When an HSA is Not a Good Idea

It is open enrollment season (at least here in the US.) That means selecting health coverage for 2017 and deciding whether an Health Savings Account (HSA) is right for you. The early retirement community is obsessed with HSAs, and naturally so. Still, it’s not right for everyone and today’s post will address when an HSA is NOT a good idea.

For those unfamiliar, an HSA acts as a sort of IRA/401(k) on steroids. I dove into the IRS reglulations and outlined the key numbers surrounding the HSA in a recent article. The short version is, an HSA is a powerful retirement tool where tax contributions and distributions are tax free AND avoid FICA taxes. No other retirement vehicle comes close when it comes to tax efficiency.

Of course, the one catch is you need to spend the money on, “qualified medical expenses,” but luckily, that bucket contains a lot of items. We can also spend the money many years after we make contributions. If you want to see me discuss the pro’s and con’s, then check out my prior article: Health & Taxes: What’s an HSA Anyway?

Is an HSA Right for Everyone?


No. Even in the Distilled Dollar household we have opted for one HSA eligible plan and one plan without an HSA.

We settled on these plans due to personal choice. At the end of the day, optimizing our net worth is not the end all be all and takes a back seat to us making the decisions we feel are right for our health.

What do I mean by personal choice?

For me, HSA’s represent a tax efficient vehicle to build an additional retirement nest egg. It also serves as a constantly growing asset that I can use to offset current or future medical bills. I’m fortunate that the fee structure of my HSA is relatively low (no monthly fee, for example). I’m also hesitant to visit the doctor in the first place as I, in full millennial fashion, basically tough it out until I get better. At the end of the day, if I’m sick and needed to have a major medical procedure done, my current HSA can pay the full deductible nearly twice over.

For my fiancée, things are different. She prefers to visit a doctor as soon as something comes up. She errs on the side of caution. For these reasons alone, I think she is better off with a low deductible, high premium healthcare plan.

Sure enough, as if fate had intervened to prove our decision a wise one, my fiancee recently discovered she needed knee surgery because her tendon decided to retire early. No doubt, this surgery would have likely negated the savings we could have seen with an HSA, so we’ve netted out a positive result from her plan.

If you have expected, high cost medical care in the following year, then an HSA is NOT a good idea.


If you’re not sure, then I would weigh the pros and cons and pick what feels more comfortable. As I mentioned above, optimizing our net worth in any given year should not mean losing sleep.

Is an HSA right for you? Do you know other times when an HSA is not a good idea?

Master Distiller

13 comments… add one
  • Jon @ Be Net Worthy Oct 28, 2016, 4:47 am

    My employer did away with HMOs a few years ago, so our only option now is an HSA or something called a HRA (Health Reimbursement Account). The out of pocked maximum is lower with an HSA and it has the tax benefits, so I’m not sure who would pick the other plan.

    I’ve been very happy with the HSA since we started it a few years ago. I max it out, although we have paid a few big medical bills from it. We still have a balance in the low four digits and growing!

  • The Green Swan Oct 28, 2016, 6:48 am

    Ah man, that’s too bad about your wife! I hope for a quick and easy recovery!

    Good points on the HSA, it is important to think about the potential health expenses you may have coming up. My wife and I have chosen the HSA path in most years, but we’ve found going the traditional low deductible, higher premium option for her only and through her employer has been the right financial choice when we’ve expected or planned on having kids.

  • Cindy @ Smart Family Money Oct 28, 2016, 9:49 am

    Ugh, these are hard choices! My family has been on a high deductible HSA plan for 2 years and I think it has worked out to be a bad choice for us both years, unfortunately. HSA plans are often great for either extreme: very low expenses OR very high expenses. If you’re in the middle (with maybe one minor surgery or hospital visit), you’re often better with a PPO plan. I’m planning to do all the math for our family to see if it really was a bad choice or not. Of course, for next year, we have to take some wild guesses again… will my kids manage to stay out of the hospital? Only time will tell!

  • Financial Panther Oct 28, 2016, 11:44 am

    In my opinion, HSAs are best suited for folks with really high income who need the tax advantaged savings. For our household for instance, we’ll want the HSA space in order to reduce our taxable income. Otherwise, we’re just getting crushed on taxes. Since we anticipate having a really high household income, for the most part, we should be able to cash flow almost any expense that might come up.

  • KH Oct 28, 2016, 1:16 pm

    I’m sorry, I must be missing something when it comes to understanding why an HSA is so helpful.
    I know you get tax benefits for putting money away, but it seems to me that one takes a chance by deliberately underinsuring themselves in order to be able to “save” for a medical expense in the future.
    Don’t get me wrong, I think HSAs would be wonderful if the rate of return on such accounts was virtually assured to be higher than the rate of inflation on medical costs, but I don’t think that’s ever the case. Let’s say someone were lucky enough to get an 8% rate of return on their HSA savings account, do you really think that medical costs are climbing only 8% per year? The Epipen debacle is just one example of how healthcare costs easily spiral out of control. As a type-I diabetic, I have personal experience as to the rising cost of healthcare just in terms of cost of insulin. When I bought a bottle of insulin in college, it was maybe $15 a bottle. Same kind now costs over $100 per bottle, and that’s not even the new more expensive kinds.
    The very nature of insurance is that you’re supposedly insuring against unknown or unforeseen events/expenses. In January of 2016, I had an unforeseen/unanticipated torn meniscus that needed arthroscopic surgery to repair. I had ignored leg pain for at least a year, but I finally had to get it checked out and that was the result. I didn’t do anything directly in recent memory to cause it, the doctor attributed it to long-ago athletic activity. Even though I was not on a high deductible health plan eligible for HSA I paid a pretty penny in deductibles and co-pays. I can only imagine what I would have paid on a high deductible plan, and how would I make up the difference? By paying out from the HSA I saved into in the theory that it will grow? Can’t grow when I have to deplete it to pay for actual medical expenses that rose at a rate far greater than the rate I was getting in the account.
    Am I right or wrong? Am I missing the point about HSAs?

    • Dan Palmer Oct 28, 2016, 4:22 pm

      You’re absolutely right- medical inflation can take a huge bite out of your savings. Two points however- when you’re retired, most of your income/spending is based on your savings. So medical inflation will take a bite out of your savings regardless of where you parked it. Since the HSA is the most tax advantaged savings vehicle (double tax savings, vs single tax savings on Roth IRAs, IRAs, 401Ks, etc), using it as a piece in your retirement planning could prove prudent (provided your HSA has good investment options).
      Secondly, if you use your HSA as a current medical spending and medical emergency fund (meaning you don’t stash much more than you anticipate using in the near future), you again are harvesting the immediate tax benefits- basically you get an immediate ~25% bonus on every dollar contributed to the account. Since you’re using it in the near future, you’re not getting hit with the medical inflation.
      For a few more points on why I really like HSAs- http://penniesanddollars.com/why-hsa/.

      But yes, the Master Distiller is also right- for some people the HSA just doesn’t make sense. Although one interesting thing with my company’s health plan offerings- even if you max out the out of pocket max on the High Deductible Health Plan (the plan that comes with an HSA) because of the lower premiums, you still end up spending less than if you’d maxed out on the traditional plan.

    • Distilled Dollar Nov 6, 2016, 9:54 am

      Sorry for the late response KH. I hope you swing by to see this.

      In my case, the HSA is matched with a plan that has a deductible of ~5K of medical expenses. Once those expenses are reached, the plan pays for 100% of anything over. In the low deductible case, the deductible comes down to ~1.5K.

      On the surface, the worst case scenario is I am out of pocket an additional 3.5K, but my HSA includes a few employer benefits such as matching contributions and ways to earn additional contributions. If I add to this, the face that my monthly paycheck is actually higher (because of the lower premiums), then the worst case scenario is I will be out of pocket an additional ~1K. Given the risk associated, I’ve weighed my options and have elected the HSA is a better route for me, but not the better route for my fiancee.

      As for rising medical costs, I agree – and that is something to factor in each year’s medical coverage.

      I hope that clears it up, but let me know if it does not!

  • Full Time Finance Oct 30, 2016, 6:20 am

    Just a note of clarification I think might be needed. You mean reasons to get a low deductible plan instead of a high deductible. Only the latter is eligible for an HSA. So you can’t have the HSA with a low deductible but the low deductible might be cheaper over the year. It’s an important distinction as employers don’t always offer low deductible( like my own). So the lower deductible is not necessarily optional but the HSA is, in which case it’s always a good idea. Another thing to be aware of is if you get married neither of you can have a low deductible for either of you to qualify for an HSA.

    • Distilled Dollar Nov 6, 2016, 9:49 am

      Yep! Exactly. I hope the article isn’t confusing when it comes to this point. If you’re expected cost of care is going to be high, then you might be better off paying the higher premiums throughout the year.

      In some odd cases, such as my own, the difference between the high premium, low deductible plan VS the low premium, high deductible plan is less than $1,000. That’s driven because my employer offers an HSA with matching contributions and ways for me to earn additional contributions. I have the added benefit of keeping the HSA funds in a tax free environment, appreciating further.

  • Jax Nov 6, 2016, 4:35 pm

    My employer contributes $1600/year to my HSA, and I contribute the rest over the course of the year. It makes sense for me because I am a single person, I don’t have any ongoing medical expenses (yet) and I don’t go to the doctor often-mostly the dentist 4 times a year and the eye doctor. Like you, I enjoy the tax benefit and being able to save a large sum of money for medical expenses just in case. If (when?) I start having more ongoing medical issues, or if my employer stops contributing so much to my HSA, I will consider another plan.

    Right now I am saving up my HSA money for braces. Invisalign won’t work for my mouth, so I will need to do the “traditional” braces for probably two years, which will entail a lot of dentist visits and a large down payment.

  • OMGF Dec 10, 2017, 8:43 am

    I’m super late on this one but love to add my two cents anyways. Not all HDHPs are created equal. My former employer’s PPO plan was only offered with a HDHP and corresponding HSA to which they contributed $1000/year. However, the “high deductible” was only $1500. Total out of pocket max was $2500 for the year. When I tell you that I got so much healthcare for free this year after hitting the max, you would not believe it. The story would have been totally different if my deductible was $5000.

    • Distilled Dollar Dec 11, 2017, 9:26 pm

      So late I have to delete this comment. – Matt’s bot

      JK! Same here with the large employer contribution – as mine offers more than a third of the value of my HSA. I’ve been looking at a lot of different deductibles lately, and some are quite high – 5k or 6k or more as you mentioned – so something to keep in mind as people evaluate if an HSA is right for them. Thanks for the comment and glad to see you left a few on a few other posts too!

  • Cash Balance Plan Jun 2, 2018, 10:14 am

    An HSA is almost always a great idea. It is not “use it or lose it” so it will carry over into future years. But if someone needs to get more in then a section 105 plan may make a lot of sense. That way you can get way in excess of the HSA limitations. Either way, make sure you have something place for your medical expenses.

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