Category Archives: HDHP

HDHP Minimum Deductible and Out of Pocket Max – Defined

Overview

As with many things HSA related, the HDHP (High Deductible Health Plan) definitions are more complicated than they need to be. Each year, the IRS defines what plans are “HSA eligible” meaning those plans allow you to open and contribute to a Health Savings Account. The definition consists of two attributes – Minimum Deductible and Out of Pocket Max. Moreover, these two attributes vary based on the type of coverage you have, which is either self-only or family. Note that even if you get those right and your plan is an HDHP (and by definition, HSA eligible), there are still other requirements that determine your HSA eligibility – this is just the first of 4.

The goal of this article is to explain the HSA Minimum Deductible and the Out of Pocket Max, what they are, their amounts for a given tax year, and go through some examples of how they work and what plans qualify.

Minimum Deductible

All insurance plans have a deductible, or the amount you must pay before insurance kicks in and begins covering expenses for the year. This amount can vary between $0 and many thousands of dollars. To be HSA eligible, a plan must have a deductible greater than or equal to that year’s Minimum Deductible. In essence, it defines the “High” part of High Deductible Health Plan. It says, “if you want to contribute to an HSA, your insurance deductible must be at least this amount”.

The inverse is also true: insurance plans with a deductible less than or equal to the Minimum Deductible are not HSA eligible. If your insurance has an deductible less than the HSA Minimum Deductible, you cannot contribute to an HSA.

HSA eligible plans must have a deductible higher than the minimum deductible

Note that your deductible generally resets at year end. You can use this to your advantage by “taking a bath” in years where you have a lot of medical coverage. If you hit your deductible in a given year, you might as well schedule additional care for that year as insurance has “kicked in” and is paying for your services. If you are close to hitting your deductible, you may want to pull forward expenses from the subsequent year to hit your deductible in the current year. Once the deductible is met, your only financial liability for insurance is 1) premiums and 2) the out of pocket max (discussed next), often driven by “coinsurance”.

Out of Pocket Maximum

All insurance plans have an out of pocket maximum, or the maximum amount that you can spend on medical care in a year. Note that insurance premiums are NOT included in the out of pocket maximum. Instead, it consists of amounts you pay for 1) deductible and 2) coinsurance.

HSA eligible plans must have an out of pocket maximum less than the HDHP definition

To be HSA eligible, your plan cannot exceed the HDHP definition of Out of Pocket maximum. For some reason, the IRS decided that there needed to be an upper bound on OOP max for plans to be HSA eligible. This is counter intuitive, at least to me, as a high out of pocket max is punitive to the holder and costs them more money. It is exactly those people who need the reduced savings HSA provides.

Add it to the list of things to fix : )

If your insurance plan has an out of pocket maximum that exceeds the HDHP definition for a given year, you cannot contribute to an HSA. Also note the risk of coinsurance. Coinsurance is an amount you owe above the deductible. Often times it is stated as a percentage followed by the out of pocket max, for example, 20% up to $10,000. Assuming you have a deductible of $6,000, your plan looks like this:

  • Deductible, $6000 – amount you pay before insurance pays anything
  • Coinsurance, 20% – after your deductible, percentage of expenses you pay up to your out of pocket max. (For kicks: in this example @ 20% you would require an additional $20k of medical bills, of which you pay $4k in coinsurance, before you reach out of pocket max)/li>
  • Out of Pocket Max, $10000 – maximum amount of deductible and coinsurance you can pay in a year.

HDHP Definitions by Year

Below are HDHP definitions by year for your reference:

2016 2017 2018 2019 2020
Self-Only Min Deductible $1,300 $1,300 $1,350 $1,350 $1,400
Self-Only OOP Max $6,550 $6,550 $6,650 $6,750 $6,900
Family Min Deductible $2,600 $2,600 $2,700 $2,700 $2,800
Family OOP max $13,100 $13,100 $13,300 $13,500 $13,800

Examples for plans that qualify as HDHP

Here are some examples of 2020 insurance plans that qualify as an HDHP and allow you to contribute to an HSA:

  • Self Only: Deductible = $1,400, Coinsurance = 40%, OOP Max = $6,900
  • ✓ Meets minimum deductible; does not exceed out of pocket max.
  • Self Only: Deductible = $3,000, Coinsurance = 10%, OOP Max = $4,000
  • ✓ Exceeds minimum deductible, does not exceed out of pocket max.
  • Self Only: Deductible = $6,700, Coinsurance = 0%, OOP Max = $6,700
  • ✓ Exceeds minimum deductible; does not exceed out of pocket max.
  • Family: Deductible = $2,800, Coinsurance = 25%, OOP Max = $13,800
  • ✓ Meets minimum deductible; does not exceed out of pocket max.
  • Family: Deductible = $7,000, Coinsurance = 60%, OOP Max = $10,000
  • ✓ Exceeds minimum deductible; does not exceed out of pocket max.
  • Family: Deductible = $13,800, Coinsurance = 60%, OOP Max = $13,800
  • ✓ Exceeds minimum deductible; meets out of pocket max.

Examples for plans that don’t qualify as HDHP

Here are some examples of 2020 insurance plans that do not qualify as an HDHP and do not allow you to contribute to an HSA:

  • Self Only: Deductible = $1,350, Coinsurance = 20%, OOP Max = $6,960
  • X Lower than minimum deductible; exceeds out of pocket max.
  • Self Only: Deductible = $0 Coinsurance = 40%, OOP Max = $3,000
  • X Lower than minimum deductible.
  • Self Only: Deductible = $7,000, Coinsurance = 0%, OOP Max = $7,000
  • X Exceeds out of pocket max.
  • Family: Deductible = $2,700, Coinsurance = 25%, OOP Max = $13,900
  • X Lower than minimum deductible; exceeds out of pocket max.
  • Family: Deductible = $1,000, Coinsurance = 100%, OOP Max = $5,000
  • X Lower than minimum deductible.
  • Family: Deductible = $7,000, Coinsurance = 30%, OOP Max = $14,050
  • X Exceeds out of pocket max.

Note: I created TrackHSA.com to track medical expenses you pay using Health Savings Account as you spend up to your deductible or out of pocket max. It provides record keeping to store purchases, upload receipts, and record reimbursements securely online.

TrackHSA logo

Cost Effective Catastrophe Insurance

The Appendix Problem
When I was 9, my stepbrother came home one day complaining of terrible stomach pain.  The usual remedies proved ineffective, and as time went on the pain intensified.  It became so acute and insufferable that his parents eventually took him to the hospital.  After performing a range of diagnostic tests, the doctors determined that his appendix was on the verge of rupturing.  He was rushed into the ER and, not long after, he was one internal organ less and a few ounces lighter.

Two weeks later, the medical bills started showing up.

The testing, surgery, and recovery care could have cost my parents over $20k.  You would not believe how expensive time in front of doctors can be.  Luckily, they had health insurance that covered all but the deductible.  For a low cost each month, they eliminated the risk of unlimited medical liability.

From a young age, I understood the value of medical insurance as a hedge against the unexpected.

 

Reducing Medical Liability for a Low Cost
While the chance of one’s appendix becoming inflamed is low, there are many possible illnesses and catastrophic events (i.e car wreck) that may occur at any time.  Nearly all of them are out of your control.  For example, heart disease is only partially driven by diet and lifestyle, both of which are controllable.  Other factors, including family history and random risk factors, are out of your control.

You may be the safest driver in the world, but you may also live in LA, driving next to some of the worst.

The following formula conceptualizes your expected medical liability for any sickness or injury:

Medical Liability ($) = Cost ($) x Probability (%)

While the probability of a catastrophic event is low, it is definitely > 0. The problem with probability is that when said event happens to you, the value is 1, or 100%.

It pays to do some research on the cost of medical procedures for the uninsured.  The cost of many medical procedures in the United States is astronomical.  Without insurance, that cost may be well beyond your financial reach.

Imagine the scenario in which you are uninsured and are involved in a car accident.  Thankfully, you survive after an ambulance ride, a few emergency surgeries and 2 weeks or recovery.  Weeks later, the medical bills start rolling in.  Unfortunately, without insurance, you are responsible for the bills in their entirety.  What would be the effect on your finances if the bills totaled $10k?  $20k?  $50k?  Walking around with unlimited Medical Liability could wipe out years of hard-earned savings, or put you in a bottomless pit of debt. Mitigating this risk is the cornerstone of health insurance.

Considering the above formula further, the only variable you can materially influence is the Medical Liability.  You can make healthy choices to reduce some Probabilities, but others still lurk in the shadows, untamed.  As for Cost, you may be able to negotiate a lower bill with a hospital after an accident, but you may not like the amount you still need to pay.

This is why an HDHP (and HSA) is such an intelligent form of insurance.  For a small amount each month, it limits one’s Medical Liability to your OOP max.  It is both cost effective and good value. At the same time, it provides an excellent investment vehicle with which you can protect yourself.

As many a financier has stated, the first rule of investing is wealth preservation.

 


What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is tax advantaged savings account for medical expenses.  You can open one if you are insured by a qualified High Deductible Health Plan (HDHP).

Basically, it is your own bank account designated for medical expenses.

Your HSA is a personal savings and investment account that you own forever.  Even if you change health insurance plans or quit your job, it is yours until you spend it.  Unlike other health care plans, it does not ‘reset’ or go away at the end of the year.  This account can be used to pay for a wide variety of medical costs that include your plan’s deductible, doctor’s visits, co pays, prescriptions, dental / vision, and some household medical items.

There are important tax advantages to an HSA account that make it very attractive.  Notably, the contributions, growth, and qualified withdrawals all occur tax free.  This is called the Triple Tax Advantage.  As long as you follow the rules, you can effectively pay for your medical expenses (besides premiums) using tax-free dollars.  This is a huge economic benefit.

You can invest your HSA in a manner similar to retirement accounts.  This allows your savings to compound and grow over time.   Investment options span from interest bearing savings accounts to bonds, stocks, ETF’s, and mutual funds.  This is a great option if you have a long time horizon, as you can accumulate a great deal of savings.

After age 65, you can withdraw from your HSA without penalty and use the money for anything.  You just need to pay income tax on the distribution.  Thus, an HSA is a form of retirement savings.

Each year there is a contribution limit for how much you can save in your HSA.  You may decide to fully fund your HSA at the start of the year or contribute some money each month (I currently contribute $160 per month).  During some months, medical expenses may arise, requiring you to spend some of your health savings account.  For example, you visit the doctor, which costs you $45.  With ‘regular’ insurance plans, you would only have to pay a $25 copay out of pocket.

While $45 is certainly more than $25, remember that you have been saving every month as the monthly premiums are lower.   Ideally, you can pour those “savings” into your HSA account.  In that way, you shift part of your health care spending from a monthly expense (never see it again) to a lifelong asset (you own it forever).

A Few Qualifiers
To open an HSA, you:

  1. Must be covered by an HSA qualified HDHP (see below)
  2. Cannot be claimed as a dependent on someone’s tax return
  3. Cannot have any other health care coverage
  4. Cannot be enrolled in Medicare

First, you need an HDHP
High Deductible Health Plans (HDHP) are a category of insurance plans available from your health insurance provider.  Key characteristics of HDHP’s are:

  • Lower monthly premium than similar plans
  • A higher yearly deductible than similar plans
  • An out-of-pocket maximum that limits your yearly financial liability

HDHP policies have a yearly deductible of $1,200 or higher.  This deductible must be paid before insurance coverage kicks in.  At the same time, your monthly premiums can be much lower than regular insurance.  Think of it similar to your car insurance – a conveniently low deductible requires higher monthly premiums.  Financially, it often makes sense to have a higher deductible and pay lower monthly premiums.  This is due to the infrequent need to pay the deductible.  After some period of time, the savings from having a lower monthly premium add up to more than the difference in deductible.  And these savings keep accruing, month after month.

HSA eligible policies are fairly easy to spot.  Often times when comparing policies, you will see an icon or text that says “HSA Eligible”.  This lets you know that your plan is a qualified HDHP.

You can see how this is presented on plans from ehealthinsurance.com:

 

EHealth Insurance HSA

 

As soon as you your HDHP coverage begins, you can open and fund your HSA account.  It takes but minutes as there is not much paperwork required.  From there, you are on your way to controlling your health care and saving for your future.