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High-Deductible Health Plan

A high-deductible health plan is a health insurance plan with a high minimum deductible for medical costs. A deductible is the part of an insurance claim that the insured pays out of pocket. Once a person has paid that portion of a claim, the insurance carrier will cover the other portion, as specified in the contract. A high deductible health plan typically has a higher annual deductible than a typical health plan, and its minimum deductible differs by year.

Understanding a High-Deductible Health Plan

High-deductible health plans are thought to lower general healthcare expenses by forcing individuals to be more conscious of medical costs. The higher deductible also lowers insurance premiums, making health coverage cheap. This benefits healthy individuals who require coverage mostly in case of a serious health emergency. It can also benefit wealthy families who can afford to meet the deductible since it offers access to a tax-advantaged Health Savings Account.

HDHP coverage comes with an annual catastrophic limit on out-of-pocket costs for covered services from in-network providers. (For 2019, for instance, the limit is $6.750 for an individual and $13,500 for a family, rising to $6,900/$13,800 in 2020.) After you have reached this limit, your health insurance will pay 100% of your expenses for in-network care. If you are interested in taking this route, it’s vital to understand how HDHPs work and how having one will change how you pay for healthcare.

Special Considerations of a High-Deductible Health Plan

One of the perquisites of an HDHP is a health savings account, which is only available to the U.S. taxpayers who are enrolled in one. HDHPs became more popular 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 expenses that HDHPs does not cover. These funds are not subjected to federal income taxes at the time of their deposit.

An HSA is one of the ways a person can cut expenses if faced with high deductibles. As long as withdrawals from an HSA are used to pay for qualified medical costs that are not covered under the HDHP, the amount withdrawn will not be taxed. Qualified medical costs consist of dental services, vision care, prescription drugs, deductibles, copays, psychiatric treatments, and other qualified medical costs 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 suffer a 20% early withdrawal penalty.

Contributions made to an HSA don’t have to be used or withdrawn during the year of taxation. Any unused contributions can be rolled over to the next year. For wealthy families who can afford to self-insure, an HDHP offers them access to HSA tax-advantaged savings that they can use in retirement, when the early withdrawal penalty for nonqualified costs no longer applies.

Resources and References:

• How High Deductible Health Insurance Plans Work
• Rules of a Health Saving Account