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high-deductible health plan (HDHP)

What is a high-deductible health plan?

In lay terms, a high-deductible health plan could simply be considered a policy with a high deductible. But the term “high-deductible health plan,” or HDHP, is specific to plans that not only have high deductibles, but also conform to other established federal guidelines.

HDHPs are the only plans that allow an enrollee to contribute to a health savings account (HSA). High-deductible insurance is considered a type of consumer-driven health plan, so you may hear the term CDHP used in conjunction with these plans. The idea is to give patients control over how to spend and invest their money.

HDHPs cover preventive care before the deductible – the ACA requires this of all plans – but under an HDHP, no other benefits are provided until the insured has met the deductible. That means HDHPs cannot have copays for office visits or prescriptions prior to the deductible being met (as opposed to a plan that’s got a high deductible but also offers copays for office visits from the get-go; people might generally consider the latter to be a high deductible plan, but it’s not an HDHP).

So with an HDHP, you’ll have to pay out-of-pocket for everything other than preventive care until you hit your deductible. After that, the insurance will pay benefits based on the plan’s coinsurance level (many HDHPs have 100 percent coverage after the deductible).

Minimum deductibles and maximum out-of-pocket

HDHPs have specific guidelines in terms of allowable deductibles and out-of-pocket costs. These are adjusted annually by the IRS, but there were no changes from 2016 to 2017.

For 2018 coverage, the minimum required deductibles for HDHPs increased to at least $1,350 for an individual, and $2,700 for a family. And the upper limit on total out-of-pocket exposure under an HDHP in 2018 also increased to $6,650 for an individual, and $13,300 for a family (note that this is lower than the total out-of-pocket allowed on non-HDHPs under the ACA).

HSA contribution limits

To help pay these out of pocket costs, it’s both wise and typical to pair your high-deductible plan with a health savings account (HSA).

For 2018, the contribution limits rose to $3,450 for an individual and $6,900 for a family. If you’re 55 or older, you can contribute an extra $1,000 a year.

[note that there has been a lot of confusion about HSA contribution limits in 2018. First, IRS Revenue Procedure 2017-37, published in May 2017, set the limits at $3,450 and $6,900 for individuals and families.

Then in December 2017, the Tax Cuts and Jobs Act was enacted, and included a change in the way the IRS would make inflation adjustments for some things, including HSA contribution limits. As a result, the IRS published a bulletin in March 2018, decreasing the contribution limit for a family to $6,850 (people who had already put $6,900 into their HSAs were instructed to withdraw $50 in order to avoid an excise tax on excess contributions).

But in April 2018, the IRS reversed course, and published Revenue Procedure 2018-27, which states that people with family HDHP coverage may contribute up to $6,900 to their HSAs for 2018. This change was made because the IRS determined that the additional tax revenue would be more than offset by the administrative burden of reducing the limit to $6,850.]

The money that you contribute to an HSA will reduce your modified adjusted gross income (which determines your eligibility for premium subsidies in the exchange). In some cases, selecting an HDHP and contributing to an HSA could help a household avoid the ACA’s subsidy cliff, so it’s an option to consider if you find yourself with just a little bit too much income to qualify for premium subsidies.

Republicans in Congress considered several ACA repeal bills in 2017, and expanding HSAs via higher contribution limits was a common factor in most of them. However, none of those bills were enacted, so the already established rules governing HDHPs and HSAs remain in place. The contribution limits are adjusted annually by the IRS, but nothing has changed about how they’re established.

How can HSA funds be used?

This money in your HSA is yours to withdraw, tax-free, at any time, to pay for medical expenses that aren’t covered by your high-deductible policy. You can reimburse yourself after the fact if you prefer – so if you incur a medical expense in 2018 but pay for it without withdrawing money from your HSA, you can opt to reimburse yourself for that spending several years down the road, as long as you keep your receipts.

If you take money out of your HSA for anything other than a qualified medical expense, you’ll pay taxes on the withdrawal, plus a penalty. But once you turn 65, the HSA functions in much the same way as a traditional IRA: you can pull money out for any purpose, paying only income taxes, but no penalty. You also have the option to just keep the money in the HSA and use it to fund long-term care later in life. The money is never taxed if you’re withdrawing it to pay for qualified medical expenses, even if you’re no longer covered by an HDHP at the time that you make the withdrawals. But contributions to the HSA can only be made while you have in-force coverage under an HDHP.

You can also withdraw money from your HSA to pay Medicare premiums (for Part A, if you don’t get it for free, and for Parts B and D, but not for Medigap plans), or to pay long-term care premiums. There are limits, based on age, on how much you can pull out of your HSA to pay long-term care insurance premiums with pre-tax money (the following limits are for 2018; they’re indexed for inflation each year by the IRS). If your age is:

  • 40 or younger, you can withdraw $420 tax-free to pay long-term care insurance premiums
  • 41 to 50, you can withdraw $780
  • 51 to 60, you can withdraw $1,560
  • 61 to 70, you can withdraw $4,160
  • 71 or older, you can withdraw $5,200

How do the premiums compare to other plans?

In terms of premiums, HDHPs are usually among the lower-cost plans available in a given area, but they’re typically not the least expensive plans. That’s because the rules that govern maximum out-of-pocket costs for HDHPs are different from the rules that govern maximum out-of-pocket costs for all ACA-compliant plans. In 2014, the two were equal: the maximum allowable out-of-pocket for HDHPs was $6,350 for an individual and $12,700 for a family, and those were the same limits that applied to all ACA-compliant plans. So in that year, HDHPs were among the least expensive plans available.

But as time went on, the limits that apply to all ACA-compliant plans climbed faster than the limits that apply to HDHPs. For 2018, HDHPs can have a maximum out-of-pocket of $6,650 for an individual and $13,300 for a family. But the 2018 upper limit for out-of-pocket costs on ACA-compliant plans is $7,350 for an individual, and $14,700 for a family. So there are non-HDHP plans available that have higher out-of-pocket exposure (and thus lower premiums) than HDHPs.

If being able to contribute to an HSA is a priority for you, you’ll want to focus on the HDHPs available in your area. But if the premium is your primary concern and you don’t plan to contribute to an HSA, you may find less-expensive plans that aren’t HDHPs, and that have higher out-of-pocket exposure than the available HDHPs.