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Choosing an HDHP and HSA

HDHPs and HSAs: Why These Are Better Together

July 10, 2020

Do High-Deductible Health Plans (HDHPs) need Health Savings Accounts (HSAs)? Not necessarily. To participate in an HSA, you must be enrolled in an HDHP. However, the reverse isn’t true: If you’re enrolled in an HDHP, you’re not required to participate in an HSA. But the two are certainly better together. 

In this blog post, we dig into why an HDHP pairs so well with a HSA, why enrolling in both can help you be sure you and your family are set up for financial success both now and later, and why we think the two accounts are too often misunderstood (hint: it has everything to do with a name).

What’s an HDHP?

An HDHP is a type of health insurance with lower monthly premiums and a higher deductible than traditional health insurance plans. The minimum deductible and maximum out-of-pocket expense requirements are set by the IRS and tend to change a bit from year to year to address inflation: For 2020 and 2021, an HDHP is defined as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. With an HDHP in 2020, your maximum yearly out-of-pocket expenses (including deductibles, copayments and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family.

Because HDHPs have higher deductibles, you will need to take extra care to budget for your out-of-pocket healthcare costs — both those you anticipate and those you don’t. That’s where an HSA comes in handy. By setting aside money into an HSA, you can pay for eligible medical expenses with money before it’s taxed.

What’s an HSA?

An HSA is a tax-advantaged account you can use to pay your current and future qualifying medical expenses, as well as those of your spouse and your tax dependents. With money from this account, you pay for healthcare expenses that are not covered by your HDHP.

HSAs are often misunderstood or confused with Flexible Spending Accounts (FSAs), and research we’ve done has proven that. HSAs have a number of key differences from FSAs, including: 

  • All HSA funds carry over from year to year. 
  • HSA funds can be invested, and earnings (through investment or interest) are tax-free.
  • HSA funds are available as you contribute them, while all Medical FSA funds are available on Day 1 of the plan year.

Why an HDHP and HSA are better together?

As triple tax-advantaged accounts, HSA contributions are tax-free, earnings are tax-free and withdrawals for eligible expenses are tax-free. Any unused funds in your HSA at the end of the year are yours to retain in the account and accumulate toward future healthcare expenses. 

Your HSA is also portable, meaning that you can take it with you if you change employers. That also makes an HSA a smart retirement-planning tool, because once you turn 65, you can use funds for non-qualified medical expenses without being subject to the 20 percent IRS penalty that would otherwise apply to funds used for non-qualified medical expenses. 

If you’re in the early stages of your career and aren’t sure what having an HSA today has to do with your financial security in the future, consider that the average couple who retired last year will need $285,000 to cover their medical expenses in retirement. By arming yourself with a HDHP while continuing to fund an HSA, you can be well-prepared for healthcare costs in retirement. In fact, some experts agree that pairing a HDHP with a HSA is a better retirement savings vehicle than a 401(k).

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