A high deductible health plan (HDHP) is a type of health insurance plan that has lower premiums but higher deductibles than a more traditional plan. It’s also the type of plan you need to have if you want to be able to contribute money to an HSA.
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Now, you might think: my plan totally has a high deductible—that counts, right?
Not necessarily: The term “high deductible health plan” means more than just having a high deductible. An HDHP needs to conform to specific rules laid out by the IRS in order to be considered an HSA-eligible plan.
So, what exactly qualifies as a high deductible health plan?
There are three rules set by the IRS that HDHPs have to follow:
- You pay 100% until you meet the deductible: Unlike plans that have copays for office visits and prescriptions from the get-go, you have to pay the full cost of care for everything except preventive care until you hit your deductible. So if you go to the doctor when you have the flu and before you meet the deductible, you’ll have to pay the full visit amount and not just a copay.
- There’s a minimum deductible amount: In 2019, your deductible needs to be at least $1,350 if it’s only you on the plan, and at least $2,700 if you have any other family members on the plan. That means you’ll have to pay at least $1,350 in medical costs before your plan kicks in and starts paying for your care.
- And there’s a maximum on out-of-pocket costs: In 2019, your individual out-of-pocket costs can’t be more than $6,750. For a family, the maximum is $13,500. So as long as you get care from in-network medical providers, you won’t pay more than those amounts during the year.
What are the benefits of a high deductible health plan?
There are a few reasons you might get a high-deductible plan:
- The monthly premiums are generally lower than those of more traditional plans that offer copays for office visits.
- If you have an HDHP, you can contribute money to an HSA, which has tax benefits.
- As with other health plans, even though you’ll pay “full price” for care before you meet the deductible, the amount you pay will be the discounted price negotiated by your health insurance carrier.
Why would an employer offer an HDHP?
There are several reasons why your business might want to offer an HDHP for employees:
- Offering an HDHP makes employees eligible for saving pre-tax money in an HSA. That helps reduce their tax burden and provides them with an interest-bearing account that they can use for medical expenses.
- In addition to offering an HDHP, many employers opt to make contributions to their employees’ HSAs. This can be an attractive benefit for recruiting and retaining employees, and the contributions are pre-tax for both the employer and the employee.
- HDHPs can be a way for employers to keep insurance costs in check. An HDHP—even combined with employer contributions to employees’ HSAs—is often less expensive in terms of monthly premiums than a more traditional health plan.
Can you give me an example of how an HDHP works?
Sure! Meet Lynn. She has an HDHP and hasn’t met her $3,000 deductible yet. That means she has to pay for all of her medical expenses out of pocket until she hits the $3,000 mark. After that, her insurance benefits kick in.
She’s feeling sick and goes to the doctor, who bills $200 for the visit. Lynn’s insurance plan has a negotiated rate of $140 for the office visit, so the doctor reduces the bill down to that amount. Lynn pays the $140, and it counts towards her deductible. She still has to pay $2,860 in medical costs for the year before her health plan will start paying for her care.
If Lynn had a plan with copays for office visits even before the deductible is met, she would have paid a copay for her doctor’s visit instead of $140. The average copay for primary care office visits is $25.
Still not sure whether an HDHP is right for you and your business? Chat with a broker to learn more and decide if an HDHP is right for you.