February 15, 2024

One of the core forms of benefits plans is a high deductible health plan, or HDHP. As a consumer, the first thing one might notice is that premiums tend to be more affordable than the more “premium plan”. Another consideration with this plan type is a health savings account or HSA. So, let’s break down the basics of HDHPs and HSAs so that you can make the choice that is best for you.

The basics of HDHPs and HSAs

At its core, an HDHP is a plan with a higher deductible than a traditional insurance plan. This does mean that monthly premium is typically lower. However, the member will pay more health care costs due to the higher deductible paired with a higher out-of-pocket maximum that must be met before the insurance company starts to pay its share.

High deductible health plans are often paired with health savings account (HSA). This form of tax-advantaged account allows for employee contributions, often with some level of employer match or incentive, which are saved pre-tax. This allows members to pay for certain medical expenses with money free from federal taxes.

How to determine if an HDHP is right for you

Start by taking inventory of the amount of health care costs you experience within a plan year. Outside of your annual wellness exam, how often do you see your physician? If it is only once or twice a year with minimal cost, this may be a good fit for you. If you incur frequent medical expenses, or are prone to injury, this plan may stretch your financial limits.

Additionally, consider your medication use. Do you have many monthly maintenance medications do you use? If so, HDHPs may not be optimal. In this scenario, the copays of more premium health plans could end up saving you money out of pocket in the long term.

Benefits of HSAs

A Health Savings Account is a tax-advantaged savings account (meaning, pre-tax contributions) that you can use to pay qualified medical, dental, or vision expenses. An HSA is owned and funded by the employee. Employers can also contribute to an HSA. This is often done on a matching basis or through other organizational incentives, such as participating in the wellness program. Once the employer contributes to the account, these funds belong to the employee.

Tax Free Funds

With an HSA, members must specify how much pretax income to contribute from each paycheck (up to annual limits set by the IRS, see below for 2024).  When withdrawing from an HSA to pay for qualified expenses, members may take it out tax free.  Again, this is the employee’s account and money. This means that even if employees change jobs, this account and its funds go with them.

Carryover

If funds remain at years end, they are not lost. Instead, they carry over from year to year. One important consideration is what happens if employees switch from an HDHP to a traditional plan. They will not be able to make contributions to the HSA.  However, members can still use the money they have already contributed to their HSA to continue to pay for qualified medical expenses.

Shared Benefit

Another benefit of having an HSA account is that individual contributions can be used to pay for qualified expenses for any member of the household. Let’s look at an example:

An employee has the employee-only HDHP coverage through their employer with an HSA. Their spouse has a traditional plan through their employer. The employee can use their HSA funds to pay co-pays on their spouse’s plan and help offset their deductible from medical expenses. The government views HSAs as belonging to the entire household. So, that money can be used by any member of that household.

HSA Contribution Limits & Regulations

The following limits have been set for HSA contributions, updated for 2024. They vary by HSA type and are expanded when employees pass the age of 55.

Table with 2024 HSA Contribution Limits

 

Important Note on Regulations: HSAs involve very complex rules, including limitations on eligibility, contributions and expense reimbursement. It is also important that these funds are used for eligible expenses. Federal and state tax penalties may be assessed if these requirements are not met.

Speak with a tax advisor about personal circumstances with respect to the HSA rules. The best practice is to keep the receipts of the qualified expenses HSA funds were spent on. This will protect you in case the government audits on those purchases.

Questions? Don’t hesitate to reach out.

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