Is a High-Deductible Health Plan and Health Savings Account Right for Me?

When choosing health benefits coverage for the coming year, you may be one of many people who have the option to select a high-deductible health plan (HDHP). By enrolling in an HDHP, you are also eligible to contribute to a health savings account (HSA), either through your employer or on your own. An HSA is intended to pay for out-of-pocket medical expenses, such as a deductible—either now or in the future.

Before we address the health coverage decision, some background on HSAs may be helpful. HSAs offer a “triple-tax benefit” for federal taxes:

This essentially combines the benefits of Roth and pretax retirement account strategies. However, you don’t want to tap into the HSA for nonmedical expenses, or you could trigger a 20% penalty and ordinary tax.

An HSA is owned by the individual. It’s your money, so you never forfeit an unused balance or lose it if you change employers. That can be a significant advantage over health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs).

If you have the choice between an HSA-eligible HDHP or a traditional, low-deductible health plan, how do you decide?

The tax advantages of an HSA can certainly be significant for people who have the ability to save. But, first, you need to make sure the HDHP makes sense for your situation.

With a typical health plan—either an HDHP or a traditional, low-deductible health plan—the total cost you pay includes three main components: the insurance premium, the deductible, and the coinsurance (a percentage you pay after meeting the deductible). The trade-off is that the HDHP has lower premiums than a traditional plan—but a higher deductible and often higher coinsurance. The higher your expected medical expenses, the more you should favor a traditional plan.

Your employer may provide tools to help you assess which plan is best for you, or you can compare the plans based on your estimated level of medical expenses. In many cases, the break-even point—the level of medical expenses where the plans result in the same cost to you—equals approximately the difference in premiums plus the traditional plan deductible.

You’ll also want to consider coinsurance, prescription cost structures, out-of-network provider rules, and any HSA/HRA contributions made by your employer. Since medical needs are hard to predict, you should also compare the plans’ out-of-pocket maximums.

For many people, the insurance comparison is where the analysis should end. If you have access to an FSA with the traditional plan, in the short term, you get similar tax benefits as with a high-deductible plan and an HSA.

If you can invest for the long term—as opposed to using the HSA for current-year medical expenses—this is when you will reap the full triple-tax benefit.

An HSA has better tax benefits than both Roth and pretax retirement savings accounts, provided the distributions are used for qualified medical expenses. The value of those tax benefits depends primarily on your time horizon, marginal tax rate, and investment returns. We estimated the value of a $4,150 HSA contribution, compared with the other retirement savings options, using conservative assumptions.

Here’s an example that can help you understand the chart: Suppose your marginal tax rate is 25%, you’re 15 years from retirement, and you’re able to invest the 2024 HSA contribution of $4,150 (holding it until retirement). This single HSA investment is worth around $1,275 more than a comparable retirement plan contribution in today’s dollars. So even if you estimate that the traditional coverage would cost you $1,000 less in 2024 based on your projected expenses, the additional tax benefit means a high-deductible plan with an HSA may make sense.

An HSA can be a powerful savings tool—but make sure it’s right for you.