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SmartAsset: What Is a High-Deductible Health Plan?

According to the U.S. Bureau of Labor Statistics, the average American household spent $5,177 on healthcare costs in 2020. With healthcare costs eating into many American budgets, you may wonder if a high-deductible health plan (HDHP) can cover some of those expenses or leave you on the hook for necessary medical care. Let’s break down what is an HDHP. A financial advisor could help you decide whether or not a high-deductible health plan is a smart move for your finances.

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

A deductible is the amount of money you’ll pay before the insurance company provides assistance. So, if you have a health plan with a $1,000 deductible, you’ll have to pay for $1,000 of qualified medical expenses before the insurance company starts to help out.

A high-deductible health plan comes with a deductible that’s higher than a traditional insurance plan. Here’s the breakdown of the IRS definition of an HDHP for 2022:

  • Self-coverage: As an individual, a high-deductible health plan includes plans with a minimum annual deductible is $1,400.
  • Family coverage: As a family, a high-deductible health plan includes plans with a minimum annual deductible is $2,800.

A health plan with a deductible of a few hundred dollars might feel high for your budget. But technically, the plan won’t be considered a high-deductible plan until it hits the $1,400 threshold for individuals and the $2,800 threshold for families.

HDHPs and HSAs

If your health plan meets the IRS definition of a high-deductible choice then you are eligible to contribute to a health savings account (HSA). An HSA is a specialized tax-advantaged account that you can use to save for medical expenses. The opportunity to contribute to an HSA is a big deal. A triple tax advantage makes HSAs an attractive investment vehicle.

Here’s how the triple tax advantage of HSAs works:

Pre-tax contributions. You can contribute a maximum of $3,650 as an individual of $7,300 as a family into your HSA. The funds you contribute are on a pre-tax basis. With that, you’ll lower your taxable income and tax burden for the year.

Funds grow tax-free. Within your HSA, you can invest the funds. As your investments grow, there is no tax involved. You won’t encounter capital gains or interest taxation within your HSA.

Tax-free withdrawals for qualified expenses. If you withdraw the funds for qualified medical expenses, you won’t have to pay taxes on the withdrawal. This step completes the triple tax advantage of HSAs.

Many consider HSAs to be a premium retirement savings tool due to the triple tax advantage. If you are worried about paying for medical costs down the line, this is an especially useful option.

HDHPs: Advantages and Disadvantages

SmartAsset: What Is a High-Deductible Health Plan?

As with all financial choices, there are some advantages and disadvantages to consider with a HDHP.

Let’s start with the pros:

  • Access HSA opportunities. HSAs are exciting investment opportunities with plenty of tax advantages.
  • Lower premium payments. A higher deductible leads to lower premium payments. Depending on your medical expenses, you might come out ahead when compared to a traditional health plan.

Now for the cons:

  • High-deductible lurking. The biggest drawback is the deductible itself. Generally, it means keeping more savings earmarked for medical expenses. But it can be tough to fit this deductible into your budget.

HDHPs: How It Fits Your Into Your Finances

A high-deductible health plan works best for people that don’t expect to encounter extensive medical costs. Take a realistic look at your healthcare needs before jumping into an HDHP. If it’s likely you’ll need extensive medical treatments, then an HDHP might not be right for you.

If you decide to opt for an HDHP based on your relatively good health, then saving for the deductible is important. Although no one wants to encounter a major medical expense, life is full of surprises. If possible, set aside your deductible amount in a savings account that you can easily access if necessary.

Bottom Line

SmartAsset: What Is a High-Deductible Health Plan?

A high-deductible health plan means you’ll be on the hook for a significant amount of medical expenses before your health plan starts to pick up the tab. It’s important to consider the deductible when choosing a health plan. If you can’t afford the deductible, then seeking out a health plan with a lower deductible is the smart move.

Healthcare Tips

  • A financial advisor can help you create a financial plan for your healthcare expenses. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • One major perk of a high-deductible health plan is the ability to contribute to a health savings account (HSA). This investment vehicle allows you to save for future medical expenses with the help of a tax break.

Photo credit: ©iStock.com/Vladimir Vladimirov, ©iStock.com/Ridofranz, ©iStock.com/Andrii Dodonov

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