Understanding a high deductible health plan can change the health insurance game for you! Continue reading to find out what it is and how it works.
Health care is costly. What’s more is that the cost never appears to stop increasing! That is the reason a few people stay away from it completely. However, skipping health insurance is like whitewater boating without a life jacket. The sun and the splash may feel pleasant for some time, however when you get carried away, you will wish you had put one on. In the event that your organization offers you a high-deductible health plan, otherwise called an HSA-eligible plan, as a choice, it is a smart idea to get comfortable and familiar with how it functions. The first question individuals usually have is what is a high deductible health plan. High deductible health plans (HDHPs) will keep your monthly premium payments low while giving 100% coverage to preventive, in-network services before you satisfy your deductible.
What is a high deductible health plan?
As you can likely guess from its name, a high-deductible health plan has a higher deductible than other plans. In any case, there is a significant result — lower month to month premiums. HDHPs are a somewhat new approach to deal with health coverage, however they are turning out to be more popular each year both as an employee benefit and for the self-employed.
High-deductible health plans are thought to bring down the overall healthcare costs by driving people to be more aware of clinical costs. The higher deductible likewise brings down insurance premiums, making health coverage more affordable. This benefits healthy individuals who need coverage generally if there is a serious health crisis. It can likewise benefit wealthy and affluent families who can afford to meet the deductible since it offers access to a tax-advantaged Health Savings Account.
HDHPs have two purposes which are as follows:
- To contain spiraling health care costs across the board
- To encourage customers to make better informed choices about their health care
How are these purposes achieved? Well, there is something about a flat fee that encourages individuals to often overuse a benefit. You know, like that one aunt and uncle in your family; the ones who are usually in great health, but still go to the doctor for blood tests, CT scans and an MRI every time they sneeze? These habits can cause runaway spending, along with ballooning costs over time — which causes health care costs to keep rising.
However, when you have to shoulder some of the expenses pertaining to your health care, you will probably try to find ways to save on insurance. You will obviously try to spend less. So, to help make an HDHP more worthwhile, the IRS has come up with a few features that make such a plan very budget friendly. Nevertheless, you have to ask yourself whether this is the right plan for you.
HDHP coverage comes with a yearly catastrophic limit on out-of-pocket costs for covered services from in-network providers. (For instance, for 2019, the limit is $6,750 for a single person and $13,500 for a family, rising to $6,900/$13,800 in 2020.) Once you have met this limit, your plan will pay 100% of your costs for in-network care. If you are interested in taking this route, it is important to understand how HDHPs work and how having one will change how you pay for healthcare.
How does a high deductible health plan (HDHP) work?
To qualify as an HDHP and to draw benefits from all the associated advantages, the IRS sets minimum deductibles and maximum out-of-pocket costs. The amounts for 2020 are as follows:
- Minimum deductible for an individual: $1,400
- Minimum deductible for a family: $2,800
- Maximum out-of-pocket expenses for an individual: $6,900
- Maximum out-of-pocket expenses for a family: $13,800
One important thing to know is that preventive care like vaccinations, yearly health exams and a few screenings are covered by an HDHP. However, this plan is not intended to help you cover things like visits to the doctor, prescription or visits to the emergency room. You will have to cover those out-of-pocket, up to the amount of your deductible, which is usually the same or close to your out-of-pocket maximum.
In any case, the beneficial thing about a HDHP is that down the years, whenever you are somewhat healthy, you will only be on the snare for low premiums and infrequent medical costs. You are additionally well shielded from calamities — like requiring an emergency medical surgery or treatment for a recently diagnosed ailment, which could bankrupt you if they had occurred without health insurance.
Albeit an HDHP will mean paying for a major portion for an event like that out-of-pocket, lower premiums assist with cushioning the blow. Along these lines, if you do go through something similar, you will most likely have the option to bear the cost of the out-of-pocket maximum, particularly in the event that you exploit an instrument that is available only to individuals who are enrolled in an HDHP: a Health Savings Account (HSA).
At the point when you have an HSA, it is a triple tax shelter you can use to develop your cash. Despite the fact that an HSA is certainly not a necessary part of the plan, it is unquestionably something you should open if you have an HDHP. It is similar to a 401(k) for health care! (However, in case you are working the Baby Steps, wait until Baby Step 3 to begin contributing.) Here is how an HSA works:
- Any cash you save in the account can be used to pay for qualified medical costs. This would be a great place to bank the money you will save on premiums when you have changed to an HDHP.
- Employers who provide an HDHP with an HSA as an employee benefit will usually include an employer match. This is a great way to boost your investment without incurring expenses!
- Anything you save in an HSA goes pre-tax.
- The money can be invested. Moreover, if you take that route, it also grows tax-free.
- If you want to withdraw the cash to cover medical costs, you still will not be taxed!
- Moreover, you do not have to fret about losing your HSA savings. Funds roll over each year, and they continue to be available for any future healthcare necessities you may have.
- After retirement, your HSA acts like a traditional IRA. Therefore, you can use your HSA funds for anything you would like. Qualified medical costs will still be tax-free, and any non-qualifying medical costs will be taxed as income, as is the case in a 401k.
This is mostly like having a turbocharged emergency fund only for your medical costs. If you can contribute the sum of your yearly deductible each year, that would be even better! At minimum, draw benefits from any employer match and watch the cash grow.
High deductible health plan premiums
The usual rule is that the higher your deductible is, the lower your health insurance premium will be. Therefore, if you choose to have a health plan with a lower deductible, you will most probably pay a higher premium. Nevertheless, your specific HDHP expense is based on various factors, such as your:
- Tobacco use
High deductible health plan tax benefits
To assist in offsetting the expenses of reaching a higher deductible, many individuals with HDHPs also open a health savings account (HSA), a tax-advantaged savings account. With an HSA:
- Any cash you do not spend, rolls over into the upcoming year
- You do not have to pay for federal taxes on the cash you put into it
- Your money can earn interest, which is also tax-free
- Your total yearly contribution is tax deductible
HSAs come with contribution limits and restrictions. In 2020, you could contribute up to $3,500 if you had individual coverage, or $7,100 if you had family coverage.
The money you contribute to an HSA, can be used to cover qualified medical costs, such as:
- Copays or coinsurance
- Glasses or contacts
- Specific over-the-counter medications
If you make use of your HSA to pay for non-medical costs, you will have to pay income taxes and a penalty on the sum you spend. Go to the official IRS’ website to find a complete list of eligible expenses.
How does an HDHP work with an HSA?
An HSA can be combined with a qualified high deductible health plan and provides the opportunity to save for health care costs. If you are signed up for an HSA eligible plan, what you save in premium costs can help offset out-of-pocket costs not paid for by the plan, especially if you put those savings into an HSA.
- If you sign up for an HDHP, you might pay a lower monthly premium but have a higher deductible (which means that you pay for more of your health care items and services before the insurance plan pays).
- If you join your HDHP with an HSA, you can cover that deductible, along with other qualified medical costs, using cash you have saved up in your tax-free HSA.
- Therefore, if you have an HDHP and do not require a lot of health care items and services, a lower monthly premium might be beneficial for you. If you need more care, you will save by using the tax-free money in your HSA to pay for it.
- Your HSA balance rolls over each year, so you can build up reserves to pay for health care items and services that you might require later.
Advantages of high deductible health plan
For the vast majority, the most engaging part of a HDHP is the low month to month premium. Since the deductibles are high, month to month premiums are lower than plans with low deductibles and low out-of-pocket maximum. An out-of-pocket maximum is the most you will pay out of pocket during your coverage year.
HDHPs give 100% coverage to preventive, in-network services before you meet your deductible. In case you are relatively healthy and for the most part do not have clinical costs beyond yearly physicals and screenings, there is a good possibility that you will save cash by selecting an HDHP.
A full rundown of qualifying preventative services and screenings is available at Healthcare.gov. Here are a few examples of the clinical care that is 100% covered before you meet your deductible.
- Abdominal aortic aneurysm screening for men of specified ages who have ever smoked
- Aspirin to prevent heart disease for men and women of certain ages
- Blood pressure screening
- Certain immunizations such as the flu shot
- Cholesterol screening for adults of certain ages or at higher risk
- Colorectal cancer screening for adults over 50
- Depression screening
- Diabetes (type 2) screening for adults with high blood pressure
- Anemia screening on a routine basis for pregnant women or women who may become pregnant
- Breast cancer mammography screenings every 1 to 2 years for women over 40
- Breastfeeding comprehensive support and counseling from trained providers, and access to breastfeeding supplies, for pregnant and nursing women
- Cervical cancer screening for sexually active women
- Osteoporosis screening for women over age 60 depending on risk factors
- Well-woman visits to get recommended services for women under 65
- Autism screening for children at 18 and 24 months
- Behavioral assessments
- Blood pressure screening
- Depression screening for adolescents
- Developmental screening for children under age 3
- Hearing screening for all newborns
- Vaccines for illnesses such as whooping cough, influenza, and chickenpox
Let us quickly review all the reasons why HDHP is a must have:
- You will have lower premiums, and those are savings you can bank toward future medical costs.
- You can start an HSA to offset the high deductible.
- An HSA lets you draw benefits from three tax shelters.
- When you have met your yearly out-of-pocket maximum (which for many high deductible health plans is pretty close to the deductible), an HDHP covers you 100% for the rest of the year.
The biggest advantage is that if you are healthy and do not have any huge medical events on the horizon, an HDHP can keep your monthly payments low.
Disadvantages of high deductible health plan
Indeed, high deductible health plans keep your monthly payments low. However, they put you in danger of confronting enormous medical bills that you cannot afford. Since HDHPs for the most part only cover preventive care, an emergency or accident could bring about extremely high out of pocket expenses. For instance, if a normal visit that is covered by your HDHP prompts a diagnosis of an ailment that needs costly treatment, you will be on the hook for the cost of that care.
Another conceivable drawback is what HDHPs might mean for your future health. You could end up trying not to go to the doctor to treat a disease or injury or to explore possibly hazardous symptoms, all because you cannot afford the out of pocket expenses. Trying to stay away from visits to the doctor and prescriptions could make the way for confronting a considerably larger medical bill for a hospitalization instead of an in-office visit.
The biggest disadvantage of an HDHP is that if you require unexpected care — such as a medical emergency or a new diagnosis — the sum you pay out-of-pocket could be very high.
How do I know if I have a high deductible health plan?
If you have an HSA account, then you have a high deductible health plan. For 2021, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for a single person or $2,800 for a family. An HDHP’s total annual out-of-pocket costs (including deductibles, copayments, and coinsurance) cannot be more than $7,000 for a single person or $14,000 for a family. (This limit is not applicable to out-of-network services.)
When should you get a high deductible health plan?
There is no “one-size-fits-all” answer to this question. Despite the fact that HDHPs are being offered by more employers all the time, health care is too complicated to be solved with a single universal approach. Before deciding, the few things you could consider are:
- Are you young and healthy? If this is the case, then this plan could be great for you. If you do not visit the doctor’s office a lot, it is worth having a high deductible to be able to pocket what you will save with lower premiums.
- How large is your family? The smaller the members of your family, the better you will fit with an HDHP. A household of just you and your spouse is a lot less likely to pay a high deductible as compared to a family of six. It is simple math. However, that is not to say that this approach cannot work for a large family. When paired with an HSA and its awesome tax advantages, an HDHP can work in families of many sizes.
- Do you have other options? If an HDHP is one of many options that you have (like with employee benefits) you will once again need to do the math. Run some imaginary numbers through each option. Try to figure out what a typical month, or year, will look like financially in each option. Sometimes the savings on one side or the other are small. In that case, strongly consider an HDHP so you can take advantage of an HSA.
- Do you, or any member of your family, have chronic health conditions? It could be worthwhile to accept higher monthly premiums if you are already aware of the fact that you are going to have higher-than-average medical expenses in a given year.
Important considerations of a high deductible health plan (HDHP)
One of the advantages of an HDHP is a health savings account (HSA), which is only available to United States taxpayers who are signed up for one. HDHPs turned out to be more common when the new health savings account (HSA) enactment was signed into law in 2003. Taxpayers contribute assets to an HSA to be utilized for clinical costs that HDHPs do not cover. These assets are not dependent upon federal income taxes at the hour of the deposit.
An HSA is one of the ways in which an individual can reduce expenses whenever faced with high deductibles. As long as withdrawals from an HSA are utilized to pay for qualified clinical costs that are not covered under the HDHP, the sum removed will not be taxed. Qualified clinical costs incorporate deductibles, dental services, vision care, prescription medications, copays, psychiatric therapies, and other qualified clinical costs not covered by a health insurance plan. In the event that you make withdrawals for non-qualified costs, you should pay personal duty on the sum, and in case you are under 65 you will cause a 20% early withdrawal penalty.
Contributions made to an HSA do not need to be utilized or withdrawn during the tax year. Any unused contributions can be turned over to the next year. For well off families who can afford to self-insure, an HDHP gives them admittance to HSA tax-advantaged savings that they can use in retirement, when the early withdrawal penalty for nonqualified expenses does not make a difference anymore.
Debunking some HDHP myths
Myth 1: HDHPs are more expensive.
Reality: HDHPs can be less costly:
- Lower premiums. Your monthly premiums are usually lower, but you do need to budget for your out-of-pocket costs, for instance, deductibles. If you do not use your insurance often, an HDHP typically offers the most cost savings.
- Know what is included at no cost. Preventive care such as a physical, well-child visit, vaccination or mammogram are covered at 100%, without a copay.
- You can work the HSA angle. When you place the difference between the monthly premium in the HDHP and conventional coverage into an HSA, you are pocketing the savings. Over time this can add up and you will have a balance to use for medical costs if needed.
- Leverage the tax breaks. The HSA that comes with an HDHP offers a triple tax benefit that helps you save up some money on taxes:
- Interest and any investment earnings in the account are tax-free.
- Your HSA contributions are made pre-tax.
- Your payments for qualified medical costs are tax-free.
- Take the HSA match. Some employers match contributions to HSAs. If your employer does the same, you are leaving cash on the table by not participating.
Myth 2: HDHP plans are confusing.
- It’s actually pretty simple. The main difference is that you pay a higher deductible, which is offset by the lower premiums you pay.
- You can learn as you go. Usually your knowledge will increase after the first year. As per Paul Fronstin from the Employee Benefit Research Institute, “The longer people are in the plans, the less complicated they are.”
- Use resources available to you. There are various tools to help you learn more. Use online calculators to compare costs between a conventional plan and an HDHP, or check out the HSA Guide for more details on how to use an HSA.
- Learn more from those in the know. HSA–eligible plans are increasing in popularity. There are chances that you may have a close friend or colleague who you can talk to about how they use their HSA-eligible health plan.
Myth 3: HDHPs don’t cover as much.
- You’re covered for major medical costs and preventive care is covered at 100%. The main difference is that you have a higher deductible amount. Then, you can use an HSA to repay yourself for the out-of-pocket costs, including the deductible and coinsurance.
- Use it now or later. When HDHPs are combined with HSAs, it permits you to accumulate money to pay for qualified medical costs now, and in retirement.
Is a high deductible health plan good?
- Lower monthly premiums: Most high deductible health plans have lower monthly premiums. If you think that you will only need preventive care, which is covered at 100% under most plans when you stay in-network, then the lower premiums that often come with an HDHP might help you save some cash in the long run.
- Tax-free spending account: Some qualified high-deductible health plans may be combined with a Health Savings Account (HSA). You can use the funds in an HSA to help pay for eligible medical costs. The money deposited into an HSA is tax-free, which can also help you save money.
We understand that finding out how to pay for health care can feel like a headache. In any case, what can be significantly more agonizing is tumbling off the raft without a plan set up to remain above water. We all deal with large clinical expenses at some point in our lives. What’s more is that confronting them without insurance is something no one can afford. HDHPs are helping a huge number of Americans pay for health care.
In case you are thinking about an HDHP, or you are already in one, you need to match it with a health savings account. The best kind of HSA to have is one that is adaptable, available on request, and comes with a debit card you can use to pay for clinical costs.
The amount of cash an HDHP will help you save relies upon the subtleties of certain plans available to you. While you can save money by paying lower premiums and enjoying a tax break through contributions to an HSA, you actually need to do the math based on your individual circumstance.