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Why it is recommended to have High Deductible Health Insurance and to have HSA - Max out the pocket? I am not able to understand the benefit of having High Deductible Health Insurance and HSA.

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    If your company offers a HDHP, and you're relatively healthy, then you contribute to an HSA, since the HSA is tax-favored. – RonJohn Jan 7 '18 at 16:31
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    Please explain further what you would like explained. Are you asking why HDHP & HSA is recommended over a low-deductible plan? Are you asking why someone should contribute to an HSA? Are you asking why it might be recommended to contribute your max out-of-pocket to your HSA? Or are you asking something else? – Ben Miller Jan 7 '18 at 17:35
  • @BenMiller, " Why it might be recommended to contribute your max out of pocket to your HSA? " – goofyui Jan 7 '18 at 21:03
  • @TTT, Thank you .. it make sense !! Next question would be, if i dont use for any medical expenses ... is there a way to withdraw this money at some point of time .. either with or without tax applied ? – goofyui Jan 8 '18 at 1:52
  • @goofyui - (not sure what happened to my first comment..) The money in your HSA is yours, so you can take it out any time. BUT, if you take it out and don't apply it to an eligible medical expense (past or current), then it becomes taxable income in the year you take it, AND if you are under 65 years old you also must pay a 20% fee. – TTT Jan 8 '18 at 16:19
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With respect to health plans and HSA compatible, there are 3 relevant categories:

  1. Health plans that are not HSA compatible because the deductible is too low.
  2. Health plans that are not HSA compatible because the Max Out Of Pocket is too high.
  3. Health plans that are HSA compatible.

In general you want to avoid #2. Unfortunately there may still be some plans available on the Health Exchanges that fall into this category due to a mistake Congress made when the ACA was passed. (They forgot to make sure the HSA compatible limits and ACA compatible limits stay in sync, and they have since diverged leaving a gap of plans that aren't compatible because the MOOP is just barely too high.)

With respect to 1 vs 3, if you have the option of both you'll need to run the numbers to see which is better for your scenario. The reason HSA plans (HDHP) are sometimes preferably is partly due to the tax advantages of funds put into an HSA. That is one important factor in deciding between 1 and 3. But if you choose a plan that is HSA compatible, then it is always recommended to open an HSA account.

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and HSA is a tax advantaged account according to IRS rules. That means you (and your company if it contributes) get to fund it with pre-tax dollars. You can also invest using your HSA account, which means you can grow the principle through investments rather than having it sit as cash, earning nothing. Lastly, you get to keep it forever, which means it is always there to fund medical related expenses. It's basically a Roth IRA for medical expenses. It also can be used to cover dental and vision expenses.

Therefore, it's a win for consumers. Try to max out contributions every year. It lowers your taxable income and shields a small bit of your wealth from taxation.

Don't confuse HDHP with traditional insurance. There are no insurance plans sold in the US anymore. An HDHP is a health care plan involving a third party payer that covers a set of procedures outlined in Obamacare regulations. Your HDHP is only related to an HSA in as much as Obamacare regulations specify that you are only allowed to contribute to an HSA when you have an HDHP. Very complex - only politicians could design a system this complex and inefficient.

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    Since HDHP and HSA existed long before Obamacare, and even then you could only contribute to an HSA if you had an HDHP, I'm not sure if your 3rd paragraph is factually accurate. – RonJohn Jan 7 '18 at 17:24
  • Thank you @rocketman, HSA is roll over plan. Assuming that, I am on 25 years and for the next 30 years i am continuously rolling over the HSA plan without using any medical expenses. Was it ever possible to withdraw the money from HSA account as similar to 401K. In 401K, we are allowed to withdraw without tax when we are around 59.5 years .. something like that ..?? – goofyui Jan 7 '18 at 21:08
  • for an HSA, there are no age restrictions. The only restriction is that money must be used for a medical/dental/vision expense. I'm sure the rules will change over time as to what you are allowed to spend your money on (wink, wink), but for the time being, it's a very tax efficient way of paying for medical expenses. – rocketman Jan 7 '18 at 21:34
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    -1 for "There are no insurance plans sold in the US anymore". This is just blatantly false and is political propaganda, not meaningful financial advice. – R.. Jan 7 '18 at 23:27
  • I would disagree. Insurance is a contract to cover costs, not a membership in an organization. Take any other insurance product and identify where the insurance company is required by law to pay the service provider rather than the owner of the insurance. Furthermore, what other insurance product cannot discriminate based on the buyer's past behavior or history? Car, home, liability. Drunk drivers pay more for their car insurance than ones with clear driving records. Rather than propaganda, the statement is simply factual. – rocketman Jan 8 '18 at 23:09
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If you are certain you will need expensive medical care (especially, if you're pregnant and planning to carry to term, and especially in the case of a marketplace plan, since the ACA allows you to switch down to a cheaper plan due to a change in size of family), a HDHP is not likely a good financial decision. You're often better off with a low deductible in that case.

If you don't know you'll need expensive care, your expected medical expenses (care plus insurance premiums) will be lower with a high-deductible plan. Of course this is a risky course of action if you can't afford the deductible (and max out-of-pocket), so essentially the availability of high-deductible plans is a sort of regressive tax. Note that even if you don't exceed the deductible, you are getting something of high value out of it, since providers typically charge you 5 to 10 times as much (and sometimes nearly 100 times as much) for the same treatment if you don't have insurance, due to special pricing contracts with the insurance companies whose networks they participate in.

As for a HSA, it's a tax break for "partial self-insuring", so another regressive tax. Whether it makes sense depends on your financial situation and health. Yes you save on taxes, but if you don't anticipate any major medical expenses for a long time, you might benefit more from having the funds liquid.

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In a nutshell, you might pay less or about the same in total for for insurance and deductibles together than when you choose a low deductible plan.

However, if you don’t need the full deductible, you save money.
Even if you do (use it all), you save taxes on the whole amount.

Overall, chances are you getting away cheaper.
Of course you need to be able to plan ahead and keep your money available. if you tend to spend every cent you make soon, an HDHP might get you in trouble.

In addition to that all, you can use the HSA to save money tax free - like an additional IRA

  • Thank you !!! I learned from here that HSA can be invested similar to IRA - Which would be Funds. If i dont need money to spent on Medical treatment, is there a way to withdraw the money from HSA with or without tax at some point of time.? – goofyui Jan 8 '18 at 1:51

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