Health Insurance

The upside of high-deductible plans for boomers

Sam Gibbs, executive director
Bertha Coombs | CNBC

For many baby boomers a high-deductible health-insurance plan with a big out-of-pocket maximum may not be the best health insurance option. But for 59-year old Sam Gibbs it turned out to be just what the doctor ordered when he decided to switch jobs, because he had a health savings account.

"As part of my exit package, I negotiated to divert some of my vacation pay and other pay into my HSA," said Gibbs, the former president of government systems at eHealth.

When he left eHealth last year, Gibbs was able to take that tax-free cash in his HSA account and use it to pay for continuing COBRA coverage, because it was considered as a qualifying life change under IRS rules.

"I was eligible to pay my COBRA payment out of my HSA, which was pretty good, since my COBRA premiums were $1,600 a month," for his family plan, Gibbs explained.

With a traditional or HMO health plan and a flexible spending account, he would not have had that option.

'A hidden gem'

Unlike an FSA, health savings account funds don't expire at the end of the year, and HSAs are portable when you change jobs or insurers.

"I think health savings accounts are a hidden gem in this environment," Gibbs said.

Health savings accounts, or HSAs, are available for people less than 65 years old with high-deductible employer or individual health insurance coverage, including Obamacare plans. The plan must have a deductible of $1,300 or more for an individual, and $2,600 or more for family coverage.

For 2017, high-deductible plan members can save up to $3,450 in an individual HSA, with tax-free contributions of their own or from an employer. For family plans, the maximum HSA contribution is $6,700. Baby boomers 55 years or older can make an additional $1,000 catch-up contribution.

"Those that tend to spend more on health care may want to consider a traditional PPO [plan] or HMO," said Jen Clark, data scientist at benefits firm Benefitfocus.

Yet, as health costs continue to rise, more employers are now offering high-deductible plans that can carry lower premiums. Benefitfocus research found when offered a choice between a traditional and high-deductible plan, most younger workers chose the latter.

"Adoption is highest among millennials. It's nearly twice that of older generations," said Clark.

For older workers in good health, analysts say high-deductible plans may also make sense when combined with tax-free savings in an HSA.

"In most cases, we find that if you actually do the arithmetic and look at your usage… that you actually end up spending less," with an HSA-eligible plan, said Chad Wilkins, head of HSA Bank, one of the nation's largest health savings account administrators.

HSA Bank and most health savings account providers have financial calculators to help crunch the numbers, but if you're considering an HSA plan, benefits pros say don't just look at your annual cost.

How does an HSA work?

One of the biggest advantages of HSAs is that the funds in the account don't expire, which make them a good a way to save and plan for large health-care expenses down the road.

"We have so conditioned people to make this an annual decision," said Jay Savan, a partner at benefits firm Mercer. "If your objective is, 'I have a longer-term view, I want to accumulate cash for future needs,' maybe you might be better off enrolling in the HSA eligible plan."

For example, if you're contemplating an expensive procedure like Lasik surgery to correct your vision, you could save for the out-of-pocket costs over the course of more than one year with an HSA.

What if you wind up paying more out-of-pocket costs than you've saved in your account in a given year? You could still reimburse yourself retroactively from future savings in your HSA.

"I can save my receipts for an expense that I incurred this year… and reimburse myself on a tax-advantaged basis because there's no time limit for when I can reimburse myself," said Kevin Robertson, senior vice president at HSA Bank.

HSA tax advantages for retirement

HSAs provide a number of tax-advantages for long-term saving. Contributions are pretax if you're on an employer plan. If you're on an individual plan, you can deduct your contributions in the same way you would an IRA.

Like IRAs, HSAs can also be used to grow your health savings in an interest-bearing account or through investments.

"That cash accumulation feature creates a different kind of dynamic," explained Mercer's Jay Savan. "The bottom line is that an HSA is a retirement accumulation account masquerading as health insurance."

There are no limits on how much your account can grow within an HSA, and as long as you use the funds for health costs, withdrawals are not subject to capital gains or income taxes.

"The earnings and gains in the account are tax-free, and then you can take it out at any time to pay for health-care expenses, tax-free, including Medicare premiums," said Alex Tolbert of benefits firm Bernard Health, which advises businesses and consumers about benefit choices.

What if you need the cash for something besides health-care expenses? Then you will have to pay income tax on the cash and you will be subject to a penalty unless you're 65 or older.

"If you're leading a charmed life, you can spend it on whatever you want after age 65 and you just pay ordinary income taxes," said Tolbert.

Sam Gibbs is sticking with high-deductible plans. Though he could get benefit through his new employer Agile Health Insurance, he has opted instead to pay for an HSA-eligible Obamacare plan so that he can continue to fund his health savings account.

"The Obama administration is not so keen on HSAs," Gibbs said, "but it's still viable on the exchange."

With retirement just around the corner, what he and his wife can save, will help when they're over 65.