What Is a High-Deductible Health Plan (HDHP)?
A high-deductible health plan (HDHP) is a health insurance plan with a high minimum deductible for medical expenses. A deductible is the portion of an insurance claim that the insured pays out of pocket. Once an individual has paid that portion of a claim, the insurance company will cover the other portion, as specified in the contract. An HDHP usually has a higher annual deductible than a typical health plan, and its minimum deductible varies by year. For 2019 it is $1,350 for individuals and $2,700 for families, and it will rise to $1,400 and $2,800 in 2020.
- A high-deductible health plan (HDHP) allows for lower insurance premiums and is the only way to qualify for a tax-advantaged Health Savings Account (HSA).
- An HDHP is best for younger, healthier people who don’t expect to need healthcare coverage except in the face of a serious health emergency.
- HDHPs are also good for wealthy individuals and families who can afford to pay the high deductible out of pocket and want the benefits of an HSA.
- HDHPs are believe to lower overall healthcare costs by making people more aware of the cost of medical expenses.
Understanding a High-Deductible Health Plan (HDHP)
High-deductible health plans are thought to lower overall healthcare costs by forcing individuals to be more conscious of medical expenses. The higher deductible also lowers insurance premiums, making health coverage more affordable. This benefits healthy people who need coverage mostly in case of a serious health emergency. It can also benefit wealthy families who can afford to meet the deductible because it offers access to a tax-advantaged Health Savings Account (see below).
HDHP coverage comes with an annual catastrophic limit on out-of-pocket expenses for covered services from in-network providers. (For 2019, for example, the limit is $6,750 for an individual and $13,500 for a family, rising to $6,900/$13,800 in 2020.) Once you have reached this limit, your plan will pay 100% of your expenses for in-network care. If you're interested in taking this route, it's important to understand how HDHPs work and how having one will change how you pay for healthcare.
Having an HDHP allows you to get a health savings account (HSA), to which you can contribute tax-deferred contributions that can be used to pay for qualified medical expenses not covered by the HDHP.
Special Considerations of a High-Deductible Health Plan (HDHP)
One of the perks of an HDHP is a health savings account (HSA), which is only available to United States taxpayers who are enrolled in one. HDHPs became more common when the new health savings account (HSA) legislation was signed into law in 2003. Taxpayers contribute funds to an HSA to be used for medical costs that HDHPs don’t cover. These funds are not subject to federal income taxes at the time of the deposit.
An HSA is one of the ways an individual can cut costs if faced with high deductibles. As long as withdrawals from an HSA are used to pay for qualified medical expenses that are not covered under the HDHP, the amount withdrawn will not be taxed. Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, copays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan. If you make withdrawals for nonqualified expenses, you will have to pay income tax on the amount, and if you are under 65 you will incur a 20% early withdrawal penalty.
Contributions made to an HSA do not have to be used or withdrawn during the tax year. Any unused contributions can be rolled over to the following year. For wealthy families who can afford to self-insure, an HDHP gives them access to HSA tax-advantaged savings that they can use in retirement, when the early withdrawal penalty for nonqualified expenses no longer applies.