Should I choose a high-deductible health plan?

Choosing a high-deductible health plan (HDHP) is often a smart financial decision for individuals and families who want lower monthly premiums and the ability to open a tax-advantaged Health Savings Account (HSA). While an HDHP requires you to pay more out-of-pocket before insurance kicks in, the premium savings and potential employer contributions can often offset those costs.

Reasons to consider an HDHP

• Deductibles may be only slightly higher than traditional plans.
• Premium savings could help offset higher deductibles.
• Only HDHP enrollment lets you contribute to a Health Savings Account.
• Your employer may offer cash incentives or benefits to choose an HDHP.

Myth: “I spend too much at the doctor to choose a high-deductible health plan.”

Among the biggest myths in healthcare is that high-deductible health plans (HDHP) are not great for families that spend a lot of money each year on doctor visits and medications. Most see the higher deductible and believe it will simply cost too much. But there are several other factors to consider, as well, when you enroll.

As you decide between health plans during open enrollment, be sure to calculate your true costs and long-term healthcare spending. Below are four factors for consideration.

How do deductibles work with an HDHP?

By definition, HDHPs carry higher deductibles than traditional health plans, meaning they require you to pay more out of pocket before your insurance coverage begins. However, the difference between an HDHP deductible and a traditional plan deductible may be much smaller than you expect.

Review your plan options carefully. You may find only a marginal difference in deductibles.

In addition, under the Affordable Care Act (ACA), most health insurers are required to cover preventive health services at 100% (no copayment, coinsurance, or deductible) when provided by an in-network provider. This means you won’t pay anything out-of-pocket for your annual physical exam and other preventive care.

Do HDHPs have lower monthly premiums?

Yes, traditional health plans tend to have much higher premiums compared to HDHPs, which means more money comes out of each paycheck. Note that your premiums likely don’t count toward your deductible. So, your premiums are gone whether you use the insurance or not.

Do the math. You may find that the annual premium savings of an HDHP offset the comparatively higher deductible. At minimum, having more take-home pay can potentially make it easier to cover that higher deductible if an emergency arises.

How does HSA eligibility work with an HDHP?

To be eligible to open and contribute to a Health Savings Account (HSA), the IRS requires you to enroll in a qualifying high-deductible health plan. Traditional health plans do not meet HSA eligibility requirements, meaning you miss out on the long-term tax advantages that an HSA provides.

When choosing a health plan, some only consider their healthcare spending in the next 12 months. But how will you pay for healthcare expenses when you’re 70 or 80 — or even five years from now? If you plan to use your 401(k) to pay for healthcare expenses in retirement, you’ll also need to plan for the income taxes on the distributions.

By contrast, with an HSA, you’ll never pay taxes on money used for qualified medical expenses. Not next year, not in ten years, not in fifty years. So, if you spend a lot on healthcare, you can save a lot more using tax-free money.¹

The best part? HSA funds never expire. They stay in your account even if you change employers, health plans, or retire.

As you weigh the costs and benefits of an HDHP, ask yourself: What is it worth to be able to grow tax-free investment earnings and make tax-free distributions for qualified medical expenses?² If you add up the potential tax savings over your lifetime, the savings may dwarf the additional cost of your deductible each year.

Will my employer contribute to my HSA?

In many cases, employers may offer a contribution to your HSA as an incentive for choosing an HDHP or completing other qualified wellness activities. Employers usually contribute to your HSA on the first day of the new plan year, and some even offer an HSA contribution match with each paycheck.

Keep in mind that employer contributions count toward your total HSA contribution limits. In total, employer contributions could add hundreds or thousands of dollars into your account each year.

At first, traditional health plans might appear marginally cheaper. But once you consider the HSA employer contribution, the case for an HDHP becomes much stronger. Don’t leave money on the table.

Frequently Asked Questions

Can I switch from a traditional plan to an HDHP during open enrollment?

Yes, open enrollment is the standard time when employees can switch from a traditional health plan to a high-deductible health plan (HDHP) for the upcoming plan year.

What is considered a qualified medical expense for an HSA?

Qualified medical expenses are designated by the IRS and include costs like doctor visits, prescription medications, dental care, vision care, and certain over-the-counter medicines and products.

Do I lose my HSA funds if I leave my job?

No, the funds in a Health Savings Account (HSA) belong to you completely, meaning they roll over from year to year and stay with you even if you change jobs or retire.

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