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Things you just don't get

HRoi

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I would go for the gold because silver and bronze are for the first and second losers, respectively
 

otc

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And even then the benefits aren't quite so clear cut. Using HSA funds today leaves you more regular post-tax money that you could also invest.

Say you have a $1000 bill and we'll just call total taxes 30% (at least in present day, these are decisions made on or near the margin)... We'll also assume you are already maxing out 401k and IRA (possibly with backdoor), otherwise you probably should just use the HSA for today's health expenses and then funnel more money into 401k.
We'll also assume you actually invest. For many people though that's not really the case...a $1000 unexpected medical bill ends up meaning $1000 less savings that year.

Pay with Cash, invest HSA:
you need to earn $1400 pretax to pay that bill
But you invest pretax $1000 in basically an IRA. In 25 years at 8% that's worth $7300. You have to pay 30% ordinary income taxes on that, so that nets you $5110. Even if you saved that specific receipt, that only gets you $1000 tax-free, so you're at $5410.


Pay with HSA, invest Cash:
Pay 1000 of pretax income to cover the bill.
Invest $1000 post-tax (that cost you $1400 pretax) in a taxable account and hold. In 25 years at 8% that's also worth $7300. But the gains should get taxed at long term cap gains of 15% (and if you're in the 20% cap gains rate at retirement...well..fuck you, this $1000 bill is not worth the time you spent thinking about it). That nets you $6355.

Now of course this isn't a perfect comparison.
- you could have saved other receipts, but each of those receipts would involve the same tradeoff (every bill you pay in cash is $$ not invested post tax).
- odds are you don't actually invest the full $1000 post-tax when you pay the bill from the HSA. You probably end up spending more money on other things than if you had paid from savings.
- Tax management at retirement could easily push your ordinary income tax rate lower. Your income is probably lower (since you don't need to spend AND save anymore), cap gains and Roth assets keep your marginal rate down, etc. which keeps your average rate low. If you think a rate of <20% is fair to apply to your decision to withdraw from the HSA in retirement, the comparison becomes much more favorable.
- You'll certainly have contemporaneous medical costs in retirement that you can use to withdraw from the HSA tax free. This is a big piece that moves "pay with cash" ahead.

But...I'm not convinced that last one totally solves the problem if you were already maxing out your HSA every year when you were young. In this example we are only looking at the $1000 that would have been spent. But what if that was your only major medical expense that year, but you actually contributed the full $3650/7300? For every $1000 that was leftover in the HSA that year, there's another $7300 in your HSA 25 years later. That's a lot of future medical bills you can cover.

So it ultimately depends on how much medical care you need when you are younger. If you are fully spending your HSA every year (and thus not carrying over any investment to the triple-tax-advantage), then paying some bills with cash seems to make sense in order to get HSA investments for the future. But if you are maxing that shit every year and only have small or infrequent medical expenses...you'll have plenty leftover for for the later-year expenses.
 
Last edited:

brokencycle

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And even then the benefits aren't quite so clear cut. Using HSA funds today leaves you more regular post-tax money that you could also invest.

Say you have a $1000 bill and we'll just call total taxes 30% (at least in present day, these are decisions made on or near the margin)... We'll also assume you are already maxing out 401k and IRA (possibly with backdoor), otherwise you probably should just use the HSA for today's health expenses and then funnel more money into 401k.
We'll also assume you actually invest. For many people though that's not really the case...a $1000 unexpected medical bill ends up meaning $1000 less savings that year.

Pay with Cash, invest HSA:
you need to earn $1400 pretax to pay that bill
But you invest pretax $1000 in basically an IRA. In 25 years at 8% that's worth $7300. You have to pay 30% ordinary income taxes on that, so that nets you $5110. Even if you saved that specific receipt, that only gets you $1000 tax-free, so you're at $5410.


Pay with HSA, invest Cash:
Pay 1000 of pretax income to cover the bill.
Invest $1000 post-tax (that cost you $1400 pretax) in a taxable account and hold. In 25 years at 8% that's also worth $7300. But the gains should get taxed at long term cap gains of 15% (and if you're in the 20% cap gains rate at retirement...well..fuck you, this $1000 bill is not worth the time you spent thinking about it). That nets you $6355.

Now of course this isn't a perfect comparison.
- you could have saved other receipts, but each of those receipts would involve the same tradeoff (every bill you pay in cash is $$ not invested post tax).
- odds are you don't actually invest the full $1000 post-tax when you pay the bill from the HSA. You probably end up spending more money on other things than if you had paid from savings.
- Tax management at retirement could easily push your ordinary income tax rate lower. Your income is probably lower (since you don't need to spend AND save anymore), cap gains and Roth assets keep your marginal rate down, etc. which keeps your average rate low. If you think a rate of <20% is fair to apply to your decision to withdraw from the HSA in retirement, the comparison becomes much more favorable.
- You'll certainly have contemporaneous medical costs in retirement that you can use to withdraw from the HSA tax free. This is a big piece that moves "pay with cash" ahead.

But...I'm not convinced that last one totally solves the problem if you were already maxing out your HSA every year when you were young. In this example we are only looking at the $1000 that would have been spent. But what if that was your only major medical expense that year, but you actually contributed the full $3650/7300? For every $1000 that was leftover in the HSA that year, there's another $7300 in your HSA 25 years later. That's a lot of future medical bills you can cover.

So it ultimately depends on how much medical care you need when you are younger. If you are fully spending your HSA every year (and thus not carrying over any investment to the triple-tax-advantage), then paying some bills with cash seems to make sense in order to get HSA investments for the future. But if you are maxing that shit every year and only have small or infrequent medical expenses...you'll have plenty leftover for for the later-year expenses.
The average American isn't coming anywhere close to maxing their 401k. Vanguard releases data, and 12% of participants max. Only 62% of people with a plan voluntarily contribute, so that's 7-8% of people in total.

So your whole analysis makes a very flawed assumption when it comes to why companies do what they do when it comes to their healthcare plans and why people pick what they pick.

 

SixOhNine

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We max out our 401k and we spend all our HSA money every year. 🤷‍♂️
 

otc

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The average American isn't coming anywhere close to maxing their 401k. Vanguard releases data, and 12% of participants max. Only 62% of people with a plan voluntarily contribute, so that's 7-8% of people in total.

So your whole analysis makes a very flawed assumption when it comes to why companies do what they do when it comes to their healthcare plans and why people pick what they pick.

Yeah, but if you're not in that position, you're probably not really worrying about the theoretical optimal plan of spending HSA money today vs investing for triple-tax-advantage.

If you are contributing to your HSA at all, you're probably happy to spend from it on today's medical bills both to save taxes and to stop you from blowing your budget.

Like sure, the HSA is theoretically better than a non-matched 401k or IRA contribution (as long as the rules don't change), but it becomes a marginal difference at best and not worth nerding out over if you can just contribute to a "normal" retirement vehicle instead.

And I don't think it has anything to do with why companies choose one plan over another. Certainly in my company's messaging there's absolutely nothing about using your HSA as a secret-IRA like @jbarwick says...They are probably assuming you will use the HSA money on that year's medical bills (and probably not fully contribute unless you spent that much last year).
 

jbarwick

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When I worked in employee benefits, we focused all of our messaging on the average employee.

This reminds me of one vendor we used for a niche benefit. I forget what the hell it was but we used to pay for the benefit then give this guy a fee of $1.75M per year for what was not a ton of work. The reason the actual HR people kept him around is he would buy everyone in HR, Director level and up, a Christmas wreath. We couldn't get rid of the Christmas wreath guy even if we could save money! I stopped working there in 2014 but the last time I spoke with a buddy, he was still a vendor and expanded to wreath program to everyone in HR.
 

Texasmade

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All this milkshake ain't bringing any boys to the yard.
Have you thought about signing up for the Right Stuff if you want to bring some boys to the yard? I hear there are a lot of alpha male masculine men on that app.
 

brokencycle

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Yeah, but if you're not in that position, you're probably not really worrying about the theoretical optimal plan of spending HSA money today vs investing for triple-tax-advantage.

If you are contributing to your HSA at all, you're probably happy to spend from it on today's medical bills both to save taxes and to stop you from blowing your budget.

Like sure, the HSA is theoretically better than a non-matched 401k or IRA contribution (as long as the rules don't change), but it becomes a marginal difference at best and not worth nerding out over if you can just contribute to a "normal" retirement vehicle instead.

And I don't think it has anything to do with why companies choose one plan over another. Certainly in my company's messaging there's absolutely nothing about using your HSA as a secret-IRA like @jbarwick says...They are probably assuming you will use the HSA money on that year's medical bills (and probably not fully contribute unless you spent that much last year).
My response was a tongue in cheek reply about assuming people are maxing their 401k. That's all.
 

Texasmade

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When I worked in employee benefits, we focused all of our messaging on the average employee.

This reminds me of one vendor we used for a niche benefit. I forget what the hell it was but we used to pay for the benefit then give this guy a fee of $1.75M per year for what was not a ton of work. The reason the actual HR people kept him around is he would buy everyone in HR, Director level and up, a Christmas wreath. We couldn't get rid of the Christmas wreath guy even if we could save money! I stopped working there in 2014 but the last time I spoke with a buddy, he was still a vendor and expanded to wreath program to everyone in HR.
Wait a minute. He got paid $1.75M a year for Christmas wreaths that probably cost no more than $20 a piece?
 

jbarwick

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Wait a minute. He got paid $1.75M a year for Christmas wreaths that probably cost no more than $20 a piece?
I mean, he might have worked a solid month in there so maybe he earned $146K as it was a solo shop. The remaining $1.6M meant we were paying about $16K-ish per wreath.

I am shocked too because before I left they signed an engagement with McKinsey where they would save the company $100M in benefits costs and somehow this guy is still a vendor. McK made $3M to regurgitate what we told leaders years prior which was, "if we make employees pay more of the Total Benefits Cost, it will save the company money."

That job was step #1 in why I left healthcare.
 

Texasmade

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I mean, he might have worked a solid month in there so maybe he earned $146K as it was a solo shop. The remaining $1.6M meant we were paying about $16K-ish per wreath.

I am shocked too because before I left they signed an engagement with McKinsey where they would save the company $100M in benefits costs and somehow this guy is still a vendor. McK made $3M to regurgitate what we told leaders years prior which was, "if we make employees pay more of the Total Benefits Cost, it will save the company money."

That job was step #1 in why I left healthcare.
McKinsey is such a fucking joke.
 

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