How to Budget for a Health Insurance Deductible

Financial Strategies for When You Can't Afford a High Deductible

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It’s not unusual to have trouble paying your health insurance deductible—some deductibles are thousands of dollars. And if you don’t have that much in savings, it can feel like your deductible is far too high.

Your options for dealing with the cost depend on whether you owe your deductible right now or whether you’re preparing in advance. If you’re looking to the future and realizing you’ll have to come up with this chunk of change eventually, here are some options to work your deductible into your budget.

Flexible Spending Account (FSA)

If you have job-based health insurance, you may be able to participate in a flexible spending account. An FSA is a special type of tax-advantaged savings account that can only be used for healthcare expenses, like paying your deductible, copays, and coinsurance.

How does it work? If your employer offers an FSA, you can sign up to participate during open enrollment when you make your health insurance choices for the coming year. You'll decide how much you want to contribute (the maximum is $2,700 in 2019), and then your employer will deduct a small amount, pre-tax, from each of your paychecks during the coming year and put it into your FSA.

By the end of the year, the total amount that will have been deducted from your pay will be equal to the amount you elected to contribute to your FSA. When you need to pay your deductible, you can use the money in your FSA.

It’s easier to pay your deductible using an FSA, because rather than having to come up with a large amount of money from a single paycheck, you’re breaking that financial burden into much smaller amounts spread over the entire year.

Additionally, the money you put into your FSA comes out of your paycheck before taxes. This makes your taxable income smaller—you pay less income tax. Because the total amount of income tax that will be taken out of each paycheck will be smaller, your FSA contributions won’t impact your take-home pay as much as, say, putting that same amount of money into a regular savings account.

For example, perhaps you put $40 per paycheck into your FSA and that lowers your income tax by $8. Your take-home pay will only be $32 less than before, even though you’re squirreling away $40. (Your exact figures will depend on your income tax bracket and how much you opt to contribute to your FSA for the year.)

What happens if it’s early in the year and you haven’t saved enough in your FSA to meet your deductible yet? You'll be able to withdraw up to the amount that you've scheduled to contribute over the entire year and use that money for your deductible, even before it’s been taken from your paycheck. Then, throughout the rest of the year, you'll continue to make contributions to the FSA, essentially getting it back to zero by the end of the year. In this way, an FSA can function as a sort of a loan system, if you need medical care early in the year. There are some caveats, though:

  • If you don’t spend all of the money in your FSA by the end of the year, you may lose it. If your employer allows it, you can either to roll over $500 into next year's FSA, or to carry over your remaining balance and use it in the first two and a half months of the coming year. But other than those exceptions, you forfeit any money remaining in your FSA at the end of the year.
  • The federal government limits how much money you’re allowed to put into an FSA each year. So, if your deductible is more than about $2,700 in 2019, your FSA will only cover part of it ($2,700 is the FSA contribution limit in 2019; this amount is indexed for inflation each year by the IRS).

Health Savings Account (HSA)

An HSA is a special savings account that works with high-deductible health plans (HDHPs). You put money into your HSA and use it for medical expenses, like your deductible. The money you contribute to your HSA is tax-deductible and interest earned is exempt from federal taxes.

The IRS limits how much you can contribute to an HSA. In 2019, the limit is $3,500 if you have HDHP coverage for just yourself, and $7,000 if you have HDHP coverage for yourself and at least one other family member. For 2020, these limits will increase slightly, to $3,550 and $7,100, respectively. And each year, people who are 55 or older can put up to an additional $1,000 into their HSA, as a catch-up contribution.

If you don’t use your HSA funds by the end of the year, no sweat. It stays in your HSA account, accumulating tax-free interest until you do use it. You won’t lose it at the end of the year like the money in an FSA.

In fact, if you’re healthy and don’t end up using all of the money you contribute to your HSA each year, it’s possible to grow quite a large amount of tax-advantaged savings. Some folks even consider their HSA as another retirement account.

Your employer can also contribute pre-tax money into your HSA, although not all employers do so. Unlike an FSA, your HSA doesn’t have to be associated with job-based health insurance. You can set one up yourself as long as you have a qualified high-deductible health plan (HDHP).

To get your HSA up and running quickly, you can transfer money from your IRA (individual retirement account) into your HSA once in your life without any penalties if you follow all of the Internal Revenue Services's (IRS) rules carefully. You're allowed to transfer up to the maximum contribution limit for the year in which you make the transfer, assuming you haven't made any additional HSA contributions that year. Again, there are caveats:

  • You must have a qualified high-deductible health plan to open an HSA. Not every health plan with what seems like a high deductible is actually an HDHP. If you're not sure that your health insurance is an HDHP, contact the health plan or your employee benefits department to check before you set up an HSA.
  • If you use the money in your HSA for something other than a qualified medical expense, you’ll face tax penalties.
  • There are limits as to how much money you can put into an HSA in any given year, but no limits as to the maximum that can accumulate in it over time, or the maximum that you can withdraw from it in a given year. As long as you're using the money for qualified medical expenses, you won't pay taxes or penalties on the withdrawal, regardless of how much you withdraw.

Health Reimbursement Arrangement (HRA)

An HRA is an arrangement between you and your employer that allows your employer to reimburse you for your medical expenses, including your deductible. It's similar to an HSA or FSA, except that only your employer can contribute money to it—you can't fund it yourself.

Since your employer funds the account, it’s not your money, like the funds in an HSA are. If you quit your job, you may or may not get to keep the account—depending on how your employer structured the HRA. Funds left in the account usually rollover to the next year, but that’s up to your employer.

The 21st Century Cures Act introduced a new kind of HRA that small businesses can use to reimburse employees for individual market health insurance premiums, as well as other medical expenses. And the Trump administration has further expanded HRAs by allowing employers of any size to use an HRA to reimburse employees for individual market health insurance premiums—as well as other medical expenses—starting in 2020.

Cost-Sharing Subsidy

The Affordable Care Act created subsidies to help people with modest incomes (and who buy their own health insurance, as opposed to getting it through an employer) pay their health insurance deductibles, copayments, and coinsurance. There are income guidelines to qualify and you have to have a silver-tier health insurance plan that you purchased from your state’s health insurance exchange.

If you qualify for the cost-sharing subsidy, you’ll almost certainly also qualify for the premium subsidy designed to help you pay your monthly health insurance premiums. You can use the money you save in premium costs to put toward your deductible.

Don’t disregard this subsidy just because your current health plan isn’t a silver-tier exchange-based plan. If you think you might qualify, learn about it now so you can choose a qualifying plan during the next open-enrollment period (in most states, this is November 1 to December 15, for coverage effective January 1 of the coming year). It won’t help you this year, but next year you won’t have to worry as much, because your deductible will be smaller if you qualify for cost-sharing reductions and enroll in a silver plan through the exchange.

Consider Supplemental Insurance

If your deductible is fairly high and you're worried that you wouldn't be able to pay it if and when you were to need extensive medical care, a supplemental policy that covers some or all of the deductible might be worth considering.

There are accident supplements that pay a certain amount of money if you have a claim that arises from an accident or injury, and there are also specific disease plans and fixed indemnity plans that will pay a certain amount of money depending on the circumstances (for example, if you receive a specific diagnosis that's covered under the policy, or if you spend a night in the hospital).

Supplemental plans aren't right for everyone, and it's wise to do some back-of-the-envelope math to see how much you'll be paying in premiums versus how much you could expect to receive in various situations. But for some people, having a supplemental health plan relieves some of the worries they would otherwise feel about the potential for a multi-thousand dollar medical bill.

Budget for Emergency Savings

If you’re disciplined, you can squirrel away a set amount each paycheck to put toward your deductible. While you won’t get any special tax advantages like you would with an FSA or HSA, you won’t be constrained by a lot of IRS rules about how you can save and what you must use the money for either.

It may be easier to build up an emergency fund to pay your deductible if you think of it as paying a bill in advance rather than approaching it as saving. Overall, the likelihood that you will eventually need medical care is high and you will have to pay your deductible after you seek treatment. That bill will eventually come due. Pay it to yourself in advance.

Set up a special account to hold your deductible funds. Each month when you pay your rent, utilities, car insurance, and other bills, put money into your health insurance deductible fund, too. If you have your bank automatically transfer it from your checking account into a savings or money market account, you’ll be more likely to do it consistently.

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Article Sources

  1. Internal Revenue Service. IRS: Plan now to use Health Flexible Spending Arrangements in 2019. November 16, 2018.

  2. Internal Revenue Service. Notice 2013-71. Modification of “Use-or-Lose” Rule For Health Flexible Spending Arrangements (FSAs) and Clarification Regarding 2013-2014 Non-Calendar Year Salary Reduction Elections Under § 125 Cafeteria Plans.

  3. Internal Revenue Service. Revenue Procedure 2018-30.

  4. Internal Revenue Service. Revenue Procedure 2019-25.

  5. Internal Revenue Service. Notice 2008-51. Health Savings Accounts.

  6. Miller, Stephen. Society for Human Resources Management. New Final Rule Lets Employees Use HRAs to Buy Health Insurance. June 20, 2019.

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