How High-Deductible Health Plans Work

Nov 22, 2023 By Susan Kelly

What if you could save month-to-month healthcare costs while still being eligible to start a health savings account? If this is the case, you'll require a high-deductible health insurance policy (HDHP). Let's talk about what HDHPs look like, the benefits and drawbacks, and when you should use or avoid one in your life.

Health insurance with a minimum deductible of $1,400 for individuals and $2,800 for families qualify as an HDHP under IRS regulations. You'll have to pay the deductible before your insurance covers any medical costs. In addition, the out-of-pocket maximum for an individualized design or a family plan cannot exceed $7,000 or $14,000, respectively.

Using High-Deductible Health Insurance Plan Benefits

High detectable health plan premiums are typically less expensive than premiums for a lower deductible health insurance plan. The HDHP is a good option for people who don't expect to spend much money on medical care in the future year. Saving a few hundred bucks or more a year is possible if you do it this way.

In the worst-case situation, ensure you've got the out-of-pocket maximum The increased interest on the medical debt will make it more difficult to pay your bills if you can't afford them. If the HDHP's out-of-pocket limit is beyond your means, you may want to consider an insurance policy with higher rates but a lower deductible.

The scenarios outlined above demonstrate a situation in which selecting the HDHP is the best option. If your annual medical expenses exceed your deductible, you'll pay $4,500 in premiums and deductibles with either plan. The HDHP, on the other hand, guarantees that you will only pay $1,500 in premiums unless you know exactly how much you will need to spend on medical bills shortly.

HDHPs let you contribute to a savings plan, which is an additional benefit. After taxes, the same $3,000 in medical bills might cost you $4,000. If your workplace offers a flexible spending account (FSA), you may be able to pay for $2,550 of your $3,000 medical expenses if you select the non-HDHP plan. With the non-HDHP, you'd get the same tax savings.

A simplified example is not as easy to understand as it appears. Furthermore, the choice between a high or low deductible plan isn't crystal cut in most real-world scenarios. If you don't know how much you'll spend on medical care this year, you'll have to figure out how much you can afford to pay out of your cash.

Eligibility for a Health Savings Account

Another key benefit of an HDHP is saving money in a health savings account, as previously mentioned. When you utilize your HSA to pay for medical expenses, you could save significant money because your contributions are pre-tax.

For instance, if you're paying federal taxes at a rate of 24%, a $100 medical bill will only cost you $76. To be eligible to make HSA payments and collect any pension payments to your HSA, you must have an HDHP.

Combining an HDHP and an HSA may entitle you to "free" wealth in the form of optional workplace contributions to your HSA. Furthermore, if you want to use an HSA, you don't have to stick with your HDHP for the foreseeable future.

Invested donations can rise over time. Contributions carry across from year to year. Even if you no longer have an HDHP, you can still utilize the money in your Health Savings Account (HSA) to pay for medical expenses in the future.

High-Deductible Health Plans Have Drawbacks

One of the major disadvantages of selecting an HDHP is the possibility of significant annual out-of-pocket payments. Affordable Care Act rules specify that from January 1, 2021, the most anybody can pay out of pocket for in-network benefits is $8,550 ($8,700 in 2022).

The most you can spend as a family is $17,100 in 2019 ($17,400 in 2022). Insurance plans used to be able to demand that one member of a family satisfy the family maximum, but this is no longer the case. Those with a family health insurance plan will benefit from this new rule. For the remainder of 2021, if any family member incurs $8,550 in health care expenses, they will be completely covered.

It's also possible that enrolling in an HDHP may cause you to avoid seeing your doctor because of the hefty out-of-pocket expenditures. Do not choose an HDHP if it will make you sick or impede your recovery because you wish to save money by avoiding doctors, surgeries, or prescriptions in the near run. For both financial and physical reasons, it's a bad idea.

What Is the Major Benefit of a High-Deductible Health Plan?

With a high-deductible health insurance plan, you can save money for future medical costs by opening a tax-advantaged health savings account. Many people, particularly those nearing retirement, can benefit from an HSA because the money is used to pay for medical expenses in old age.

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