This fall's benefits-enrollment season arrives during the surging coronavirus pandemic. So, many employees might be thinking harder about the choice between a high-deductible health-insurance plan and a conventional one with higher premiums but lower deductibles.


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Among large companies, 71% now offer a high-deductible health plan, up from 32% in 2011, according to an annual survey of employers from consulting firm Mercer LLC.

The savings from switching to a high-deductible plan can be substantial. Comparing the options requires analyzing the details of each plan and considering your health-care needs and ability to finance out-of-pocket expenses. The hassle involved often causes people to "simply default to the plan they are already in," said Anika Hedstrom, an adviser in Portland, Ore.

But it pays to do the math, especially amid a recession, she added. Here's what to do and consider.

UNDERSTAND YOUR CHOICES

High-deductible plans generally charge lower premiums. But they expose policyholders to potentially higher out-of-pocket costs, in the form of deductibles and copayments.

Many also offer the option to save up to $3,600 (for individuals) or $7,200 (for couples filing jointly) in 2021 in a health-savings account, or HSA. Those 55 or older can save $1,000 more.

An HSA can have a greater tax advantage than a traditional 401(k) or individual retirement account. Like those accounts, it allows users to set aside pretax money without paying federal or, generally, state income taxes. The money grows tax-free and, if used for medical expenses, can also be withdrawn tax-free. In contrast, with a traditional 401(k) or IRA, income tax is paid on withdrawals.

High-deductible health plans generally work well for people in good health, who aren't likely to spend enough on medical care to fully offset the money they save on premiums. But, as the math below shows, they can also be the better choice for some people with higher medical costs.

CRUNCH THE NUMBERS

Some employers offer online tools to compare options. But you can do some back-of-the-envelope calculations to understand the costs and benefits of each plan under a few scenarios.

Start by calculating your savings for the year on premiums under the high-deductible plan. Ms. Hedstrom, for example, would spend almost $3,900 in 2021 on premiums in the high-deductible option available to her family. That's about $3,300 less than the almost $7,200 she would pay in premiums for the conventional plan.

If your employer makes a contribution to your HSA, count that as savings, too. Nearly 80% of employers kick in some money, typically $500 for single workers and $1,000 for a family, according to Mercer.

Ms. Hedstrom's husband's employer contributes $1,000, bringing the family's savings with the high-deductible plan to $4,300.

Ideally, you should use at least the amount you save on premiums to fund an HSA to cover out-of-pocket medical expenses now or in the future. (Those who can afford it should consider contributing up to the maximum allowed.) When you contribute to an HSA, you save on taxes. To calculate your tax savings, multiply the amount you intend to contribute to your HSA by your federal tax rate. (You can also factor in savings on state income tax and FICA tax.)

Ms. Hedstrom's total savings on taxes, premiums and employer contributions under the high-deductible plan: about $5,500.

Given the high-deductible plan requires Ms. Hedstrom to pay a greater share of her medical bills, how much more could she be forced to spend?

Ms. Hedstrom starts by assuming her medical expenses will equal the $4,000 deductible for her high-deductible plan, which is significantly higher than the conventional plan's $1,500 deductible. With medical expenses at that level, she would pay $2,500 more in the high-deductible plan.

Since the high-deductible plan saves her $5,500 on items including premiums and an employer contribution, she can spend that $2,500 and still come out ahead by $3,000.

WORST-CASE SCENARIO

Roy Ramthun, a consultant who specializes in high-deductible plans and HSAs, recommends conducting a "worst-case-scenario" analysis. This shows which plan would be most cost-effective in the event an employee spends so much he or she hits the plan's out-of-pocket spending limit. (After that, the plan becomes responsible for 100% of expenses for the rest of the year.)

Assume Ms. Hedstrom's family continues to stick largely with doctors and hospitals that take their insurance on an "in-network" basis. The high-deductible plan could make them responsible for $8,000 in out-of-pocket spending—a number that includes the plan's $4,000 deductible. Some of the blow would be offset by the $5,500 Ms. Hedstrom stands to save in premiums and employer contributions.

In contrast, the annual out-of-pocket maximum with the conventional plan is even higher, at $9,000, providing less protection against high medical bills.

As a result, the high-deductible plan is the mathematical winner in this scenario, as well. (Mr. Ramthun recommends repeating this exercise using the two plans' out-of-network spending limits.)

If you choose a high-deductible plan, consider how you would meet out-of-pocket medical expenses that arise before you have time to build your HSA's balance. For example, if you get hit with a $2,000 medical expense in January, your HSA, which is funded over time via payroll deductions, might have little in it. As a result, you'll have to fund the gap—something some employers have started extending loans for, according to Joseph Kra, Northeast health business leader at Mercer.

CONSIDER RETIREMENT

Even if the math doesn't strongly favor one approach or the other, there is another reason to choose a high-deductible plan: to use an HSA to build additional retirement or emergency savings.

If you lose your job and are on federal or state unemployment benefits, you can tap an HSA to pay health-insurance premiums, said Mr. Ramthun.

Many people overlook HSAs as a retirement-savings vehicle because the accounts are typically used to pay current medical bills. But the biggest payoff with an HSA comes when the money set aside isn't used for current medical bills. It instead compounds tax-free over time for use in retirement.

Of course, pursuing such a strategy requires you to pay at least some current medical costs out-of-pocket. But there's a big bonus: If you are organized and stockpile receipts for past out-of-pocket medical costs since establishing the HSA, you can withdraw your HSA money tax-free in retirement and reimburse yourself. (Receipts can be stored in paper or digital formats.)

Doing this will allow you to supplement your retirement income free of taxes. This could help keep your taxable income below the level at which you would fall into a higher tax bracket or trigger higher Medicare premiums.

Write to Anne Tergesen at anne.tergesen@wsj.com

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