How to choose the best health insurance plan
We are in the midst of the open enrollment season for employer benefits such as health, life and disability insurance. If you work for a company that offers these valuable compensation enhancements, you’ve likely received a menu of benefits to choose from and a short window of time to make your choices for the year ahead.
These choices may seem inconsequential, especially those that cost a few dollars per paycheck, but there are many business benefits that serve as a financial lifeline when unexpected challenges arise. Here we will focus on the most complex decision that lies ahead of you: health insurance.
This is undoubtedly one of the most important benefits an employer offers, but how do you know which health care plan is right for you? Affordability of premiums is a factor, but it’s not as simple as choosing the option with the lowest premiums. To start weighing the best option for you, consider not only the cost of the premiums, but also how much you’re likely to pay for the deductible and coinsurance.
Reimbursable premiums, deductibles, coinsurance and maximums
The deductible is the amount of your expenses that you have to pay before the insurance company can help you cover the costs of your care. Each person on your policy can have their own deductible or all expenses can apply to a family deductible. Find out the rules of your plan, as this difference alone can have a significant impact on your total disbursements.
Once you have reached the deductible, the insurance company will begin to pay a portion of your expenses. The share is determined by the amount of the coinsurance; a 20% coinsurance rate means that you will pay 20% of your expenses and the insurance company will pay the remaining 80% until you reach your maximum. The maximum is another important number to consider.
Suppose, for example, that you are the only person on your plan. Premiums are $ 1,500 per year, your deductible is $ 2,500 per year, your coinsurance rate is 20% and your maximum amount is $ 6,000. If you spend $ 2,000 on medical expenses, your total disbursement will be $ 3,500: $ 1,500 for premiums and every $ 2,000 of expenses since you will not yet have reached your deductible.
Suppose instead that you spend $ 7,000 on medical expenses. Your total costs would be $ 4,900: $ 1,500 for premiums, $ 2,500 to cover your deductible and 20% of the remaining $ 4,500, or even $ 900.
If the costs are over $ 7,000, you will continue to pay the 20% coinsurance amount until you have paid the maximum of $ 6,000 in addition to your premiums.
Features of tax-saving health insurance: FSA and HSA
Health insurance plans often offer the option of using a Flexible Spending Account (FSA) or a Health Savings Account (HSA). Contributions to either of these accounts will reduce the amount of your income subject to federal and state tax, but that’s where their similarities end.
Flexible expense accounts are often available with traditional health insurance plans. You can contribute up to $ 2,850 to an FSA for 2022 and the amount you choose should be close to the health care expenses you will pay for the year. If you don’t have enough qualifying expenses in the year to use up all of your FSA, the remaining money is usually wasted at the beginning of March of the following year. In other words, it’s a benefit to be used or lost, unless your employer allows you to defer some of it until next year.
A health savings account is only available if you have a High Deductible Health Care Plan (HDHP). The higher your deductible, the more you pay before your coinsurance rate applies. HDHPs are often less expensive than their FSA-eligible counterparts and can work well if you are in good health and have low medical costs throughout the year. Since these plans also tend to save employers money on premiums, they may offer to contribute to your HSA (read: free money to use for health care expenses).
Access to an HSA is an important advantage of HDHPs. Unlike FSAs, contributions to your HSA are not to be used or wasted. Money can stay in the account indefinitely and can even be invested and increased over time. The annual contribution limit is $ 3,650 for individuals and $ 7,300 for families of two or more, less contributions made by your employer. Not only are these contributions eligible for federal and state tax deductions, but distributions from HSAs are also tax-exempt if used for medical expenses. Even the growth that occurs on invested HSA dollars escapes future taxation, making it a rare triple tax threat with benefits at the time of contribution, when the money is in the account and at the time of. the distribution.
In most cases, the health care plan you choose will determine whether you can use an FSA or an HSA. You generally cannot use both, except in cases where you choose to fund a limited-use FSA with an HSA and an HDHP. These types of FSA can only be used for limited expenses like dental and vision care and can be combined with the use of an HSA.
When evaluating your total coverage costs, it’s important to take into account the potential tax savings on FSA or HSA contributions and any money your employer is willing to contribute to your HSA. If you are in the 22% tax bracket and contribute $ 2,500 to one of these accounts, the tax savings would be $ 550. Subtract the tax savings and employer contributions from your pocket calculation above to get a true all-inclusive cost estimate of your medical bills for the year.
Of course, having access to your preferred network of doctors is another important part of selecting health insurance, but if more than one plan meets this criterion, you can use this framework to determine which plan is the best financially. Start by estimating next year’s medical expenses, calculate your total spending on both premiums and medical bills, and reduce that cost through your FSA or HSA tax savings and employer contributions.