The term “high deductible health plan” probably sounds pretty self-explanatory. But it’s actually an official term that the IRS defines—it doesn’t just mean any health plan with a highdeductible.
This article will describe what a high-deductible health plan is, how they’re regulated, how they work withhealth savings accounts, and how they differ from other types of health coverage.
High deductible health plans—often referred to as HDHPs—have to follow three rules:
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A high deductible health plan is not the same thing as acatastrophic health plan. “Catastrophic” is a term that was used in the past to describe any health plan with high out-of-pocket costs, but the ACA created a specific definition for it.
Catastrophic health plans are only available to people under the age of 30 and topeople who have hardship exemptionsfrom the ACA’s individual mandate.Catastrophic plans can never be HDHPs because they cover three non-preventive office visits pre-deductible and have out-of-pocket exposure that’s higher than the limits imposed for HDHPs.
You Need an HDHP in Order to Contribute to an HSA
If you want to be able to contribute to a health savings account (HSA), you need to have coverage under an HDHP.And again, that doesn’t just mean any plan with a high deductible. This can be a point of confusion, as people sometimes assume that they can contribute to an HSA as long as their health plan has a high deductible—but it needs to be an actual HDHP that follows the IRS rules for that type of plan.
Along with having HDHP coverage, you also can’t have any other additional health plan—with limited exceptions for supplemental coverage—and you can’t be claimed as a dependent on someone else’s tax return.
If you meet these rules, you’re considered HSA-eligible, which means you can make contributions to an HSA (or someone else, including an employer, can make contributions to your HSA on your behalf).
There’s a special rule that allows a person to make the maximum annual contribution to an HSA if they enroll in an HDHP mid-year (even if it’s as late as December 1), but then they must remain covered under an HDHP for the entire following year.
Otherwise, HSA contributions cannot be made for any month that you’re not HSA-eligible. So for example, if you turn 65 and enroll in Medicare, you have to stop contributing to your HSA, even if you’re continuing to work and you’re still enrolled in your employer’s HDHP.
Deductibles on Non-HDHPs Have Rapidly Increased
As deductibles on all health plans have increased over the years, the minimum deductibles for HDHPs aren’t really that “high” anymore, relative to the deductibles on non-HDHPs. In fact, it’s common to see non-HDHPs that have deductibles that are quite a bit higher than the deductibles on HDHPs.
So, average deductibles on all types of employer-sponsored plans have increased much faster than the minimum deductibles for HDHPs, reaching a point where the average deductible on an employer-sponsored plan (including plans that are not HDHPs) is now higher than the minimum allowable deductible for an HDHP ($1,735 versus $1,600).
And in the individual market, for people who buy their own health insurance, average deductibles are even higher: For people who buy their own coverageoutside the exchange, average deductibles exceed $4,000 for a single individual.
Cost-sharing reductions(CSR) result in lower deductibles for about half of the people who buy their plans in the exchange.But average deductiblesin the exchangeare substantial for people who aren’t CSR-eligible.
So while the concept of a high deductible can seem scary, these plans are certainly well worth considering if you have one as an option, especially if you have the means to contribute to an HSA and reap the tax advantages that go along with that. The deductible might not be as high as you’re expecting, and as we’ll discuss in a moment, the out-of-pocket maximum on an HDHP might be lower than the out-of-pocket maximum on the other plans available to you.
Lower Out-of-Pocket Maximums With HDHPs
Back in 2004, there weren’t any limits on how high out-of-pocket maximums could be on other types of health coverage—HDHPs were unique in terms of having a federally set cap on how high an enrollee’s out-of-pocket exposure could be.
And while employer-sponsored plans often had quite generous coverage with limited out-of-pocket costs, it wasn’t uncommon to see five-figure out-of-pocket limits in theindividual marketfor people who purchased their own health insurance.
But starting in 2014, theAffordable Care Actimplementedcaps on in-network out-of-pocket costsfor all plans that weren’t grandmothered or grandfathered.These caps are indexed annually, so the out-of-pocket maximums allowed under the ACA haveincreased each year.
But the formula that’s used to index the general limit for out-of-pocket maximums isn’t the same as the formula that’s used to index the limit on out-of-pocket maximums for HDHPs. In 2014, the two limits were the same. The cap on out-of-pocket maximums that applied to HDHPs that year was $6,350 for a single individual and $12,700 for a family, and those same limits applied to non-HDHPs as well.
As a result, people shopping in the individual market for health insurance will tend to see several non-HDHPs that have higher deductibles and out-of-pocket maximums—and lower premiums—than the available HDHPs.
And people who are enrolling in a health plan from an employer might find that the maximum out-of-pocket exposure on the HDHP option (if one is available) could be lower than the maximum out-of-pocket exposure on the more traditional plan options.
This can be counter-intuitive, as we tend to think of HDHPs as the low-cost, high-deductible option. But the dynamics of the rules for out-of-pocket limits have slowly resulted in HDHPs no longer being the lowest-priced plans in most areas.
HDHP Pre-Deductible Care and Services
Under the terms of the ACA and subsequent federal regulations, all non-grandfathered health plans must fully covera specific list of preventive carewith no cost-sharing for the insured.That means the preventive care has to be covered before the deductible, and no copays or coinsurance can be charged.
But HDHPs were previously not allowed to pay for members' health care until the minimum deductible (ie, at least $1,500 in 2025) had been met. So in 2013, the IRS issued regulatory guidance to clarify that a health plan could comply with the ACA’s preventive care rules and still be an HDHP.
As a result, HDHPs cover preventive care in the same manner as other health plans: pre-deductible, and without the member having to pay anything for the service (if services other than the recommended preventive care are performed, the member will have to pay the full cost—at the network negotiated rate—if they haven’t yet met the deductible).
So when some states started to require pre-deductible coverage of male contraception, it appeared that their residents would no longer be able to contribute to HSAs, as their health plans would no longer be considered HDHPs if they complied with the state rules.
To address this, the IRS issued transitional relief in early 2018, allowing HDHPs to provide pre-deductible coverage for male contraception through the end of 2019, without losing HDHP status.That gave the states time to revise their laws to provide exemptions for HDHPs, so that they aren’t required to provide any care—other than federally-required preventive services—before the minimum deductible is met.
If you look at state legislation regarding insurance mandates, you’ll often see special rules for HDHPs. For example, a law that was enacted in New Jersey in 2020 requires health plans to cap an enrollee’s out-of-pocket drug costs at no more than $150/month starting in 2021 ($250/month in the case of bronze or catastrophic plans).But the bill has an exception for HDHPs, noting that they can continue to require the member to pay the full cost of prescriptions until the federally-established minimum deductible is met.
If that exception hadn’t been written into the rule, all state-regulated (ie, coverage that’s notself-insured) HDHPs in New Jersey would have lost their HDHP status under the terms of this new law. That’s because they would have had to start covering a portion of their members' medical costs pre-deductible if and when the member needed an expensive medication.
Although the rules for pre-deductible coverage under HDHPs are fairly strict, the IRS has shown flexibility on this issue. In addition to the transitional relief for male contraceptive coverage, the agency also issued new rules in 2019 that expand the list of services that can be covered as preventive care under an HDHP.
Under the new guidance, an HDHP can provide pre-deductible coverage for several specific treatments when patients have certain specific conditions:
To be clear, HDHPs are notrequiredto cover any of these services pre-deductible, since these are not part of the ACA’s preventive care mandate. So HDHPs, as well as non-HDHPs, can still have plan designs that imposecost-sharing, including deductibles, copays, and coinsurance, for any of the services listed above.
But the new IRS guidance gives HDHP insurers some flexibility in terms of being able to provide pre-deductible coverage for some services that can help keep members' chronic conditions under control, and help them stay healthier in the long run.
The IRS also published guidance in 2020 that allows HDHPs to cover COVID-19 testing with no cost-sharing, as well as treatment for COVID-19.The regulations were also relaxed to allow HDHPs to provide pre-deductible coverage for telehealth, through the end of 2024.
Through the end of the COVID public health emergency period (which ended in May 2023), the federal government required virtually all health insurance plans to pay for the cost of COVID testing without requiring the member to pay copays, deductibles, or coinsurance. With the flexibility that was granted to HDHPs, these plans were able to follow the federal testing coverage requirements without losing HDHP status.
There was never a federal requirement (and very few state requirements) for health plans to fully pay for the cost of COVIDtreatment. but some insurers voluntarily agreed to do so for at least several months in 2020. If these plans were HDHPs, the IRS guidelines allowed them to maintain their HDHP status while also paying for COVID treatment pre-deductible.
Summary
A Word From Verywell
High-deductible health plans are a special type of health plan that will allow you to contribute pre-tax money to a health savings account. Money in that account can grow over time, as there’s no “use it or lose it” rule for HSAs.
And while the term “high-deductible” might seem intimidating, it’s important to understand that HDHPs often have deductibles that are very comparable to the deductibles on non-HDHPs. Depending on your specific needs, an HDHP might be a good fit for your health coverage, especially if you’re willing and able to make contributions to an HSA.
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