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 minim u m deductible amoun t that allows the enrollee to get a Health Savings Account (HSA). The IRS can change the minim u m 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 Governme n t. 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 unifor m 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 premiu m $466 per mont h (to be adjuste d per the 2/1 change). The HDLP premiu m 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 Governme n t. 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 contribute s the maximu m each year for 10 years. He can invest the balance in the same kind of invest me n t s 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 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year10
$6,150 times 5% interes t = 6,457.50 $9,457.50 times 5% = $9,930.38 $12,930.38 X 5% = $13,576.90 $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 maximu m for a family - $5,950. Year Year Year Year Year Year Year Year Year Year
11 12 13 14 15 16 17 18 19 20
$45,570.36 x 5% = $47,848.88 $53,798.88 x 5% = $56,488.82 $62,438.82 x 5% = $65,560.76 $71,510.76 x 5% = $75,086.30 $81,036.30 x 5% = $81,036.30 $86,986.30 x 5% = $91,335.61 $97,285.62 x 5% = $102,149.90 $108,099.90 x 5% = $113,504.89 $119,454.89 x 5% = $125,427.64 $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 depart m e n t for 28 years and he has two years to go to full retireme n t. 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 contribute d $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 un - reimbur sa ble medical expenses for the duration of his retireme nt. Things like prescription co- pays and things that are exclude d from a plan and / o r Medicare.
The money in this account belongs to the enrollee. As you know, Corzine has deferre d matching the pension funds because the state is short on cash. There are states that have cut their retireme n t plans even on those that already retired because pension funds were not adequately funde d. 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 concerne d 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 compa nies changed so that the HDMP is the ONLY choice. I am very happy with it particularly of the savings value.