If you choose to enroll in a high-deductible health plan (HDHP), you might receive several benefits over a traditional healthcare plan. You may pay less each month and see several tax and retirement advantages if you enroll in an HSA. Here’s what you need to know.
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What Is a High-Deductible Health Plan (HDHP)?
A high-deductible health plan (HDHP) is a type of health insurance with lower monthly premiums but higher deductibles compared to traditional health insurance plans. With an HDHP, you have to pay for more healthcare costs before the insurance coverage kicks in.
The deductible is what you pay out of pocket for medical expenses before your insurance starts covering a portion of your costs. Some plans may cover things like annual physicals or immunizations before you meet your deductible, but it’s not guaranteed. For 2024, HDHPs must have an annual deductible of at least $1,600 for individuals and $3,200 for families.
There are a few reasons people choose HDHPs. First, the lower monthly premiums can make the coverage more affordable, especially if you’re healthy and do not have a lot of healthcare expenses. Second, these plans are often paired with health savings accounts (HSAs), allowing individuals to save money tax-free to help cover their out-of-pocket expenses.
Key to Saving: Pairing an HDHP with a Health Savings Account (HSA)
An HSA is a tax-advantaged savings account available to people enrolled in HDHPs. HSAs let you set aside pre-tax or tax-deductible funds to cover qualified medical expenses, such as deductibles, copays, and other healthcare costs. These contributions can grow tax-free over time, and withdrawals used for eligible medical expenses are also tax-free.
HSAs can help you manage health expenditures in several ways. First, they provide a way to offset the high deductibles in an HDHP. You can use what you’ve saved in your HSA to help pay for the bills you accumulate before you hit your deductible.
Second, the money in an HSA can accumulate over the years, creating a healthcare nest egg. This can be particularly advantageous if you do not have a lot of healthcare costs now but want to save for future medical needs.
Benefits to Know About Your HDHP
Opting for an HDHP could offer you numerous advantages compared to a conventional healthcare plan, such as the perks of having an HSA alongside your HDHP. Here’s the essential benefits to consider.
Lower Premiums, Lower Recurring Costs
If you’re relatively young, healthy, and rarely require medical attention, you might be able to benefit from the lower premiums HDHPs have compared to other health insurance plans.
Consider this example: If you’re a 50-year-old with heart disease and diabetes, you would likely see the doctor numerous times a year and have many medical expenses. This type of person would benefit from a plan with a lower deductible, as their coverage kicks in sooner. In exchange for lower deductibles, these plans usually have higher monthly premiums.
In contrast, if you see the doctor once a year for your annual physical and do not typically have other medical expenses, paying a higher premium does not make financial sense. Instead, an HDHP gives you lower premiums to help you save more money each month. In essence, you’re trading lower monthly premiums for the responsibility of covering a larger share of your healthcare costs when necessary.
Tax Advantages in Saving, Growing, and Withdrawing With HSAs
The money you contribute to your HSA is tax deductible. It’s usually taken right out of your paycheck by your employer, so you do not have to do any calculations. This reduces your taxable income for the year, potentially saving you on your tax returns.
In addition, the funds within your HSA can grow tax-free. You do not have to pay taxes on any interest, dividends, or capital gains your HSA investments generate. This tax-free growth can help you build a solid nest egg over time, especially if you contribute consistently.
Qualified withdrawals from your HSA for eligible medical expenses are also tax-free. You can withdraw from your HSA to pay for everything from a doctor’s office copay to certain over-the-counter drugs. Other types of investment accounts, like a traditional IRA, do not work this way. Instead, they require you to pay taxes any time you withdraw money. You can use your HSA funds without incurring additional tax liabilities, providing a triple tax benefit.
Withdraw From Your HSA Even After Retirement
One of the standout features of HSAs is that they belong to the individual, not the employer. This differs from flexible spending accounts (FSAs) offered with employer-sponsored health plans. An FSA typically has lower contribution limits than an HSA and does not let you roll over funds each year. More importantly, if you were to quit or retire, your FSA would be closed, and you’d forfeit any savings in it back to your employer.
The same is not true of HSAs. Your HSA belongs to you even when you’re no longer eligible to contribute. For example, when you reach retirement age, you might drop your HDHP to sign up for Medicare. You would not be able to put any more money into your HSA, but you can continue using your HSA funds for qualified medical expenses without paying taxes on them. Medicare beneficiaries, in particular, can tap into their HSA funds to cover Medicare premiums, copayments, deductibles, and other qualified medical expenses.
Greater HSA Expense Eligibility
HSAs can cover a surprisingly wide range of eligible expenses. While using them to pay for doctor’s visits, prescriptions, and hospital bills is common, you can also use them for other health-related items and services. Here’s a quick look at a few of the categories you might not have known are eligible:
- AA meeting transportation
- Acne and prescription skincare
- Cold remedies
- First-aid kits
- Health DNA tests
- Infertility treatment
- Medicated body or face wash
- Menstrual care products
- Over-the-counter pain relievers
- Reading glasses
- Rubbing alcohol
- Transition lenses
- Used needle container
The broad spectrum of qualified HSA expenses encourages a holistic approach to healthcare and wellness. You can proactively manage your well-being by using HSA funds for health needs you might otherwise have ignored or skipped.
What This Means for You
HDHPs have many benefits. You can save money every month, reap tax rewards, and even create health savings to draw from in the future. However, they’re not the right choice for everyone.
Typically, they may offer benefits to people who are relatively healthy and young without ongoing health expenses. If you know you have a health condition that requires doctor visits and treatments, you would be better off with a lower-deductible plan, so your insurance company will cover your expenses sooner rather than later.
How can you know what type of plan is right for you? Add up your annual health expenses to see if they’d reach the deductible of the plans you’re looking at. You might also consider talking with an expert healthcare agent for more personalized advice.