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High deductible health plans (HDHPs) are currently the only path to having an HSA. Of course, most -- but not all HDHPs meet the criteria to qualify for an HSA. The current IRS definition for an HSA-qualifying HDHP is a plan with a deductible of $1,400 for individuals and $2,800 for families (2021).
With open enrollment season coming sooner than you think, now's a good time to start thinking about whether or not an HDHP is the right choice for your upcoming health plan. Read on for one person's account.
So, this sounds complicated (but it actually isn't)
Why should you consider an HDHP? The trade-off for the higher out-of-pocket costs is HDHPs typically carry a lower monthly premium than traditional health insurance. And being able to contribute to an HSA is a definite benefit of having an HDHP – the triple tax advantage of HSAs along with the fact contributions are yours until you tap into the funds.
(Unlike the "use it or lose it" provisions with flexible spending accounts (FSAs).)
This can make traditional insurance versus an HDHP a more-involved decision process that brings a number of questions into play, including long-term financial planning and overall health.
Typically an HDHP is more attractive for younger employees who tend to be healthier simply because of their age and single employees. A consideration for families is the fact that more people covered by a high-deductible plan means it's more likely those out-of-pocket expenses will arise in any given year.
When an HDHP might not be the best option
Of course, there will always be circumstances that turn the HDHP option into something that just isn't right for an employee.
One example would be a relatively young employee who still engages in a number of recreational sports activities like basketball or volleyball leagues, or higher-risk activities such as skiing, snowboarding or skateboarding. The increased risk for orthopedic or other injuries tied to those types of activities might mean taking the chance for paying out-of-pocket for a broken bone, serious joint sprain or torn ACL isn't worth the gamble.
One consideration in this example is the 2021 HSA contribution limit for individuals is $3,600 while the potential out-of-pocket costs could be up to $7,000 meaning there is no way to save up to the out-of-pocket max each year with that year's HSA contribution.
A second example would be an employee of any age with a family history of chronic health issues such as heart or blood diseases. And, of course, this consideration would increase each year as someone with an HDHP ages. The issue is chronic illness typically requires a range of expenses from ongoing care and possible medication to more extensive diagnostic testing to chart the progress – or lack of progress – of the disease. The result is a known level of annual medical expenses that will have to be spent out-of-pocket with an HDHP.
Like all insurance and financial decisions, going with an HDHP and an HSA over traditional insurance and an FSA is worth spending some time debating, given your own circumstances and how far you are willing to spend out-of-pocket for medical expenses.
If having lower monthly health insurance premiums and being able to contribute to a savings account rather than a spending account is attractive to you, this combination could make sense for your circumstances.