Why Choose an HDHP with an HSA?

A high-deductible health plan (HDHP), also known as an HSA-qualified health plan, is a health insurance plan that can help you save on healthcare expenses through lower monthly premiums and the ability to open and use a health savings account (HSA).

However, while HDHPs and HSAs have several advantages that can save you money, they also have some important considerations to understand.

In this article, we’ll outline the reasons why you may want to choose a high-deductible health plan alongside a corresponding health savings account.

Note, however, that this is a high-level explanation, and you should speak with your health insurance provider or a financial professional about the path forward that’s best for you.

Understanding the Basics of HDHPs and HSAs

High-deductible health plans (HDHPs) are an increasingly common way for Americans to save money on their healthcare costs.

Often, they’re paired with a health savings account (HSA) to save for out-of-pocket healthcare expenses as well as further utilize the tax advantages and financial stability offered by an HSA.

By combining your HDHP with an HSA, you can take advantage of the cost-savings of a higher deductible health plan along with the savings benefits of an HSA.

What is a high-deductible health plan (HDHP)?

A high-deductible health plan is a form of health insurance that carries a higher-than-average deductible but lower-than-average premiums.

To expand on these terms a little:

• Deductible — A deductible is the amount of money you pay for healthcare expenses before your insurance kicks in. By law, HDHPs have a minimum deductible of $1,500 for individuals and $3,000 for families in 2023 and a maximum out-of-pocket cost of $7,500 for individuals and $15,000 for families. Your deductible will likely fall somewhere between this minimum and maximum number (depending on your situation).
• Premium — A premium is the amount of money you pay for your health insurance each month to keep your coverage active. Think of your premium as the base cost of your health insurance that you’ll have to pay to ensure your coverage doesn’t lapse. If you have your health insurance through your employer, it’s common for them to pay a portion of your premiums.

Deductibles and premiums often have an inverse relationship in the context of health insurance.

If you choose a plan with a lower deductible (meaning your insurance will kick in sooner in the event you have significant medical bills), you’ll likely have higher premiums.

On the other hand, if you choose a plan with a higher deductible, you’ll likely pay less in premiums. This is because of the expectation that you’ll pay more out-of-pocket for your medical expenses before your insurance kicks in.

Because of this inverse relationship, balancing your deductibles and premiums is a practice in risk management based on the current state of your health and other financial considerations.

If you don’t usually pay much money for healthcare (outside of a routine costs), it may be beneficial to choose a plan with a higher deductible so you’ll pay less in premiums. If you have or expect to have high healthcare costs, it may be better to choose a plan with a lower deductible but higher premiums.

This is because such a plan would place a lower cap on your medical bills, saving you money by protecting you from having to pay more before hitting your deductible.

What is a health savings account (HSA)?

A health savings account is a tax-advantaged savings and investing account designed to help you save money for future healthcare costs and is only available to individuals who have are enrolled in a high-deductible health plan (HDHP), otherwise known as an HSA-qualified plan.

The IRS considers health savings accounts to be “triple” tax-advantaged:

• The IRS will deduct any money you put into the account from your taxable income for the year (since contributions are typically made pretax).
• Contributions to the account will grow tax-free, even if your money earns interest or appreciates over time (such as if you invest the funds into stocks or mutual funds).
• Finally, you won’t have to pay any taxes on funds you withdraw from the account, provided you spend these funds on qualified expenses.

The point of an HSA is that it provides a buffer between your finances and the effects of a sudden and unexpected medical bill, all while helping you chart a path toward better long-term financial health. 

HSAs and retirement planning

HSAs are one of the best accounts available to save money for retirement because of their triple tax-advantaged status and investment capabilities.

Since you can invest the funds in your HSA into a number of financial options (from stocks and bonds to mutual funds), these funds have the potential to grow over time through interest, compounding returns and the appreciation of the underlying funds.

HSAs are a common way to save money for retirement since their tax benefits and flexibility often surpass the advantages of even a 401(k) or individual retirement account (IRA).

And once you turn 65, you can take distributions from the account for any reason without incurring a penalty. Note, however, that you’ll still have to pay income taxes on any money you withdraw that doesn’t go toward a qualified expense. Prior to age 65, you’ll have to pay income tax on any money you withdraw that doesn’t go toward a qualified expense, plus an additional 20% tax penalty.

What’s the point of opening an HDHP and an HSA?

HDHPs and HSAs are for more than just insurance—they’re financial tools you can use to better organize your finances and save money over time. When deciding whether to choose an HDHP with an HSA, you should always start by weighing the various pros and cons.

Advantages of high-deductible health plans and HSAs

High-deductible health plans come with four major benefits that make them appealing for individuals with lower healthcare costs:

• HDHPs come with lower monthly premiums, potentially saving you hundreds, if not thousands, of dollars per year in upfront costs.
• These plans will usually pay for preventive care such as annual physicals, flu vaccinations and more, meaning many common medical expenses are covered without having to pay the deductible first
• HDHPs will protect you from large medical bills if you or a covered family member gets seriously sick or hurt – once you pay the deductible, your plan will pay some or all the remaining expenses.
• Your HDHP allows you to save money on a tax-free basis in an HSA to pay healthcare expenses for you and/or your family members.

Taken together, combining your HDHP with an HSA gives you the best of both worlds – lower health insurance premiums plus tax-free savings to pay for healthcare expenses.

Disadvantages of high-deductible health plans and HSAs

Since HDHPs offer the same health insurance coverage as traditional plans except with a higher deductible, the only real disadvantage can be the upfront out-of-pocket medical costs. However, that is where the HSA comes in. By saving tax-free dollars in your HSA, you will be able to use those funds to pay for any expenses for yourself and your family members, including:

• Doctors visits
• Laboratory and testing
• Hospital
• Pharmacy
• Dental
• Vision

In fact, you can save money on many expenses you are paying today using tax-free money from your HSA. For a searchable list, check out The Complete HSA Eligibility List.

Partner with a bank that can make your money work for you

Choosing whether to go with an HDHP/HSA pairing will ultimately depend on the specifics of your situation.

HDHPs and HSAs don’t have to be difficult, and we’re here to help you best understand how you can use them to work toward your financial goals.

For current HSA account holders, if you have any questions about your HSA, contact Participant Services at 800-270-7719.