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Updated on April 18, 2024
A high-deductible health plan (HDHP) is a type of health insurance that typically offers lower monthly premiums and a higher deductible. The deductible is the amount the plan member must pay before the insurance company starts paying for covered medical services.
While the term “group health plan” often brings to mind traditional insurance options like Health Maintenance Organization (HMO), Point of Service (POS), and Preferred Provider Organization (PPO), employers are increasingly opting for high-deductible health plans. Unlike traditional plans, which generally feature higher premiums and lower deductibles, an HDHP offers lower monthly premiums but requires a higher deductible.
The IRS sets annual limits defining an HDHP. For 2024, these limits include:
For instance, a $2,000 deductible for self-only coverage means the employee covers the first $2,000 in medical services, after which the plan covers all subsequent eligible medical expenses for the year.
It’s important to note that HDHP deductibles do not apply to certain preventive care services such as annual checkups and routine screenings, which are covered upfront, even before meeting the deductible.
To help offset the cost of HDHPs, employers often combine them with savings or reimbursement programs.
A health savings account (HSA) is a type of savings account that lets employees pay for qualified medical expenses on a tax-free basis via payroll deduction. To be eligible for an HSA, the employee must participate in a high-deductible health plan. This is why an HDHP is often referred to as an HSA-eligible plan. Notably, employers can contribute to their employees’ HSA.
Individuals are not restricted to obtaining an HSA solely through their employer. They can independently set up an HSA, provided they have an HDHP.
A Health Reimbursement Arrangement (HRA) is an employer-funded plan offering tax-free reimbursements to employees for qualified medical expenses. Employers set the HRA’s annual funding as a fixed dollar amount, often allocated in monthly installments. In contrast to HSAs, which are employee-owned, HRAs are employer-owned.
There are several types of HRAs, including traditional HRAs, Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), and Individual Coverage Health Reimbursement Arrangements (ICHRAs). Whether the HRA can be combined with a high-deductible health plan depends on the type of HDHP.
For more in-depth information on HRAs, refer to our article “QSEHRA vs. ICHRA: Understanding the differences between these health reimbursement arrangements.”
Ultimately, the money in the employee’s HSA account or that is reimbursed through an HRA enables them to pay for certain medical expenses not covered by their HDHP. These amounts are tax-free, provided they do not exceed the legally prescribed annual limits.
Advantages:
Disadvantages:
Per a ValuePenguin survey, the number of U.S. private-sector workers enrolled in HDHPs in 2021 rose for the eighth consecutive year, reaching a record high of 55.7%. Moreover, in 2023, the Kaiser Family Foundation ranked HDHPs as the second most common type of health insurance.
The distribution of worker enrollments in various plans is as follows:
Despite the growing popularity of HDHPs, it’s important for employers to educate their employees about these plans. Such education is essential, not only for promoting enrollment but also for enhancing employee engagement and satisfaction.
“Integrating a high-deductible health plan with an HSA option has significantly boosted our HDHP participation rate. This increase stems primarily from the tax savings offered by the HSA.”
“Integrating a high-deductible health plan with an HSA option has significantly boosted our HDHP participation rate. This increase stems primarily from the tax savings offered by the HSA.”
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