I understand that the HSA contribution gets added back as untaxed income for financial aid. However, I want to make I am understanding something correctly for purposes of making our benefit elections next year. If we continue to participate in the HSA plan our annual premium will be $1,700 and we will contribute the full $7,000 to the HSA account so a total of $8,800 will be excluded federally. If we participate in the PPO medical plan offered then our total premium will be $6,800 and we will contribute to the medical FSA for $2,700 so $9,500 will be excluded federally. Financial aid will make me add back the $7,000 HSA contribution or the $2,700 FSA. Assuming all out-of-pocket expenses end up being equal between the two plans (taking into consideration the difference in premiums, deductibles, co-pays, co-insurance, prescriptions etc…) it seems unfair for someone who chooses the HSA and pays lower premiums versus someone who chooses the PPO and pays higher premiums if both have the same out of pocket at the end of the year. So I am going to switch to the PPO next year. Am I missing something???
DO NOT choose your health plan on the basis of financial aid possibilities. DO NOT.
First- because unless your child gets accepted to one of the “meets full needs” colleges, it isn’t going to matter. Most colleges do not commit to meet your need- they offer whatever they offer (sometimes it’s wildly unaffordable which is called “gapping”, i.e you’ve got a huge gap between what you can afford to pay and what they expect you to pay). That’s just the way it is. So you’re making decisions to whack down your income to get more aid and guess what- it might not yield a dime extra, because the colleges your kid gets accepted to just don’t have the funds to meet your need.
Second- your families health care is a completely different decision than the college affordability decision. I get that they are linked- the dough is all coming out of the same paycheck, but do not go through any financial gymnastics for the sake of getting more aid if the decision otherwise is not one you’d be making. Colleges can change their financial aid policies year to year; nothing is etched in stone.
Third- you could change jobs, and the new plans offered might change the math on your health care substantially. Some docs might be in plan, out of plan, etc.
I know it’s tempting to do all sorts of sensitivity analysis but really- pick the health care plan that works for your family based on what you know about your needs now; regardless of the financial aid implications.
Thank you for your response, I really appreciate it!
We’ve been in the HSA for 5 years and each year the out-of-pocket has been virtually identical to what they would be in the PPO. I re-evaluate each year during enrollment and it’s been a toss-up on which to chose. Each year I’ve chosen the HSA in the “hope” that we didn’t spend the full deductible and ended up saving money on the lower premiums. But with a family of 6 we inevitably burn through the deductible and the costs are the same. This is my first year doing financial aid application and realizing the different treatment and that’s why it made me consider the change
I think what annoys me is that the financial aid treats the HSA contribution like you had some windfall when in fact, for us, it all goes out to legitimate expenses. My net of income, taxes and expenses, and thus my ability to pay, are identical under either plan yet they don’t consider that…
Again thanks for your points!
You might want to run a “worst case scenario” model where someone in the family really gets sick- something where your major medical would kick in.
That’s probably going to make you feel better. You are likely paying more for the security of insuring against something truly catastrophic (both health wise and financially) and NOT paying more for the $50 here or there type of medical expense or RX cost. I know it’s annoying year after year to not really taking advantage of your insurance… but even one surgical procedure could cost $50K, and then the cost differential might be much more dramatic.
The last study I read showed that medical costs are the most frequent trigger of personal bankruptcy in the US. That doesn’t mean that all the other factors aren’t important- but it’s usually a single diagnosis which could put the breadwinner on disability or medical leave, and then the uncovered medical expenses start to spiral.
It’s great that you’ve been prudent…
I don’t make up these rules, but knowing a bit about these, I will take a guess at the answer. The difference is a probably a result of the fact that the H.S.A. is a savings account whereas the F.S.A. is a way of funding current expenditures. Because the F.S.A. must be used for the current year (or within 3 months of the end of it), it is considered to be part of your medical costs. An H.S.A.’s funds can be invested and can sit for years before being used – more like a rainy day fund – so I expect that they think that you don’t need to be saving now for future medical costs but paying for your child’s tuition.
If, as you point out, you need to use the funds that you are putting into the H.S.A. in the current year, you are right – it’s unfair. I would guess then that you should include those medical costs in your family needs and that it would be reflected in your EFC, but I am guessing again that there could be a year’s delay.
The CSS Profile asks how much you’ve spent in unreimbursed medical expenses. So if I’ve contributed $6k to an HSA and have $6k in unreimbursed medical expenses in the same year, I am wondering if the HSA contribution would not be added back in to AGI. In that case, the HSA was just a pass-through for the tax benefit.
^^This is going to be my situation for this year. I’m curious as well. In the “additional information” section I plan to make that clear, i.e., that all of the HSA contributions went to pay unreimbursed medical expenses.
Those are unreimbursed medical expenses for sure. You have paid them out of savings.
Exactly - for financial aid purposes, you really do not get penalized for an HSA unless you are using the account to plan for future savings - like perhaps postretirement medical. The schools might add in the HSA contribution savings but they also deduct your expenses.
When you file your taxes, your HSA account activity is summarized on form 8889 (I think). Schools that require the CSS profile also require a copy of your tax return, so they will get this information.
Based on the conversations I had with various FA departments when my pups were applying, some schools didn’t even add back in the HSA contribution activity when they went through their formula.
Kind of the same thinking that some schools don’t expect working parents to stop contributing to a 401k plan while other schools want to treat that money as available for college.
Great, thanks for everyone’s insight!