Retiring Early? Don’t Choose Health Insurance Just for the HSA

Matt Allen (01:00.066) Welcome back to another episode of Talking Shit. Shit of course is an acronym for straight health insurance talk. I am Matt Allen, joined once again by Aaron Miller. How we doing, Aaron? Aaron Miller (01:10.991) Now we're doing great. You got your caffeine of choice over there? Matt Allen (01:14.348) Yeah. Just going with the French press today. Aaron Miller (01:17.933) Very nice. Got got a cold brew. Gotta take it easy on the cold brew sometimes. They they pour it strong. Matt Allen (01:22.818) Ooh, okay. Isn't that the point? Is that what you're looking for? Aaron Miller (01:27.494) yeah. It is the point, but I gotta pace myself. Matt Allen (01:33.191) You're you're pretty quick with beverages. Aaron Miller (01:37.679) They don't last long. Matt Allen (01:38.872) They don't last long in front of you. Yeah. Okay. All right. Fair enough. What we what are we talking about today? Aaron Miller (01:40.962) No. No. Aaron Miller (01:47.811) I can't wait to turn the tables on you someday. Just Matt, what are we talking about today? It's not today. We're not gonna do that today. Matt Allen (01:54.254) It's not today? thank goodness. Whew. I'm not prepared. Aaron Miller (01:57.091) Not today. Today we're gonna talk about everyone's favorite you know, financial planning tool, the HSA, a triple tax advantage, a financial planner's dream. Matt Allen (02:13.766) yeah. Aaron Miller (02:16.322) Let's start there. What is an HSA? Matt Allen (02:21.207) So in HSA, HSA stands for Health Savings Account. And so this is a it's essentially a bank account that you would open up with a financial institution. You make qualified contributions into the HSA, which I can break down what that means, up to a certain amount per year, and then that money can either accrue interest or If you're savvy, you can invest it in a wide range of equities, those types of things. Now, the reason the HSA is so popular with financial planners is because any money that you put into the HSA is pre-tax money. So we're not getting taxed on it. The interest or earnings that grow on the money that's inside it, once you withdraw it, are also not taxed. So earnings not taxed, contributions aren't taxed, and the actual money that you're withdrawing from the account is also not taxed. So it's a triple tax advantage. I put it in, there's no tax on that money. It grows, there's no tax on the growth. And when I pull it back out, there's no tax on me pulling it out. So it's triple tax advantage. And there's no other account like it. it's the only one that exists, and so there are limits on the annual contribution that you can put in. for a single the the numbers move every year. I think at the time of this recording, for a single, it's somewhere around forty-three, forty-four hundred a year, something like that. And for a family, it's double that. So it's you know eighty-six, eighty-eight hundred, somewhere somewhere in that ballpark. And you can do it per year. Now the stipulation is that in order to continue Matt Allen (04:21.879) contributing to this HSA. If I wanna put money in there, if I wanna max out that eighty eight hundred on the year, well then my family has to have something called a high deductible health plan, H D H P, in order to make the HSA contribution. So s so just a random Joe Schmo off the street who wants to take advantage of this triple tax advantaged investment vehicle cannot just Walk into Wells Fargo and go, hey, I want an HSA. They're gonna say, Great, do you have a high deductible health plan? That's the prerequisite to opening one and contributing to it. Now, that's just the stipulation to contribute. If you no longer have that high deductible health plan, if it goes away for whatever reason, or you turn 65 and you're on Medicare, you don't forfeit any of the money in the HSA. You don't forfeit any of the earnings. You don't have to close the account. That is still your money. It can still grow tax-free and it can still be withdrawn from tax-free. you just cannot continue contributing unless you have the accompanying health insurance plan with it, which is a high deductible health plan. So I hear all the time of people being like, Well, I'll just, you know, I'll just get an HSA and I'll just put some money in. Or I hear I hear business owners say, gosh, I can't really afford to to offer a group plan. What if I just start an HSA for everybody and I just put a couple hundred bucks in there for everybody? Mike, honestly, man, I would love if you could do that. But in both situations. I'd love if anyone could just open an HSA. It would make sense. I'd I because when you're withdrawing the money, the way that it's not taxable, when you do actually withdraw that money. Is because you're using it for something called a qualified medical expense. And so the idea is you put money in there, it grows, and you're taking it out to help pay for, you know, prescriptions, to pay for your deductible, to pay for doctor visits, to pay for new glasses, to pay for crowns and fillings and all these types of things. There's a huge list of what a qualified medical expense is. Some Matt Allen (06:41.857) You could like go grocery shopping at the pharmacy, and I think that might be a qualified medical expense. Don't quote me on that. But there's a huge list of things that qualify for that. And so I would love if you didn't need that high deductible health plan add-on. If you didn't need that prerequisite, I would I would love the HSA so much more. but you do need that high deductible health plan. So in the in the case of the small business owner wanting to help out his people, hey, I can't I can't afford you know, eight hundred a month to get actual health insurance, but what if I gave H S A dollars? And they I I I believe that should be allowed and that should be a route and it can work, but the prerequisite is your employee then already has to have a high deductible health plan in place. Otherwise those contributions they're nothing. You might as well just give them a two hundred dollar a month raise, you know, and then it's subject to income tax and payroll tax and all that. And I get that. but that's Essentially high level. Well, I didn't really t stay high level on the HSA, but that's kind of the intricacies of the HSA. I'm I'm I'm one to ramble. but does that make sense what that HSA is? Aaron Miller (07:53.208) It does. And I'm piecing together why it exists in the first place. And what I'm gathering is you have a high deductible plan, so your out of pocket cost, if something catastrophic does happen, would be relatively high before you know you hit that deductible or the out of pocket max. And so having HSA dollars available can limit that burden. Is that what I'm I'm hearing? Matt Allen (08:20.319) Right. So I think the original intent and the original design of the HSA was to incentivize people to move to a more high deductible type health insurance. And let's, you know, let's pretend it's a 5,000 individual deductible and a 10,000 family deductible. Well, the I think the original intention of the HSA was to have those annual contributions be close, similar, or exact to what your deductible was. And so the mindset is, hey, if I if I put pre-tax ten thousand for my family into this account per year, then if the worst case scenario happens, I can pull it out also tax-free to pay that deductible, then my insurance kicks in and covers everything. And that that was the spirit of it, I believe, at first. And now that, you know, financial planners are pretty smart smart group of individuals, they realize, well, hey, what if we put the ten K in per year? I I know that's not the limit, it's eighty eight hundred. What if we put the eighty eight hundred in, but nothing happens? You tell me I can I can go invest this and then it can it can earn tax free as well. and what if I do it two years, three years, four years, five years? And so it's a it's a very attractive investment vehicle, but the whole point of it you know, if if we bring it back to its origination and why it was spawned in the first place, is to help alleviate the financial burden of some of these high deductible health plans. So yes. Aaron Miller (09:57.882) Gotcha. And when we're talking about these high deductible health plans, do we know what that limit is to be considered a high deductible health plan? Matt Allen (10:08.234) So I have heard. There there's a hard line. Absolutely. I believe it starts at fifteen hundred individual, goes up to seventy five hundred. I think it's in that ballpark in that range, somewhere around there. again, these numbers change every year. And so again, don't quote me on that. It's super easy to just Google what they are. I guess w we can probably do that. Are you doing that right now? Yeah. Okay. Aaron Miller (10:35.533) Yeah, have it here. Individual deductible, and this is for limits for 2026. Individual deductible at least seventy five sorry, seventeen hundred, family deductible at least thirty-four hundred, and then there's an out-of-pocket max limit on that as well. Out-of-pocket max no more than eighty-five hundred. Family out of pocket no more than seventeen thousand. Yep. Matt Allen (10:58.839) Seventeen. Yep. Is there an upper echelon for the deductible as well? Aaron Miller (11:06.095) there is not. It's an at least number. Matt Allen (11:08.907) Okay. Okay. So which is good. so so what does this mean? This means that your plan can qualify as something called a high deductible health plan as long as your deductible is 1700 for individual or higher, and thirty four hundred for family or higher. But if it goes too high, that's a problem too. It used to be a bigger problem. Before new legislation was passed. But for for years, if you were on the Affordable Care Act, if you were on the marketplace, they had these bronze plans where the deductible and the out-of-pocket max, they were too high to be considered a high deductible health plan. It was this really weird wrinkle where the government had these restrictions of, well, it can't be too low, but it also can't be too high to be a high deductible health plan. You would think Aaron Miller (11:55.097) Mm. Matt Allen (12:06.359) High deductible health plan should have no cap on how high the deductible should go to still qualify for me to be able to contribute. But there was that little wrinkle starting in 2026. Fortunately for some people who are on the Affordable Care Act on the marketplace, are that all bronze plans are now considered HSA eligible. So as long as you've got any type of bronze plan on the ACA, the IRS is saying, Yep, your HSA contributions are good. Aaron Miller (12:10.915) Right. Right. Aaron Miller (12:36.013) Gotcha. Yeah, this says your deductible can't be higher than those out of pocket max limits. So that's that's the upper echelon. Matt Allen (12:42.571) Right. And so you mentioned something eighty five hundred, I think, for the individual. Well, there are ACA plans out there with higher deductibles than eighty five hundred, which is frightening, but there are. And that technically by the letter of the law is too high for the HSA qualifications. But the wrinkle is they have now said, Hey, if it's a if it's if it's a bronze, HSA eligible. Doesn't matter the limits. So we've got that now. Aaron Miller (12:50.276) Yeah. Aaron Miller (13:11.779) Gotcha. What I'm thinking about these deductibles, seventeen hundred feels pretty low as far as the deductible goes. Matt Allen (13:23.339) Well historically not very low. And if you talk to any union workers, that's sky high. but Aaron Miller (13:27.522) Okay. Aaron Miller (13:31.375) Mm. Matt Allen (13:34.933) Yes, that's that's the threshold for high deductible. It's pretty wide. It's pretty wide. It's it's a lenient Yeah. Aaron Miller (13:40.272) That is that is wide. Absolutely. So we we know what an HSA is, we know what the limits are. If you've been contributing and you then remove yourself, let's say you retire, you're no longer on that work plan that you were able to opt into the HSA, you don't lose that money. But if you get on a new plan that is not HSA eligible, you can't continue to contribute. Should this raise red flags for early retirees, or is this essentially a non issue, you know, you get to keep that money, it still continues to grow? Matt Allen (14:20.551) So, okay, this is a good stipulation because what if what if you're going along, you're making your HSA contributions, you've got your high deductible health plan still, and I'll I'll answer your question, I'll get there. And you're and you're 50. But like you lose your job. And the car breaks down, and you've got this huge expense that comes up. 20 grand. And maybe Because your salary's off right now. That's a that's a big burden. You're like, I could put it on a credit card, I don't really want to, and you're looking at this HSA and you're like, Man, there's like thirty thousand dollars in there. I've been contributing regularly to this. I know I'm only supposed to use it for medical expenses, but I know that money's mine. I gotta buy a new car. You can take that money out of there. to use for anything. It is your money, but if you take it out for an expense outside of a qualified medical expense, it's subjected to penalties and income tax then. Aaron Miller (15:31.662) Got it. Matt Allen (15:32.214) So you can still use that money. You just might get screwed by the tax man because you're not using it for a qualified medical expense. It's still your money. So you so you you'll incur a penalty from pulling it out, just like you would with you know a retirement account or something if you're if you're pulling it out early. and then it it is treated as income for that year. So so you can still use it. The caveat though, I think where you were headed with this is what if I've got forty thousand in it and I hit sixty-five and I'm retired? You know, Medicare is not a an HSA eligible plan. It's not a high deductible plan. so you cannot continue making HSA contributions while you're on Medicare. And so let's say you got 40 grand sitting in there. It grew tax-free. You know, you were responsible. If you're if you're on the right Medic Medicare plan, you don't need 40 grand for out-of-pocket healthcare expenses. You you need maybe three, four hundred a year, maybe, maybe, maybe two grand a year if you're on an expensive med. But But as long as you avoid a advantage plan, you got really low out-of-pocket costs. So what are we going to do with this 40k? Well, once you're over 65, you can pull that money out without a penalty, but it is still treated as income. Aaron Miller (16:57.559) Okay. Got it. Matt Allen (16:57.899) So it turns kind of back into like a standard 401k where you're making pre-tax contributions, but you're taxed on the on the withdrawal as as income. So the HSA has that ability that once you reach 65, if you've still got some money in there, you can pull it out and it's just taxed as income. So it's not like fully triple tax advantaged. It's just fully triple tax advantaged if you need the money for qualified medical expenses. Aaron Miller (17:33.697) I see. Okay. Matt Allen (17:34.538) Once you hit sixty-five, it's double tax advantaged, but not triple. So so it's a great it's a great account. I'm not trying to say anything bad about it, but in the event that you've got this account, it's got all this money, you hit sixty-five, you've been healthy, you haven't needed it. That's a great thing. Like, hey, I haven't needed to max out my deductible. I haven't had a major surgery or something. That's great. What'd I do with this 40k now? Well you can pull it out and use it for something that's not medical and Aaron Miller (17:56.771) Mm-hmm. Matt Allen (18:03.957) You know, it it's just treated as income. Aaron Miller (18:08.035) Gotcha. Okay. So let's go to this early retiree. They're they're retiring. Their income's gonna be low enough for them to get a tax credit. It's gonna be in that sweet spot. And, you know, maybe a silver plan is right for them. Maybe not the bronze plan. Let's say they get a cost savings reduction or cost sharing reduction. Are those silver plans HSA eligible or Is it only the bronze? 'Cause silver deductibles are high enough to be considered in that you know above seventeen hundred. Matt Allen (18:49.067) It really just comes down to the silver plan. you've gotta check with whether or not it's considered HSA eligible. You gotta look at the out of pocket max, because that's where that's where the majority of silver plans are gonna get disqualified. Maybe you've got a better deductible. when you go from bronze to silver. But the deductible might get too low, especially on some of these cost sharing plans. Aaron Miller (19:04.674) Okay. Matt Allen (19:18.391) Where you get a cost-sharing reduction for the silver, that deductible can go down to 700 bucks individual, 800 bucks individual. It's too low. Can't can't contribute anymore to an HSA. There's gonna be a lot of people who are early retirees who they don't really need to optimize their investment contribution strategy necessarily anymore. Aaron Miller (19:19.407) That's right. Matt Allen (19:42.342) by c continuing to contribute to the HSA. Ideally they're retiring early because their investment strategy was so great that now I can retire early. They're more in the in the in the lane of I'm taking money out. I'm not so much putting the money in. there are certain situations obviously where somebody will still have some income coming in that they wanna do a defined contribution to an HSA in early retirement, but I think it gets a little bit more flipped. It's now we've got this HSA money in case we need to hit our deductible and to pay our copies and our prescriptions and things like that. Thank goodness we did this. But in early retirement, I don't see as much of a need or a desire for an HSA eligible plan. but to your specific question, if their income gets them a tax credit on the ACA and they qualify for one of those cost sharing reductions on the silver, deductible usually gets too low. Aaron Miller (20:38.127) Too low. Okay. So it's not a broad hey, only bronze plans qualify. There are some plans outside of bronze, maybe in the silver range, that do end up qualifying. It just depends on the plan and the limits. Matt Allen (20:56.435) Absolutely. There are gold plans that are HSA eligible. There's silver plans that are HSA eligible. All the bronze plans are HSA eligible. but the you know, the thing that I feel like you're gonna ask me, that maybe I'm looking ahead is why doesn't everybody have one of these? Is it always the best option to go with one of these? But I I want you to ask what you wanted to ask. Aaron Miller (21:23.661) No. I it's it's the right question. Should people where where should we people be putting that on their tier list of importance when choosing an individual health insurance plan? Matt Allen (21:37.792) Okay, so in my opinion, because I am on the health insurance side and when I am a health someone's health insurance agent, it is my responsibility, and I take it very seriously, that if they're one of my clients, they will not go broke or have a major financial expense due to a healthcare situation. That's that's that's what I'm trying to do. Especially in the case of early retirees. They're entrusting me with their health care insurance to get them from their corporate plan to Medicare safely. We just got to get there safely. And so that's to avoid a catastrophic loss. That's what we're trying to do. And so optimizing for an HSA eligible plan can absolutely be done. And I think there's so many financial planners who have such the best intentions that they're optimizing income to get a tax credit on the ACA and then they want an HSA eligible plan because it's triple tax advantage, Matt, and we it's part of the investment and all that. But I feel like we're missing the force for the trees on this one. I really do. Because you don't let me say it this way you shouldn't only have a health insurance plan. Because it optimizes your investment strategy. You should have a health insurance plan because it covers your health care the best. And if it can assist your investment strategy, let's do it. I love it. my gosh. I want you to get that triple tax advantage. But I don't want you to do it at the expense of leaving yourself uncovered in certain areas for your healthcare. And you might be thinking, like, well, I don't understand. Like, this is a major medical qualified health plan. It's a high deductible health plan. Like, I have to have it in order to do the HSA contributions. What what am I missing? What do you mean, the holes? And when we go to the individual market, it's so wildly different from the group health insurance market. Most people who have worked a nine to five W-2 job, corporate America. Matt Allen (24:00.919) They've got something called a PPO. So you might say, man, I've had an HSA eligible plan for two decades. I've been making contributions. We've had to pull a little out. We had a couple deductibles we had to hit, but it's it's growing. I really like it. I want to continue doing that. I say, okay, you're retiring at fifty-eight. You still want to make your HSA contributions, fine. But that means the only place we can find a high deductible health plan on the individual market is through the Affordable Care Act. That's it. It's the only place they live. Okay. Well, that person is coming from corporate America where their HSA eligible plan was something called a PPO. So PPO, that's a network designation. That means preferred provider organization. And what that means is there's an organization of providers that they prefer you go to. They're going to give you a lower copay, lower deductible, lower out-of-pocket. Fantastic. But the hallmark. of the PPO, the best thing about it is that even if you're outside the network, you're going to be covered. So in network, it'll be a little less expensive for your healthcare, but out of network, you're still covered. That's the HSA eligible PPO they're used to. And they've been used to it for decades. But they aren't thinking PPO because they've never had an issue with their health insurance being accepted somewhere. Because they've always had the PPO. Maybe they've heard horror stories about other people having issues with that, or or they understand the concept, but they've never actually experienced it. Well, when that 58-year-old retires from corporate America from his HSA eligible PPO and says, Matt, it's really important I keep that HSA eligibility. Well, then I have to take him to the marketplace. I have to take him to the Affordable Character in order to do that. Well, he's going to have a rude awakening because his PPO isn't there. There's only a handful of states that have PPOs, but they have unlimited out-of-pocket maximums if you're outside the network. It's terrifying. That is a huge hole in any early retirement strategy, is if we have an uncapped out-of-pocket potential through health insurance. And don't even get me started. That's the best case scenario. If we got an HMO, an EPO, you don't have any coverage outside the network. Matt Allen (26:26.227) Even if it's the same company, even if you have Blue Cross Blue Shield, HSA eligible PPO through corporate America for 30 years, and you go to the marketplace and you go, Great, they got an HSA eligible Blue Cross Blue Shield plan. This is perfect. I'll bet your doctor doesn't take that plan. The doctor you've been going to for 30 years. Your specialist might not. The hospital down the street might not, because that anthem plan is now going to be an HMO, an EPO, or POS. Some states still have a PPO, but oftentimes that PPO network from the group plan is different. From the PPO network on the ACA. So you are going to have an incredibly higher difficulty finding healthcare providers who will accept this insurance. And why are we doing it? We're doing it so you have HSA eligibility, so you can continue contributing to this count tax-free, even though once you're over 65, the withdrawals are treated as income anyway. Why are we optimizing for that? Why are we having and allowing our health insurance to have this enormous hole in it? of no out of network protection when for your entire life you've been you've been coddled almost in your in your HSA PPO and you don't realize it though. You don't know what you don't know. And so a lot of these early retirees they want to travel. They're going to be out of state. Maybe they have a second home. Maybe if something came up health wise, they want to be able to choose who they go see to get that thing taken care of. That Obamacare ACA HMO is not going to let you do that. That's not the freedom that's in there. So we have two routes that we can take. We have two options we can do there. We can still get you that HSA eligible ACA plan if you want, but I'm going to recommend every single time for that 58-year-old, get a supplement to it. Get something that wraps around its narrow network that will cover you for surgeries and hospitalizations and disease care and injuries in case you need or want. To receive treatment outside the network. Because if you're just relying on that because you want the HSA eligibility and you've got an HMO and you spend three months out of the year in Florida, you're not covered down there. That's not how those plans work. It's how your work plan worked. There's trade-offs with everything in health insurance. If you want that HSA, PPO, everything, you gotta keep working. If you're willing to look at this a little bit differently and get your Matt Allen (28:53.409) Get your ACA and add a supplement, that will solve the problem because the supplements have no network restrictions. But now it's pretty expensive. If you don't get a tax credit, you're paying full price for an ACA and a supplement, you're paying a lot of money. If we can get you a tax credit on the ACA and add the supplement, that's a that's our preferred methodology of doing this. But if you're above the tax credit threshold, And you don't even really want to mess with the ACA, and I've sold you on the fact that maybe having an HSA eligible plan when you're already retired isn't really that big of a deal. Well, we can just move away from the ACA entirely. There are private, underwritten health insurance plans that have no network restrictions that'll cover you at home, they'll cover you at your Florida beach house, it'll act similarly to what your work plan was. You can go anywhere, you can keep it all the way to 65. These exist. Are they HSA eligible? No. But you a good retirement strategy likely doesn't have continued HSA contributions in it. We've already built up the HSA. Now we're taking the money out. And that's the freedom that we need to do. In order to properly protect you from corporate insurance all the way to 65, you need to make sure your freedom of provider choice is protected. And your out of pocket max is protected. An ACA plan alone will not do that. Aaron Miller (30:23.117) I love it. I love it. Ace HSAs are a hot topic. They should not be at the top of their tier list when it comes to buying your own health insurance. Health insurance is meant there, meant to be there to protect you from an unexpected medical expense, not so you can add money to your HSA. Matt Allen (30:46.389) That's exactly right. Aaron Miller (30:49.231) Yeah. Well that's what we got today. Matt Allen (30:52.427) Love it. This has been another episode of Talking Shit. Shit, of course, is an acronym for straight health insurance talk. I am Matt Allen. Aaron Miller (31:02.681) And I am Aaron Miller. Matt Allen (31:05.047) Go Bears. Aaron Miller (31:06.511) Cheers.

What happens to my HSA when I leave my employer plan? It stays yours. The money keeps growing tax-free and can still be withdrawn tax-free for qualified medical expenses. You can only add new contributions while you're on an HSA-eligible high-deductible health plan.

Which individual plans are HSA-eligible? On the individual market, HSA-eligible plans are found on the ACA Marketplace. Starting in 2026, every bronze Marketplace plan is HSA-eligible. Some silver and gold plans also qualify, but cost-sharing-reduction silver plans usually have deductibles too low to count.

What does a plan need to qualify as a high-deductible health plan in 2026? The deductible must be at least $1,700 for an individual or $3,400 for a family. The out-of-pocket maximum can't exceed $8,500 for an individual or $17,000 for a family. The IRS updates these limits every year.

Can I use HSA money for non-medical expenses? Yes, but it costs you. Before 65, non-medical withdrawals are taxed as income and hit with a penalty. After 65 the penalty goes away, but non-medical withdrawals are still taxed as income.

Should HSA eligibility drive my early retirement health plan choice? Usually not. Most HSA-eligible individual plans are HMOs or EPOs, with little or no coverage outside their network. Choose coverage around your doctors, travel, and worst-case costs first. If the right plan also happens to be HSA-eligible, that's a bonus.