Example of how a High Deductible Medical plan with a corresponding Health
Savings Account is a worthwhile benefit, especially for those earlier on in their
careers.
Definitions:
A High Deductible Medical Plan (HDMP) is considered such when it means the IRS
minimum deductible amount that allows the enrollee to get a Health Savings Account
(HSA). The IRS can change the minimum deductible from year to year.
The deductibles that qualifies a HDMP per the IRS for 2009 are:
Single: $1,150
Family: $2,300
By getting this type of plan, the enrollee can get an HSA. For 2009, enrollees can
contribute the following over the year:
Single: $3,000
Family: $5,950
This amount is tax deductible. (I am not a tax advisor so consult your tax advisor).
Single example:
So, if you have a single guy making $50,000, he can contribute $3,000 to his HSA and
this $3,000 comes off of his taxes. Assume he is in a 25% tax bracket.
$50,000 – 3,000 = $47,000
$47,000 times .25 = $11,750
If he did NOT make the contribution and therefore NOT get the tax deduction, he would
pay the following in tax:
$50,000 x .25 = $12,500
$12,500 - $11,750 = 750 The enrollee will save $750. It’s like we got $750 in help from
the Federal Government.
Since the deductible is $1,150 for a single person, ($1,150 – 750 = $400), the enrollee
would have to cover $400 that would not be offset by the $750 in tax savings,
ASSUMMING YOUR GUYS USE THE FULL $1,150 DEDUCTIBLE.
I would bet that the uniform officers need less medical services than your supervisors.
How much do your guys spend on medical coverage in a given year? Although, I am
sure you have guys that are married with kids, I would bet that you have fewer than your
supervisors. The traditional plan for single enrollees has a monthly premium $466 per
month (to be adjusted per the 2/1 change). The HDLP premium for a single person is
$364.18 – almost $100 cheaper per person.
Let’s look at the same example for a family.
So, if you have a family making combined income of $100,000, they can contribute
$5,950 to his HSA and this $5,950 comes off of their taxes. Assume they are in a 30%
tax bracket.
$100,000 – 5,950 = $94,050
$94,050 times .30 = $ 28,215
If they did NOT make the contribution and therefore NOT get the tax deduction, they
would pay the following in tax:
$100,000 x .3 = $30,000
$30,000 - $28,215 = 1,785 The enrollee will save $1,785. It’s like we got $1,785 in
help from the Federal Government.
Since the deductible is $2,300 for a family, ($2,300– 1,785 = $515), the enrollee would
have to cover $515 that would not be offset by the $1,785 in tax savings.
I think making these small, annual contributions to the town is a reasonable way to
pitch in during tough times. Single $400, Family $515.
Now let’s look at what having this Health Savings Account could mean for enrollees
over the long haul.
Let’s take the single guy. He is 35 today and has 15 years on the job. He contributes the
maximum each year for 10 years. He can invest the balance in the same kind of
investments that are in an IRA – Bonds, Stocks, Mutual Funds, Treasury Notes.
Year 1 $3,000 – Let’s save he invests in a 5%Bond Fund. At the end of the year he will
have $3,150. Let’s say he does the same thing for the next 9 years. At the beginning of
the next year he puts in another $3,000.
Year 2 $6,150 times 5% interest = 6,457.50
Year 3 $9,457.50 times 5% = $9,930.38
Year 4 $12,930.38 X 5% = $13,576.90
Year 5
Year 6
Year 7
Year 8
Year 9
Year10
$16,576.90 x 5% = $17,405.74
$20,405.74 x 5% = $21,426.03
$24,426.03 x 5% = $25,647.33
$28,647.33 x 5% = $30,079.70
$33,079.79 x 5% = $34,733.68
$37,733.68 x 5% = $39,620.36
This is a conservative estimate. It does not take into account increases in pay and
increases in the allowable contribution amount by the IRS. In our example, the enrollee
is now 45. Let’s say he gets married and begins contributing at the maximum for a
family - $5,950.
Year 11 $45,570.36 x 5% = $47,848.88
Year 12 $53,798.88 x 5% = $56,488.82
Year 13 $62,438.82 x 5% = $65,560.76
Year 14 $71,510.76 x 5% = $75,086.30
Year 15 $81,036.30 x 5% = $81,036.30
Year 16 $86,986.30 x 5% = $91,335.61
Year 17 $97,285.62 x 5% = $102,149.90
Year 18 $108,099.90 x 5% = $113,504.89
Year 19 $119,454.89 x 5% = $125,427.64
Year 20 $131,377.64 x 5% = $131,377.64
The enrollee in our example is now 55. If you are 55 and older for 2009, you can make
an additional contribution of $1,000. It’s called a catch contribution. Let’s say our
enrollee has been in the department for 28 years and he has two years to go to full
retirement.
Year 21 $138,327.64 x 5% = $145,244.02
Year 22 $152,194.02 x 5% = $159,803.72
To show you what the interest has done to this in 22 years, the enrollee would have
contributed $103,400. The difference ($159,803.72 – 103,400 = $56,403.72) was due to
the 5% rate of return.
Per the book that I gave you, the average 35 year old will need $200,000 for unreimbursable medical expenses for the duration of his retirement. Things like
prescription co-pays and things that are excluded from a plan and/or Medicare.
The money in this account belongs to the enrollee. As you know, Corzine has deferred
matching the pension funds because the state is short on cash. There are states that have
cut their retirement plans even on those that already retired because pension funds were
not adequately funded. This money would be yours. No one can take it away from you
and you can leave to your kids. As I have shown you, the contributions are tax free.
You are NOT taxed when you use it. Even the interest is not taxed.
I think this should be the only plan offered to employees. I say this because people are so
afraid of change, I am concerned that if they have a choice they would won’t choose it
just because they fear change. Some will not chose just because it does require a small
sacrifice today for the sake of the town, i.e., the $400 - $515 in out of pocket they do not
have to pay today with the Traditional Plan which is by and large what employees
choose.
In the private sector, they started to offer the HDMP and tried to ‘sell’ it to employees.
Through inertia people did not choose it. My last two companies changed so that the
HDMP is the ONLY choice. I am very happy with it particularly of the savings value.