059 PFFAP-PYP-23-1101-Open Enrollment Blunder
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Welcome to the Physician Family Financial Advisors podcast, where physician moms and dads like you can turn today's worries about taxes and investing into all the money you need for retirement and college.
Nate: Hello, physician moms and dads. I'm Nate Renneke, certified financial planner and primary advisor here at Physician Family Financial Advisors.
Ben: And I'm Ben Utley, certified financial planner and Physician Family's very own service team leader.
Nate: Today we are going to talk about how an open enrollment blunder could cost your family hundreds of thousands of dollars. It's a lot, Ben, that's a lot of scratch. Yep. Yeah, it seems sort of impossible, like open enrollment happens every year.
It, it seems kind of like, not a big deal, but it [00:01:00] is
Ben: open enrollment. Yeah. It does seem like no big deal. It's like you check the boxes, you do the same thing you did last year. Right. I mean, we're doing that right now for our, for our own, our own benefits. Exactly. So hundreds of thousand dollars. I mean, that's, that's a lot of, a lot of dough.
What, what is it that a person does in open enrollment that. It causes them to miss out on that kind of, that
Nate: kind of dough. Yeah. So one of the biggest decisions, most important decisions that physicians make during their open enrollment period is which health insurance plan they're going to choose for their family.
So, uh, you and I know this, there's a lot of times so many options, but the one option that people tend to miss is the high deductible health plan. And, um, that is actually the option that can save you a ton of money and make you a ton of money. Wait
Ben: a minute. So, high deductible health plans is like, that's the one where you go and, and your health insurance pays like nothing.
Are we on the same page?
Nate: We're on the same [00:02:00] page. That is the fear that many physicians have in using one of these plans. Okay. And I'm going to talk about why they're good, uh, and not why they're bad. And then later I want to talk about, uh, if it's worth it. Okay. Okay. So if you use a high deductible health plan, you get access to a health savings account or an HSA.
Okay. Got it. And that HSA is what's going to unlock the ability to, uh, capture this 366, 000, which is a very specific number. And it's the number we calculated that the average physician misses if they don't use an HSA.
Ben: So that's the like the foregone benefit of not using an HSA exactly. Wow. So I have a health savings account I've been using it for years, but I think you know, HSA might be something new to people and I'm sure there's some listeners who think they already have this because they have a flexible spending [00:03:00] account Which is an FSA and as you and I know they're not the same thing.
So Break it down for us. Like what is a health savings account?
Nate: Right, right. So a health savings account is a tax advantaged account where you can save several thousand dollars a year into the account to pay for qualified medical expenses. Okay, that's the high level look at this. Um, to qualify for it, obviously you have to use the high deductible health plan during open enrollment.
Okay, you can get one of these either through work or at a big brokerage company like Fidelity. Right.
Ben: Okay. So how does it, how does it work? Like, how do I get the benefit out of it?
Nate: Yeah. Yeah. So there's a bunch of ways to get the benefit. Um, a huge portion of, of the benefit is tax savings. So next year the limits, 8, 300, you put that 8, 300 in an HSA and the average physician's going to [00:04:00] get about a third of that back in taxes.
So 2, 700. Got it. So, that is one of the biggest tax breaks a physician can get. Because their income doesn't, um, it doesn't have a limit for how much you can make. Before you, you lose that benefit, you can't lose it.
Ben: Okay, so if I, if I put 2, 700, if I could save 2, 700 next year, and let's say I'm a younger physician, I got 30 years, I mean, 30 times 2, 700 is still like, uh, just like about 80, 000, so there's gotta be more to this.
Nate: Yep, there is. So, when you put this money in an HSA, You have two options with what you can do with it. You can either leave it, leave it in there just as cash, or you can actually invest the money. So when you invest this money, which is the right thing to do in your HSA, uh, you, it grows with the market and, uh, [00:05:00] much like other accounts, like a taxable account, it will grow at a similar rate.
Okay. So you're investing in the same way you'd invest for retirement. It makes sense so far, bud. Yeah. So you basically, we're
Ben: talking about like the same investment. Just do you make that investment in a health savings account or do you make it like in a taxable account someplace?
Nate: Correct. Yep. Now the differences that they're taxed much differently.
Okay. So with the taxable account, the money grows. And when you pull the money out, it gets taxed all the growth, right? With an HSA, you put the money in, you get the tax break. You invest it, it grows, and that growth, when you pull it out, is completely tax free. Ah, okay,
Ben: cool. So when you make, when you use it for the right things, which is, you know, buying health care stuff, even paying for long term care, when you're in retirement, if you just spend on your regular retirement stuff, the withdrawals are, are federally tax free.
Nate: Correct. Yep. And so that's the [00:06:00] other half of the taxes. So all the tax breaks, you can imagine literally dollar for dollar, the best way to save on taxes for physicians. So if I'm,
Ben: if I'm getting this right, the health is health savings account is the only thing I can think of that gives you. All three of those benefits at the federal level, right?
Because 529 plans, you get some states, you get a little tax break in the state and you can take it out when you pay for school with it. But it sounds like the health savings account is unique. I mean, it's even above and beyond the Roth stuff, like easy and easy growth, easy out completely tax free like that.
That seems to be the bomb. I mean, it's Like, would it be better to fund this than your 401k, like, let's say after you got the match, or like, if I have limited dollars, what would I go with this first? Do you think that'd be the top, or somewhere near the top of the filling order? It
Nate: certainly would. Now, people are It's surprising to hear that.
So it's surprising to hear that the HSA is the best place to put your cash. Um, I want to make it real [00:07:00] clear. You should be doing both, and most physicians do both. But let's say you're early on and you just have one random year in the very beginning where you just don't have enough money to do both. In that one year, HSA is best.
Yeah, okay. All right, but both terrific HSA is just a little bit better like
Ben: maybe so I could see like a newly minted attending that is You know, like they're they're excluded from the 401k plan because they haven't worked there long enough And they're choosing between like doing their backdoor Roth and maybe putting money in a taxable account And the health savings accounts.
It sounds like the health savings account is like Primo. Like that's the numero uno thing you should do.
Nate: Yeah. Si side note on that too. Mm-Hmm. For that physician that has no cash. Mm-Hmm. Uh, technically in a really bad situation, you can still get your hands on this HSA, which is not as easy in those retirement accounts.
Yeah. So if you had a, you know, health scare or something, I mean, let's basically,
Ben: if you're gonna have an emergency, it's probably gonna be a health. [00:08:00] Right. It's gonna be a health emergency, right? Exactly.
Nate: So, um. Okay, cool. Yep. Three stars across the board for that. It
Ben: sounds like we know how they work now. So, um.
Wait,
Nate: wait. There's one more thing. Okay. Okay. So, that, that is the lion's share of the savings here. But the other part that, that many people don't really dive into is the premiums. So, uh, high deductible health plans are cheaper. They just cost less every year. So when you run that out over 20 or 30 years, that, plus the tax savings, plus the growth in the account, that is what makes up this 366, 000 figure of overall benefit by using an HSA.
So don't forget about the premiums. It's hundreds of dollars a month, usually.
Ben: But with that, you also have the high deductible, right? So like you go You have a regular thing, the bill's a couple hundred bucks, and insurance doesn't pay for it until you basically get hit by a bus, right? So I mean, how does that, how does that factor into the
Nate: decision?
Yeah, so, what, [00:09:00] the way that I like to look at this is, is you, you have this huge benefit in cash. I shouldn't say the way I like to look at this. The way people do look at this, physicians that are afraid of using HSAs, the way that they look at this is they see that cash and they look at it as trading it for the benefit or the health of their family, right?
And so they, a lot of times we'll just say, no, they don't, they don't want to do that. They're not willing to trade the, you know, the, the healthcare for their family. But if you look at 366, 000. And you say, you know, let's say over 25 years, then that would mean that your health costs would have to be almost 15, 000 per year to eliminate this benefit.
Ben: It kind of feels like a false dichotomy. It's like, do I get some, some tax benefits or do I take care of my family? And I think the proper choice as I see it is, do I get these tax benefits or [00:10:00] do I take a chance that I might have to pay for my family's care out of pocket slash suck the money out of my health savings account?
Right. Exactly.
Nate: Okay.
Ben: Yeah, so I can see why physicians are scared off of this, but I mean, is this right for everybody? I mean, surely there's some case of physicians where this is like a no
Nate: go. Yeah, I have seen in in running these numbers probably a hundred times. I have seen it not be right for Less than 5 percent of people and those people are our families that have a family member with a chronic health issue.
And more importantly, there are some health issues that people have that aren't really covered at all. By health insurance. So you just got to pay for the whole thing. Um, the other big one is, uh, prescription medicine that isn't covered and you can do the math pretty easily now that you, if you're, now that you've listened to this, if it's above, you know, [00:11:00] 10, 12, 000 a year and you know, you're going to be eating away at this benefit every year, it's probably not right for you.
Yeah.
Ben: Well, what about like those, those, uh, once or four times in a lifetime things like, Oh, like, let's say you're planning to have some kind of elective surgery and you can schedule it at your will. Like maybe it's a knee or hip or something like that. Or, uh, you know, for the folks we serve, like, uh, what about like having a baby?
How do you handle, like, how do you handle, it's that, what do you do with the HSA in that
Nate: year? Right, so I've, I've successfully, um, managed my way around that a couple times in my own family and I've helped maybe a dozen families do the same. So let's say you, Most people are kind of planning when they're going to have a baby.
Sometimes you get surprised and it doesn't work out. Well, let's use that as an example. If you get pregnant, let's say you get pregnant, um, in August. [00:12:00] Okay. And you have a few months until open enrollment during open enrollment. You know that you can switch to the better health plan. Right. And, and then you will have your baby during what, during the time or during the year that you selected the health plan that will pay a ton of the costs of having that baby.
Like first coverage, the free exactly. And now, and then this is the cool part, right? When you have that baby. You have, uh, a life event that allows you to change health plans again. So, oh, wait
Ben: a minute. Wait, wait a minute. I was thinking you're gonna tell me that I, you know, uh, she has the baby and then you go, you know, like, oh, you can do it again next year.
And you go through open enrollment. Mm-Hmm. , I mean, this is, uh, to, to this moment, I had never seen or heard that strategy before, so, oh, tell me, I've, yeah. Break it down for me 'cause I wanna hear it again. .
Nate: Yeah. So I, I've done this myself successfully once, uh, my second child, uh. The timing wasn't right. And in that case, that's what we did, Ben.
We chose the [00:13:00] better health insurance. We couldn't switch. We couldn't really switch back. Well,
Ben: where, where was that strategy at the team launch? Well, I need to hear about it.
Nate: Well, our clients are getting it, so that's good. Um, so what, how it works is if you, if you, if you plan it right, you get pregnant at an opportune time, then, and really there's only a few months that it doesn't work.
So, you know, nine months of pregnancy, if as long as you're within that nine month window that open enrollment rolls around, like, let's say, let's say the baby is due in December. You can switch to the better health insurance in November, have your baby. And then as soon as that baby comes out healthy, which is actually a big important thing, because if it's a big F, right, it's a big F.
And if that doesn't happen, stay on the good insurance. Sure. Sure. But. If a baby comes out healthy and you kind of know what's out in front of you with your bills and everything, then as soon as that baby comes out, you have a life event that [00:14:00] allows you to switch insurance plans before open enrollment again.
Oh, that's awesome.
Ben: I just love this. You know, I love serving families and this is like, this is one of those neat things that we see because we do specialize in families. And honestly, folks, I got to tell you, this is the first time I've ever heard this strategy. So it's a good thing that I'm not working with the younger doctors because I might, I might miss this.
Most of my, most of my clients have already, that ship has sailed the whole ship of babies. Right? Yeah. Oh, that's cool. That's cool. It's a great strategy.
Nate: Okay. Yeah So I I want to talk about um A little more in detail. So we've we've laid out all this money you can save right and we've laid out One strategy on how you can work around big bills and the key is here is missing out on one year of this even if you don't have the The baby situation, like I described, that doesn't, that's not the lion's share of this savings.
You can miss this one year and it's no [00:15:00] big deal. You can miss it two years and it's no big deal. But there are specific, uh, there's a specific strategy on how to use your HSA that many people miss and while they get some of this benefit, they leave some on the table. Okay, so there's two wrong ways to use an HSA and there's the right way.
The first wrong way is to To not use it. Okay. That, for most families, that, that, bottom line, you should probably be using an HSA. And when you say
Ben: not use it, you mean like, they, they fail to choose health savings account and then they... Then they fail to contribute to it. Is that right? Correct. Because, I mean, you don't want to use the HSA by taking money out of it, because that kills all the tax deferred
Nate: growth, right?
That's, that's the second wrong way. Okay, cool. Some people get this half right, and they use the high deductible health plan. They contribute to it. They get that 2, 700 in tax benefit that year, which is great. But then they do what everyone else in America does. Who can't afford their, their health bills out of pocket.
And they use their [00:16:00] HSA to pay for their medical expenses. Oh,
Ben: yeah. Because, uh, compound growth, even, you know, 50 percent compound growth on zero is still nada.
Nate: Exactly. So the, the, the right way to do this is to do something that many, many people, uh, never think to do. In fact, I would, I, I would go out on a limb and say, this isn't what HSAs were meant to be used for.
They weren't meant to be used for a retirement, uh, savings vehicle. So nobody tells you how to do it. Because that's not what they're for. But the right way to do this, sign up for your high deductible health plan, get the HSA, contribute to it the maximum amount every year, invest the money, and never spend the money until you retire.
Ben: Right. And you know, there's, I've seen kind of like the half mistake where people contribute to it and, uh, you know, they, they do everything right. But in the end, like they don't, they don't [00:17:00] invest it. So they're getting cash yields. And usually the yields on these things are, are pathetic, you know, and some people were put off by the fact that maybe you have to have a minimum in cash before you can, before you can invest it.
Some of these things have a brokerage window. Like I had one with a brokerage window that was a total pain. I had to move money into the brokerage window and then invest it. And it was, it was kind of, right. Actually terrible. Uh, even for me, it was a pain, but you know, I could see people not doing that, but I mean, it, again, it extinguishes all the, all the growth that you could have.
Right. So there's a lot of little catchy hiccupy
Nate: details in here. There is. In fact, um, we're going through this right now with all of our clients and I have at least half a dozen families that are new to an HSA and they get it. They see this big pile of money and they get it. Okay. So they want to do it.
But they just, it just doesn't connect for them. This is a health account. Like, what exactly do I do? So they're taking the advice and doing it kind of in blind faith. [00:18:00] And then once you get them on the phone and explain that to them about the investing, leaving it in there, paying out of pocket, then this is what happens next, Ben.
This just starts to look like bad insurance to them. Okay, so there's another piece here. There are families that we've given this advice and they have simply decided to not take it. Okay, so they, this isn't the best insurance and they're focused on the benefit of the health insurance that they get and once they understand the taxes even, they just still feel like they're not going to get the care their family deserves.
And so the key here is to, once you can understand the math of all this and see the benefit, be okay with going to the doctor, continue to go to the doctor, I see people just decide not to go because they have an HSA or a high deductible health plan, and pay out of pocket. [00:19:00] Plan for this. It's part of your budget.
Yeah. And I looked up before this call. It looks like. After premiums are taken out and everything, that the average family will spend a few thousand dollars more on health expenses by using this high deductible health plan. So, you know, 3, 000 more for 20 years, that's 60, 000, right? You still have... 306, 000 of benefit, even though you're doing all the, you know, doctor visits and everything that your family needs.
Ben: And that's for the average physician. So, you know, uh, high earners, specialists, doubled physician families earn more. And when I ran this math, which by the way, this is part of the overtax doctors, retirement investing checklist. And there's a link in the show notes where you can get yours for the very low cost of zero.
But, but anyway,
Nate: yes. Yeah. So did you say the number?
Ben: Well it's over a half million. I can't remember what the number [00:20:00] was, but it's quantified and I, I mean there are like 20 some odd tax breaks that, you know, sometimes they go overlooked and this is one of those things. And you know, there were so many people that are skipping out on the HSA.
I was like, I wonder, I wonder how much this is really costing people. I wonder how much I'm actually benefiting from this when I do it. And I was shocked to see how. Hi, the number was for me and then I was like, well, okay, you know, I'm, I'm not in the top tax bracket. Let's, let's figure out what it is, what it is for specialists.
And I was surprised, you know, it's just really, it's stunning to see how huge that number is.
Nate: Yeah. I, I have ran this, this out on, uh, for a couple of families recently. One was a 20 years out from retirement. The other was 10 and I hadn't run a 10 year out, um, uh, HSA kind of projection for anyone. And I was really curious, like, is this actually going to help because it's 10 years and you and I know and investing the key to, you know, the key to everything is that compound growth.
[00:21:00] Yeah. And if, if that goes south, Or if you don't have enough years, the benefit gets smaller and smaller. It was still six figures. I mean, the tax savings, when you get into those higher, this was a double doctor family. They're in the highest tax bracket. I mean, they still save six figures and they have to worry a little bit less about cost of health insurance because their, their children were out of the house.
Yeah. So, I mean, this is like across the board, unless you have really high Uh, health costs every year. This is a, a, a game changer. So, I want
Ben: to go back to something you said. So, you said bad health insurance, good health insurance. Right. And, you know, I think that those are really subjective terms and I'm not sure that they really capture what's going on.
So, I know what you're saying and I'm going to break that down for our listeners. So, bad health insurance is not health insurance that's, you know, going to ignore you if you have cancer. It's health [00:22:00] insurance with a high deductible, which means that you pay for everything up until you hit 000 out of pocket, then it pays most, if not all, of the benefits that are required.
Good health insurance, quote unquote good health insurance, is health insurance where there might be a co pay and it pays for A little bit of everything up until the deductibles met. I know that this is old hat for some of you who may have done your own, your own billing and dealt with questions from patients about this.
But since Obamacare, you know, all policies essentially are created equal and really the deductible is a, is a big difference. You're not going to be left hanging if you get, you know, the insurance that is quote unquote. Bad, you know, I almost object to that, but I get it, you know, it's, it sucks to show up and have to pay out of pocket for stuff, but that's really the difference.
It's not like you're going bare, you know, it's not like your, your family won't get the care that they need because the insurance sucks. It's just that you're going to have to pay more out of pocket with this. And that [00:23:00] is the suck. You know, that's the, that's the thing you give up for this potential giganto tax benefit the same way that, you know, you give up the use of money when you stick it in your 401k.
Okay.
Nate: Yeah. Let me bridge this gap a little bit further. Okay. So the reason I use those words is because those are the words I hear physicians use. Exactly. Good and bad, right? Yeah. And I also object to it. Yeah. Um, but there's one piece that can help people if they still feel like it's bad insurance, which you and I object to, but if they still feel like that, the key to this could simply be a fully funded emergency fund.
Absolutely. You get a fully funded emergency fund. It's well over the out of pocket maximum in a high deductible health plan. And you know that if things go south one year, you can just pay for it. And if that scares you so bad that you want to miss it and you decide, you know, to me and just for my mentals, I would give up this 300, 000 to 500, 000 of [00:24:00] benefit.
You can just switch back the next year. Yeah, or just, you
Ben: know, actually take the money out of your health savings account for that one thing, right? Right. So, I mean, I read someplace that the average family experiences like a, a very large medical bill year in one out of five years. And of course, the more kids you have, the more likely you are to have that.
Right. But that was a statistic that I had. So, I mean, you know, you could take that, that tax benefit and, and chop it down by 20%. It's still... Six figures, you know, it's still enough to be able to buy like, I don't know, uh, a gigantic car or a very small house, you know, in fact, the 360, 000 is about the cost of a really nice college degree these days.
So you could think of it in that way. Agreed. All right. So I feel like that we have just stomped all over this health savings account subject today. So, uh, can you, can you tie this up with a neat bow and just, just give me the takeaway?
Nate: Yes. So the big takeaway here is that take a minute during [00:25:00] open enrollment to consider.
And HSA. And most likely, get one. Awesome.
Ben: Okay, so that's all for today, folks. Until next time, remember, you're not just making a living, you're making a life.
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