Health FSA

If your company offers this HSA-compliant Health FSA design, consider whether to make an election. This plan has the same restrictions as a general Health FSA - you're locked into a binding annual election that you can change only with certain life events and you may lose some of or all your unspent balance at the end of the plan year. But you can access your full annual election immediately to reimburse qualified dental and vision expenses, rather than spending your Health Savings Account balance.

If you don't have immediate dental or vision expenses or don't plan to fund your Health Savings Account in full, a Limited-Purpose Health FSA may not make sense for you. But if you plan to be an aggressive saver and want to reimburse qualified dental and vision expenses tax-free without depleting your Health Savings Account balance, a Limited-Purpose Health FSA is a tool to consider.

Not all companies offer a Limited-Purpose Health FSA.

Your Health Savings Account

Your employer has the option, which most companies exercise, to work with a single Health Savings Account administrator. Choosing one partner simplifies the movement of funds and ensures that all employees receive the same level of initial education. In this model, your company will send its contribution, plus your pre-tax payroll deductions, to this partner only.

You're not limited to a single Health Savings Account administrator. But if you don't like your employer's choice, you'll have to forego employer contributions and the additional tax benefits of pre-tax payroll deductions.

It rarely makes sense to reject your company's partner outright. Health Savings Accounts are like checking accounts: Every bank offers them. They all have many common features. Many customers see them as commodities. Most offer an FDIC-insured cash account, issue a debit card, and pay interest. Many offer investment options, though the menus vary dramatically.

If you don't like your employers Health Savings Account partner or the features of the account, here's an approach that allows you to retain your full tax benefit and take control of your growing balance:

1. Open an account with your company's partner so that your employer deposits its contribution and your payroll deductions into it.
2. Explore other options and choose another Health Savings Account that delivers value for you (for example, a more robust investment platform).
3. Periodically (Quarterly? Semi-annually? You decide.) move funds from one Health Savings Account to the other. You're permitted to make an unlimited number of trustee-to-trustee transfers annually. Ask the receiving Health Savings Account administrator how.

The Bottom Line

There's probably a survey somewhere showing that workers would rather undergo a root canal or watch another presidential debate rather than engage in open enrollment. That's unfortunate. You can avoid engaging, but making a less-than-optimal decision may affect your physical and financial health next year and in the future. You owe it to your future self to gather the information to make good benefits decisions now.

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HSA Wednesday Wisdom is published every other week, alternating with HSA Question of the Week. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.