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Last Updated: Friday, 13 November 2020 01:49

Published: Saturday, 10 October 2020 23:04

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Health Insurance in USA:

Health insurance is one of the highest expense after income taxes. Health insurance premiums are very high in this country, as doctors and medical facilities are ridiculously expensive. Good news is that if you are employed by a business, then a big chunk of your health insurance premium is paid by your employer. The health insurance plans are offered bythe employer, and you choose from one of their plans. You don't have the option of going and buying your own insurance plan. This works in your favor, as the plans offered by employers are way better than what you can buy in open market place.

Insurance Coverage:

When you say health insurance, what does it cover. turns out that general health insurance plans offered by your employer cover everything except Vision and dental expenses. So, employers offer these optional plans to cover dental and vision expenses. Here are 3 types of insurance plans offered by most employers:

1. Health insurance: This is the regular plan for which you pay the highest premium. It covers all medical expenses incurred by you. It costs about $5K in premiums.

2. Dental insurance: This is optional insurance that pays for your dental visits. It costs about $1K - $3K depending on the type of plans your employer offers. This is optional, but I would highly recommend getting this dental insurance, as you will need to get your regular teeth cleanup and checkup. It will pay for itself.

3. Vision Insurance: This is optional insurance that pays for your eye doctor visits. A lot of confusion here is what exactly vision insurance covers. What if I get a eye problem or disese, is that covered by your regular health insurance or by your vision insurance? Almost all eye issues are covered by your regular health insurance as it's considered a medical expense and not a vision expense. The only thing that Vision insurance covers is your regular eye checkup (once a year0 and your prescription glasses or your contact lenses. So, if you don't wear glasses, you can get away without getting any Vision Insurance. However, vision insurance is very cheap. For the whole family, you can get this insurance for less than $500/year. Since this insurance pays a large portion of your eye glasses cost, you can recover all the money that you paid in premium. So, I would highly recommend getting Vision Insurance too.

Health Insurance Plans:

Your company may offer various plans for your health insurance. A new law called "Obamacare" was passed under Obama's president ship. Many older plans were replaced by new plans. IRS dictates what is covered by these plans, how much deductible plans can have, who can be covered, etc. More details for 2019 available on publication 969 of IRS website:

https://www.irs.gov/publications/p969

There are 2 kinds of health insurance plans offered by employers as of 2020:

1. Co-pay plan: This is the traditional copay plan where you pay a $20 or $30 co-pay for visiting any doctor, and the rest is covered by the insurance company. The health premiums in these co-pay plans are higher. Health insurance premium used to be about $15K - $20K for a family of 4 (husband, wife and 2 kids) before Obmacare. However, as you are employed, your employer pays about 80% of your health insurance premium while you pay only 20% of the premium. So, your share of the premium is about $2500. This used to be superb plan as you didn't have to worry about any medical expenses except for your co-pay. Even for baby delivery, these plans charged you a flat $250 co-pay, to cover the entire cost of baby delivery, which actually costed north of $10K to the insurance company. For this reason, babies used to be called "$250 baby", as $250 was all that it would cost to bring a baby in this world.

However, with the Obama Health care reform that came in full force in year 2014, the premiums for these co-pay plans rose fast, and as of 2015, employee share of the premium has gone from $2.5K to about $8K. Also, health insurance companies are increasing co-pay for these kinds of plans. For ex, for baby delivery or other hospital visits, the co-pay is now $500 instead of $250. So, employees and employers are switching to the other pan, which is what the intent of the govt was when it initiated the health care reform. Now, most of the employers don't even give you the option of "co-pay plan". Co-pay plan are guaranteed to be expensive than the other plan, so it makes no sense for anyone to get a co-pay plan anymore. This other plan, in lieu of co-pay plan, is called the High Deductible Healthcare plan (HDHP).

2. HDHP (High Deductible Healthcare Plan): In this plan, there is no concept of co-pay. You pay 100% of medical expenses out of your pocket, until you meet a deductible limit. The health premium in these HDHP plans are lower (at about $1K/year for the employee share of the premium), but the deductible is usually set at $3K, so first $3K of medical expenses have to be borne entirely by you. After you meet this deductible, that is when insurance companies pick up 80%-90% of the medical expense. Then once you hit $6K in total expenses out of your pocket, they start covering 100% of your medical expenses. That typically happens once you have amassed about $30K in medical expenses.

Premiunm: For my HDHP plan at my employer, I pay about $3K per year in premium for a family plan. Family plans are the most expensive, but they cover all the children irrespective of the number (for the same premium). This is one of the places where having more kids pays off.

HSA (Health Savings account): To compensate for the financial hit, govt allows you to set up a HSA (health savings account) in which you can contribute money upto a certain limit (limit was $7000 for the year 2019) free of federal taxes, and use money from this HSA to pay for any qualified medical expenses. You still have to pay SSN and medicare taxes on this money, but it's exempt from federal taxes and state taxes (in most of the states). Also, the money grows tax free, and funds in this HSA never expire. The HSA is just like a normal savings account, and most of the banks will open it for free. However, any money that is moved in or out of HSA is reported to IRS, as IRS wants to make sure that you are using money in this account only for qualified medical expenses, and not for Walmart shopping spree. The bank or custodian of HSA doesn't care about what you do with money in this account. It will approve money for anything that you ask for. It's between you and IRS to figure out in case of any discrepancy. One sweetener that most of the employers add to this plan, is that they contribute free money every year if you have an HSA. Most companies contribute $1K for family plans and $500 for individual plans every year in the HSA. This contribution by employer is tax free from federal taxes, SSN taxes and Medicare taxes. So, this $1K or $500 gets deposited in full without any tax bite. Also, this money never gets reported anywhere as your income, so it's 100% free money.

How much to contribute in HSA:

You should always contribute the maximum amount allowed in HSA. For 2020, it's $7.1K. This is because the money that you or your employer puts in HSA is your money, and remains with you no matter who you work for. So, in the end, you add about $8K money in your HSA every year which you can use for almost all medical expenses. Even if you don't use part of it, there is no penalty and the money remains there until you reach age 65. Most HSA custodians allow you to put money in stock market, that also grows tax free. So, people use it as a kind of retirement account, where they put a big chunk of their balance in the stock market, and try to take out as little as possible, by keeping their medical expenses low. (some people I know of don't even use their HSA for medical expenses, preferring to pay out of their pocket, and keep 100% of their HSA money invested in stocks. I don't see any rational in that). If you withdraw money for any non-medical expense before age 65, then you have to pay a 20% penalty, and applicable income tax. However, if you use it for any medical expense, then there is no penalty and no tax, no matter when you use it.

The best part with HSA comes now. After age 65, you are free to withdraw all the money from HSA for any expense, without any penalty. You just have to pay income tax on that withdrawal, if you are using it for non-medical expense. That's what makes HDHP plans with HSA so lucrative. $8K/year is almost half of your 401K retirement account contribution for a given year. So, once you have maxed out on your 401K contribution, many people try to max out on HSA contribution.

Then upon reaching age 65, you can treat your HSA in 2 ways:

1. You can treat it as regular 401K account and pay taxes on money that you withdraw. HSA account is no different than 401K account in this case.
2. You can treat it as regular medical account, and use it for any qualified medical expense. Then you pay no taxes on withdrawal.

Dental Insurance Plans:

Your company may offer various plans for your dental insurance. Choose the one that is lowest cost, as that should suffice to cover most of the regular dental expenses. You can keep following up with your dentist, and if he/she suggests some expensive dental work, then you can sign up for the more expensive dental plan for next year, and get that treatment done the next year.

Vision Insurance Plans:

Your company may offer just one plan for your vision insurance. As I stated before, it's worth taking if any one in your family wears glasses or contact lenses. For me and my family, it's offered at $75/year by my employer. It pays for itself with just 1 pair of eyeglasses bought every year. You can pay a little out of pocket or get the eyeglass entirely free. All regular vision tests are also covered. Your real cost is less than $75, since you are not taxed on this part of income (since it's deducted from your income before any taxation is done). So, assuming 25% tax bracket, your real cost is more like $55. There is absolutely no reason not to get it.

FSA (Flexible Spending account):

We saw one kind of account called HSA that's allowed with HDHP plans. There's another kind of account for eligible medical expenses that used to be allowed before Obamacare came into existence. It was called FSA. FSA accounts could be used with both Co-pay plans and HDHP plans. Previously there used to be only 1 kind of FSA account (aka traditional FSA accounts). Now, there are 2 kinds of FSA accounts:

1. GPFSA (General Purpose FSA) or Traditional FSA or Traditional Healthcare FSA: This account is offered in lieu of HSA. It is known by so many different names. Your employer may call it by yet another name. We'll call it GPFSA here, but we mean any of these accounts. If you have an HSA account, you can't have a GPFSA account. Your employer offers this account, and you can choose only one: either HSA or LPFSA. LPFSA is what is generally referred to as FSA account in regular talks and on websites (FSA eligible). After Obamacare passed in 2012, FSA was what used to be offered with co-pay plans. But with advent of HDHP plans, HSA accounts were introduced to be used with HDHP plans. IRS disallowed having both HSA and FSA accounts, you could choose only one. So, people on co-pay plan chose FSA (since co-pay plans didn't offer HSA). However people on HDHP plan had the option to choose HSA or FSA. They could choose FSA only if they didn't opt for HSA plan.These kind of FSA were started being called Traditional FSA or GPFSA. GPFSA is inferior compared to HSA account. So if your employer offers HSA, you should always opt for HSA with HDHP plan (don't go for GPFSA).
2. LPFSA (Limited Purpose FSA): This is another account that is offered by employers. In above section, I said that FSA accounts were dis allowed with HSA. However that was not entirely right. Only traditional FSA (or GPFSA) accounts were dis allowed. A different kind of FSA accounts were still allowed to be used with HDHP plans, but the the kind of expenses you could deduct in these FSA were a lot strict than the LPFSA that were offered above. To alleviate confusion, these FSA accounts that could be used with HSA  were called LPFSA. The good news is that this account can be had on top of having an HSA account. The bad news is that this account can only be used to pay dental and vision expenses (and NO other expenses). Anytime you pay at a eye doctor's office or a dentist, the expense is considered an eligible expense for LPFSA. Any medical expense other than these 2 expenses (vision and dental) can be paid via HSA or GPFSA, but not via LPFSA.

Looks like both of these accounts are referred to as FSA accounts on IRS website, and that is the main source of confusion. In GPFSA any qualified medical expense is eligible, while in LPFSA, only vision and dental expenses mentioned below are eligible (this list is from my employer, but most employers have a similar list for LPFSA. NOTE: this list comes from IRS, so they will be similar irrespective of which employer is offering the plan):

• Vision expenses not covered by a medical or vision plan, including examinations, treatment, corrective lenses, and contact lenses
• Dental deductibles, coinsurance, and many other dental care expenses not covered by your dental plan
• Over-the-counter (OTC) drugs that are prescribed by a physician and related to vision or dental care

A sample list of eligible LPFSA expenses is on this website (this is some employer somewhere, but whatever they list here applies to everyone in USA, since the list eventually comes from IRS):

https://fsafeds.com/explore/lex-hcfsa/expenses?take=100

Any prescribed eye/dental medication (that is available over the counter only) is eligible for LPFSA. No other medication is eligible. For ex let's say you get eye drops for your eyes which are needed because of some medical condition in your eyes. If those eye drops are not available OTC, then they are considered medical expense, and NOT vision expense for LPFSA purposes. So, they won't be covered. Any eye doctor visit or any dental work should be covered by both GPFSA and LPFSA. However, there is again a fine line between medical expense vs vision/dental expense even if performed at the optometrist or the dentist. The dentist or the optometrist will mark each expense with a code that marks that expense as "medical" or "vision/dental". If he/she marked it as "vision or dental", then LPFSA will cover it, else it will not be covered by LPFSA. I've seen almost same kind of eye tests getting marked as "vision" by some optometrist/opthalmologist, while some others will mark it as "medical".

Insurance companies will outright reject any LPFSA claim that you file, if it's marked under "medical" by the eye/dental office. You may ask the doctor's office to classify the treatment as dental/vision. Sometimes they may do it, many times they won't. So, even if the expense should have been a "vision" expense, just the code that these doctors or pharmacy put determines the fate of that expense. It's not worth fighting, as it's just a mentally draining process. If it's not the right code, you are out of luck. Sometimes having a FSA debit card helps a lot. Any expense that you incur at eye doctor's office or at dentist office will automatically be eligible if you pay using this debit card. The debit card is designed specifically to work at only these locations, so you don't have to file claims for expenses that are approved via this card.

There is publication 502 on IRS website that talks about eligible expenses for FSA (it doesn't specify GPFSA or LPFSA). This is the publication that is used by all insurance companies to either grant or deny your claim:

https://www.irs.gov/publications/p502

NOTE: FSA rules were different before Obamacare came (as there was only 1 kind of FSA). You will still see websites which refer to FSA eligible items from that era. They are no longer valid. Also, no one mentions LPFSA. They all talk about FSA eligible (when they really mean GPFSA). We don't really want to have GPFSA as HSA is lot superior. The only account we are interested in is LPFSA. Also note that most of the co-pay/hdhp plans now cover routine checkup for free (thanks to obama healthcare).

Let's see in detail a LPFSA account:

Irrespective of whether you are in traditional co-pay plan or HDHP, you should consider about opening a Limited Purpose flexible spending account (LPFSA). This is beneficial mostly for people, who make < $150K, as you don't pay SSN or medicare taxes on money set aside in your FSA. You don't pay federal taxes either. So, the main advantage of LPFSA over HSA is that you pay no SSN and medicare taxes (about 7.5% of your contribution amount) in your LPFSA, but do so in HSA. So, LPFSA saves you even more money than HSA.

How much to contribute in LPFSA:

There is a maximum limit of $2700 for year 2020 that you can put in your FSA (GPFSA or LPFSA). You can contribute the maximum. The only caveat is that any funds that are unused in FSA account, get confiscated by the employer at the end of the year. However, your emploter may offer you one the 2 choices: 

• Allow you to roll over $500 from your unused funds to next year or
• provide you a maximum of 2 and 1/2 month of grace period to use the funds after the end of the year. 

Your employer can allow you only one option, and that's already pre decided by your employer for all employees. So, read your employer's FSA documents to which option your employer offers. $500 rollover is a better option, and is offered by more employers.

Since it's use it or lose it, you have to be very careful about how much you put aside in your LPFSA amount. This amount has to be decided by you before the start of the year, and you can't change it during the year. I think, it's very risky, trying to save an extra 7.5% on tax. Based on my personal experience, $1000 is a reasonable amount to put in an FSA. Especially, if your salary is < $150K and you don't have any big medical expenses pre planned for that year. These are the 2 categories where you can spend most of your FSA money.

Vision expenses: Assuming 4 members in a family, since all 4 of you are going to go for a eye checkup atleast once a year, you will pay about $100 for 4 visits. On top of that, you can buy eye glasses or contact lenses, so you can easily use $100-$200 from your FSA for glasses.

Dental expenses: For dental expenses, you could easily end up spending $200-$500 every year. You are going to make 2 dental visits every year for each of you, but those visits should be totally free as they are mostly covered by your dental insurance. Sometimes you might need to pay $10-$20 per sperson, depending in the type of insurance you have.

So, in the end, you will have no difficulty spending $500 on dental and vision expense. With $1000 as the starting balance in your account, you will easily spend $500, and can rollover remaining $500 to next year (if they are unused). Then depending on how much money you spend from LPFSA, you can readjust how much you want to contribute for next year's FSA. So, risk is pretty low of losing money in LPFSA. People usually go for an FSA account, when they are sure, they are going to have an expensive treatment, such as braces, dental surgery, eye surgery, etc. They get a quote before hand, and contribute exactly that amount of money in FSA to save some extra money on taxes. I put the maximum of $2700 in my LPFSA account, as I'm pretty sure I'll be able to use at least $2200 each year, with all the eye and dental expenses of kids.

Remember: both FSA and HSA reduce your AGI, by the amount that you contribute towards these accounts, so if you looking to bring your AGI down, you can max out the contribution to both of these accounts (about $2.7K for FSA and $7K for HSA for a total of $10K per year). Lowering your AGI, can allow you to take some deductions or get credits when filing your income taxes. Look in the income tax section for more details.

Conclusion:

So, in a nutshell, if you are employed, your total health care expenses can vary between $1K to $6K depending on the plan. Whether co-pay plan or HDHP plan is better depends on your health level. But since 2015, premium costs for co-pay plan are lot higher than premium costs for HDHP plan. Also many employers offer only the HDHP plan. So, it's wise to stick to HDHP plans, and just forget that co-pay plans even exist.

As an example, with my employer, premiums for co-pay plan are about $4K, while the premium for HDHP plan are about $1K. With HDHP plan, upto $3K have to be borne entirely by the employee, between $3K to $6K is borne 80% by insurance company and anything over $6K is borne 100% by the insurance company. So, with HDHP, the min I would ever spend out of my pocket is $0K ($1K in premium - $1K in employer contribution) while the max is around $6K ($6K in expense + $1K in premium - $1K that my employer contributes), while with co-pay plan, the min I would ever spend is $4K while the max is around $5K (just an assumption, as co-pays for visits,emergencies, medicines, etc shouldn't exceed $1K) . So, for my case, going with an HDHP is almost always better, as that can save me a lot of money, if I don't go to a doctor every week. However, when you are going to have a baby, you can save maybe $500 by being in co-pay plan, But that's the only scenario where it may be financially better to stick with co-pay plan.

My advise would be to go with an HDHP, with an HSA and a LPFSA, and use the money in HSA to invest in stock market. Within 30 years, you would be looking at $100K or more in returns in your HSA account, provided FED keeps on printing money !!