The Surprising Reason Your Health Plan May Not Qualify for an HSA

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Health insurance plans with high deductibles may be HSA-eligible. But plans could lose eligibility based on the out-of-pocket maximum. Here’s why that matters. 

Health insurance plans in the U.S. can range from affordable on a monthly basis (but don’t cover much) to an expensive monthly plan that offers good coverage if you need it. And there are a lot of options in between. If you’re considering getting a health savings account (HSA) to save for future medical costs, you may be in for a surprise about whether your plan qualifies or not.

Why some high-deductible health plans don’t qualify for HSAs

To get an HSA, you have to have an HSA-eligible health plan. That requires you to have a high-deductible health plan (HDHP), which is defined as a plan that has an annual deductible of $1,600 (individuals) or $3,200 (families) as of 2024. If you shopped around for a new health plan recently, you’ll know that isn’t exactly a rarity. But here’s the catch: While many plans come with a high deductible, they might actually have an out-of-pocket maximum that’s too high to get that distinction.

The out-of-pocket maximum limit acts as a cap on how much you’d have to pay for in-network services — including the deductible, copayments, and any coinsurance — before your insurance would cover 100% of your qualifying costs for that year. And the out-of-pocket maximum for HSA-eligible plans is roughly five times higher than the deductible. In other words, health plans that have a high deductible but don’t qualify for HSAs because of this cap can be some of the most expensive if you end up having a major medical event. Worst case: You may end up paying the full out-of-pocket maximum without getting any of the tax benefits offered by HSAs.

How to know if an HSA is right for you

The point of HSAs is to give people a way to save for health costs and potentially avoid medical debt, and there are many benefits. For example, it’s triple tax-advantaged: You wouldn’t pay taxes on the cash you put away, it can earn tax-free interest, and you don’t pay taxes when you use it on qualifying medical costs. Plus that cash can be rolled over from year to year, providing a longer-term financial cushion. But in exchange for a typically lower monthly premium, you’d have to potentially pay that high deductible before your insurance would start paying out if you required a lot of medical attention. So there is a bit of risk.

Let’s say your current non-eligible plan costs $500 per month, and has a $700 deductible. If you were to switch to a HDHP, you might only pay $250 per month, in exchange for a $1,700 deductible. So you’d save $250 per month, and you could reduce your taxable income by $3,000 if you took that savings and stashed it in an HSA, which would be enough to cover your new deductible.

However, you’ll still need to weigh the potential costs versus the savings you’d get on taxes to see if that high deductible is worth the potential savings.

For instance, if you have an expensive medical condition, putting money in an HSA might not be appealing if you’d want to reduce your deductible, and therefore minimize health costs. But for those who are in relatively good health, there is the potential to protect against future medical events by socking money away each year while lowering your taxable income. That can be useful since the likelihood of needing that cash increases over time.

Another thing to note is that the HSA contribution limit for 2024 is $4,150 for single folks, or $8,300 for families, which is higher than the deductible limit to qualify as an HDHP. So there is the opportunity to grow that extra cash over time, even if you have a year where you pay the full deductible. The best way to understand if it’s a good idea is to:

Calculate your average health insurance costs, including things like medications, procedures, and copayments for doctors visitsEstimate how much you can put into an HSA each monthCompare your annual tax burden based on your earnings versus what it would be if you subtracted HSA contributionsLook at the monthly premiums associated with HSA-eligible health plans as well as lower deductible plansDecide whether you want to save for qualified health costs that may not be covered by your insurance, like eye laser surgery or dental work

This can be complex, and on top of these factors, HSA providers may charge fees which can further muddle things. So if you’re still unsure, talking to a financial advisor can be useful here.

How to find HSA-eligible health insurance plans

If you’re interested in finding an HSA-eligible HDHP, the process is actually quite simple. You can limit your plan results on the marketplace website. To do that, click “Add filters,” located in the top-left part of the screen, and then check “Eligible for an HSA.” Or if you get your health insurance via your employer, they should clarify which plans are HSA-eligible. If not, contact your plan administrator for clarification.

You’ll then have to open your HSA with a separate financial institution that offers those accounts and make contributions through that company.

If you can benefit from an HSA, they can be vital tools for saving for medical costs while reducing taxable income — potentially a win for your personal finances. You just have to make sure your health plan qualifies first.

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