What is a High-Deductible Health Plan (HDHP)?

Many Americans are enrolled in High-deductible health plans (HDHPs), also known as HSA-qualified health plans, and the number is growing every year.

Qualified HDHPs also open the door to one of the most powerful saving and investing strategies available under current U.S. tax laws by allowing the accountholder to pair their HDHP with a health savings account (HSA). But it’s important for you to understand exactly how these plans work before you consider enrolling in an HDHP/HSA combination.

In this article, we’ll outline the basics of what an HDHP is and how it relates to an HSA. Note, however, that HDHPs are health insurance products, and you should direct any specific questions about your plan to your health insurance provider.

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

As the name suggests, they’re a health insurance plan option that offers premium savings by having a higher deductible than traditional health insurance plan options. Before we get too far into what this means, you’ll need to understand how these two terms are defined in the context of health insurance:

Deductible — A deductible is the amount of money you pay for healthcare services before your insurance kicks in. For example, if you have a $1,000 deductible, you’ll generally have to pay at least $1,000 each year before your insurance starts covering your medical costs. Some services and treatments (such as checkups, vaccinations and flu shots) may be paid before you meet your annual deductible.

Premium — A premium is the amount of money you pay for your health insurance each month. For example, if your health insurance plan has a premium of $500, you’ll have to pay this amount every month to ensure your insurance doesn’t lapse. If you receive health insurance through your employer, it’s common for them to pay a portion of your premium, which can make it more affordable.

In general, if you have a lower deductible, you’ll generally have higher premiums. This is because your insurance will pay more of your expenses in the event you have lots of medical bills in any given year. On the other hand, plans with higher deductibles generally have lower premiums since the insurance company will expect you to cover a larger portion of your healthcare costs out-of-pocket. It is a popular misconception that an HDHP is only good for younger, single, healthy people. It is important to evaluate all options you have available prior to enrollment. You may be surprised how often an HDHP is the lowest cost option when premiums, out of pocket expenses and HSA contributions are all taken into account.

How do I know if a plan qualifies as an HDHP?

“High-deductible health plan” is a legal definition outlined in the U.S. tax code and other related laws. Under current tax laws, HDHPs must set both a minimum deductible and an out-of-pocket maximum to qualify for certain tax benefits.

For 2023, these amounts are:

	Minimum Deductible	Maximum Out-of-Pocket
Individual HDHP	$1,500	$7,500
Family HDHP	$3,000	$15,000

 

As you can see in this chart, HDHPs must set a minimum annual deductible of either $1,500 for individuals or $3,000 for families. This means that, under these plans, you will pay at least this much money before your insurance kicks in.

Similarly, these plans must set an out-of-pocket maximum of no more than $7,500 for individuals and $15,000 for families. These amounts are the most you’ll ever pay annually for healthcare-related expenses.

Your health insurance company will often note whether your plan qualifies as an HDHP somewhere in the plan documents, usually with a phrase such as “HSA eligible.” 

Health insurance plans are situation-specific, and only your insurance company can give you a definite answer about whether your plan is an HSA-eligible HDHP or not.

What does an HDHP cover?

HDHP coverage mirrors traditional health insurance coverage, with the main difference being when coverage kicks in. An HDHP can’t and won’t cover any health-related costs until you meet your annual deductible, at which point it’ll begin to cover some or all of the costs. The one exception to this rule is that an HDHP may provide preventive care benefits without a deductible or at a lower deductible, provided the care falls under the categories specifically outlined by the IRS.

These preventive care categories include, but aren’t limited to:

1. Periodic health evaluations (including tests and procedures) such as annual physicals

2. Routine prenatal and childcare visits

3. Immunizations and vaccinations

4. Addiction-related services (such as programs to help you stop smoking)

5. Weight loss programs

6. Screening services for common medical conditions, such as cancer, heart disease, mental health diseases and vision and hearing disorders

Preventive care aside, once you hit your HDHP deductible, your HDHP will act as a traditional insurance plan and cover some or all of your healthcare costs until you reach your out-of-pocket maximum, at which time the insurance plan will pay 100% of your expenses.

How do HDHPs work with health savings accounts (HSAs)?

Many Americans enrolled in HDHPs choose to open health savings accounts, or HSAs. HSAs are tax-advantaged accounts designed to help you save money for future healthcare expenses.

The IRS considers these accounts to be “triple” tax-advantaged, leading to significant tax savings over the life of the account:

First, the IRS any contributions made to your account are tax-free, including contributions you make or contributions from your employer, if applicable.

Second, any earnings you receive from interest or investments is received tax-free.

Finally, any money you withdraw for qualified healthcare expenses isn’t subject to taxes.

HSAs are only available to individuals with high-deductible health plans. And they offer an excellent opportunity for you to save the money you would have otherwise spent on premiums for a traditional health insurance plan in a tax-advantaged account that can cover your future healthcare costs.

HDHPs and HSAs: A practical example

Imagine for a moment that you have a traditional health insurance plan with a deductible of $2,000 and that you pay a premium of $400 a month for this plan. Over the course of the year, you’d end up paying around $4,800 in premiums and would have to cover the first $2,000 in medical costs for that given year until your coverage kicked in.

Now, imagine that you instead have a high-deductible health plan with a deductible of $5,000—but a premium of only $250 a month. In this example, you’d pay $3,000 in premiums each year, plus the cost of medical expenses up to your $5,000 deductible.

If, in both examples, you receive an unexpected medical bill, which insurance plan would result in the lowest net cost over the course of the year?

The answer, in most cases, is that it would depend on how large the medical bill is and whether you have an HSA in place to protect yourself from the brunt of the costs:

 

	Example 1 — Traditional Health Plan	Example 2 — High-Deductible Health Plan (HDHP)
Annual Premiums	$4,800	$3,000
Deductible	$2,000	$5,000
Total Annual Cost Plus a $1,000 Medical Bill	$5,800	$4,000
Total Annual Cost Plus a $3,000 Medical Bill	$5,800	$6,000
Total Annual Cost Plus a $10,000 Medical Bill	$5,800	$8,000

As you can see in this table, at face value, the traditional health plan pulls ahead when faced with higher medical bills, while the HDHP wins out when annual medical expenses drop below $3,000. This is because the normal health plan would hit its deductible sooner than the high-deductible health plan.

However, the missing factor is that the HDHP would also provide access to a health savings account, where you could save money over time to pay for the difference in cost caused by the higher deductible. Specifically, you wouldn’t have to pay any taxes on your HSA contributions, leading to significant upfront tax benefits, as well as additional tax benefits when you use your HSA funds for a qualified healthcare expense.

In this fashion, HSAs function as a buffer for your finances, allowing you to take advantage of the lower premiums of an HDHP while also protecting yourself from the potential financial impact of a higher deductible.

HDHPs and how HSAs can affect your retirement savings

Paired together, HDHPs and HSAs provide a uniquely powerful way to get the best of both worlds regarding health care costs and long-term retirement savings.

HDHPs have lower premiums, meaning you’ll pay less money for your insurance coverage every month. The trade-off for these lower premiums is that you’ll have a higher deductible, meaning you’ll have to pay more money out-of-pocket before your insurance kicks in.

To combat this, many Americans with HDHPs open health savings accounts to protect themselves from the risk of an unexpected expense due to the higher deductible.

HSAs are tax-advantaged, meaning the IRS will generally not tax any money you put in or take out of the account. Further, your funds can grow tax-free in the account over time and can also often be invested similar to a 401(k) or IRA, meaning you can save up a significant nest egg all the way into retirement to help pay for any qualified expenses you may have. And once you turn 65, you can use your HSA funds for any expense—healthcare or not—without penalty.

HDHPs and HSAs are becoming an increasingly popular way for Americans to save money on healthcare costs while simultaneously saving money for retirement.

Figuring out if a HDHP and HSA combo is right for you

Despite all the benefits offered by HDHPs and HSAs, it’s important to determine whether these plans are right for you.

The pros and cons of high-deductible health plans greatly depend on the specifics of both your financial situation and your health, and it’s wise to discuss the benefits of such a plan with a financial professional who can guide you toward the path that works best for you.

Navigating through the rules and restrictions for these account types can be complicated, but HDHPs and HSAs don't have to be difficult. 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.