How to tell if your HDHP is HSA-qualified

If you’re an employer offering a high deductible health plan (HDHP) or an individual covered by an HDHP, you may be able to pair that plan with a health savings account (HSA). An HDHP combined with an HSA enables you to benefit from triple tax advantages. It also provides greater flexibility and customization on how health costs are allocated. But, not all HDHPs are HSA-qualified.

In this article, we'll cover the ins and outs of HSAs, including HDHP eligibility and contribution limits. We’ll also cover how a health reimbursement arrangement (HRA) can be used in place of or alongside an HSA.

Takeaways from this blog post:

• In 2024, the IRS defines a high deductible health plan as any health plan with a minimum deductible of $1,600 for individuals and $3,200 for families.
• HSA-qualified HDHPs must have a higher annual deductible than regular individual health insurance plans, a maximum limit on annual deductible and medical costs, and offer no insurance coverage until the plan participant reaches the deductible.
• Combining an HRA with an HSA can offer a more complete solution for employers looking to add value to their typical health plan and keep healthcare costs low.

What is a high deductible health plan (HDHP)?

According to the Internal Revenue Service (IRS)¹, in 2024, a high deductible health plan is any health plan that has a minimum deductible of $1,600 for individuals and $3,200 for families. In many cases, these higher deductibles mean that the plan will have a lower monthly premium payment.

Having a higher plan deductible doesn't necessarily mean the plan won’t cover basic healthcare needs without a steep out-of-pocket cost. With an HDHP, certain preventive care benefits and medical services—like annual physicals, well-child care, immunizations, and screenings— don't require any copayments or coinsurance, regardless of whether you've met your deductible.

If you have a chronic condition, are elderly, need specific prescription drugs, or require ongoing treatment, you may end up paying more out-of-pocket. Therefore, an HDHP typically works best for younger or relatively healthy individuals who don't often need much medical care outside preventive care services.

What is a health savings account (HSA)?

An HSA is a tax-advantaged savings account that lets individuals and employers set aside pre-tax money to pay for qualified medical expenses, such as deductibles, copayments, coinsurance, and other out-of-pocket costs.

Individuals can use their HSA to pay for more than 200 eligible expenses. Withdrawn amounts from an HSA aren't taxed as long as they are used for qualified out-of-pocket medical expenses.

There are many advantages of an HSA:

• Account holders aren't taxed on income that goes directly to their HSA, and can withdraw money from the account tax-free to use toward the cost of a high annual deductible.
  • HSAs have an annual contribution limit. Both employers and individuals can make contributions to an individual’s account. In many cases, employers match employee contributions toward the account.
• Individuals can use it to save for retirement.
  • At age 65, an individual can use their HSA funds to pay for non-qualified expenses without a penalty.
  • If they use their HSA on non-qualified items before age 65, they'll be subject to a penalty and have to pay federal income taxes on the withdrawal.
• Account holders have the option to invest a portion of contributed funds.
  • You can typically invest a portion of your HSA balance in mutual funds, stocks, and bonds if you maintain a certain account balance.
• The funds never expire.
  • Unlike a flexible spending account (FSA) or HRA, account holders don't need to spend their HSA balance before the end of a plan year. Balances roll over from year to year indefinitelyn.

Keep in mind that an individual needs to have an HSA-qualified HDHP in place to make contributions toward an HSA. HDHPs have a higher annual deductible than traditional plans. However, they have lower monthly premiums, making them attractive to both employers and individuals.

What qualifies an HDHP for an HSA?

You can only open or contribute to an HSA if you are covered by an HDHP and don't have any other type of health insurance. But, many people don't realize that having an HDHP alone doesn't necessarily make it HSA-qualified. There are three important criteria the health plan must meet to make it eligible.

According to the IRS² , HSA-qualified HDHPs must have:

• A higher annual deductible than typical individual health insurance plans.
• A maximum limit on the annual deductible and medical expense costs, including copays and other items.
• No insurance coverage until the deductible is met, except for the following expenses:
  • Health insurance premiums
  • Long-term care premiums
  • Dental expenses
  • Vision expenses

How to tell if you have an HSA-compatible HDHP

If you're unsure if your current health insurance policy is HSA-eligible, you can check your policy's coverage details or contact your insurance company directly for clarification.

If you're new to HDHPs and HSAs, understanding the many requirements can be difficult to navigate. If you’re an individual shopping for a plan on the federal marketplace, any HSA-eligible policies will be clearly labeled so you can ensure you're selecting the right plan before purchasing an individual plan.

If you're interested in shopping for an HSA-qualified HDHP, meeting with a local insurance broker can help you find one that meets your needs while answering your questions.

Other HSA requirements

In addition to having an HSA-qualified HDHP, the IRS has other strict guidelines for those looking to open and contribute to an HSA.

These are the other requirements to participate in an HSA:

• Plan participants must have no other health coverage except for a few types of ancillary coverage. Employees can't have coverage through Medicare, TRICARE, or TRICARE for Life.
• Someone else can't claim the plan participant as a dependent on their tax return.

Contributions and out-of-pocket limits for HSAs and HDHPs

The IRS publishes minimum deductible and maximum medical expense limits annually, which vary depending on whether you have self-only or family coverage.

Understanding these terms is important because they apply to the amount you can contribute to an HSA for the year, the minimum deductible your health insurance plan must have to be considered HSA-qualified, and the annual out-of-pocket limits the plan must adhere to. Your plan will pay 100% of your expenses for in-network medical care when you reach these limits.

The below chart lists the annual HSA contribution limits, the HDHP minimum annual deductible, and the out-of-pocket maximum for 2024:

Note: The IRS allows catch-up contributions once the participant reaches age 55, regardless of the time of year.

HSAs and HRAs

Now that we've covered the basics of HSAs let's go over how they differ from HRAs. In contrast to what we learned about HSAs, with an HRA, employers give their employees a fixed allowance to pay for qualified healthcare expenses, including out-of-pocket medical costs. Once the employee buys an item or service and the employer approves the expense, they reimburse the employee tax-free.

Some covered costs under an HRA include:

• Individual health insurance premiums (with a stand-alone HRA)
• Doctor visits
• Preventive services
• Prescription drugs
• Over-the-counter medication
• Mental health counseling
• Chiropractic care

HRAs are funded entirely through employer contributions. Employees don't contribute any of their own money to the HRA. Employers will reimburse their employees for the full amount of an incurred expense up to the defined allowance amount. Unused HRA funds also stay with the employer when an employee leaves instead of going with the employee and never expiring.

Can I pair my insurance policy with an HRA if it isn’t HSA-qualified?

If you’re an employer who offers a group plan to your team and discovers that it isn’t HSA-qualified, you still have the option to supplement your policy with a group coverage HRA (GCHRA), sometimes called an integrated HRA.

A GCHRA pairs with a group plan and can be used to reimburse employees for out-of-pocket medical expenses their group plan doesn’t cover, such as copays and prescriptions. It can be used instead of an HSA to supplement a group health benefit.

Can I have an HRA and an HSA at the same time?

In some cases, employers can offer their employees both an HSA and an HRA. However, you must follow specific rules to use both at the same time.

The easiest way to offer both an HRA and an HSA alongside an HDHP is to offer a limited-purpose HRA. Pairing a limited-purpose HRA with an HSA allows employees to use their HRA allowances on things like dental and vision premiums while saving HSA funds for future out-of-pocket expenses.

It’s important to note that a limited-purpose HRA can't be used to reimburse employees for any costs associated with the employee's HDHP deductible. For example, a qualified small employer HRA (QSEHRA) is compatible with an HSA, but only if it's a premium-only QSEHRA.

If you want to forgo offering a group plan altogether and want to just offer HRA and HSA, you can offer a premium-only individual coverage HRA (ICHRA). This enables employees to purchase their own HSA-qualified individual health plan and be reimbursed for its monthly premium. You can then contribute funds to their HSA for their out-of-pocket expenses.

Conclusion

HSAs are an increasingly popular choice for employers looking to add value to a group health insurance plan. If you offer a high-deductible plan, the tax savings of an HSA and the ability to roll over unspent money from year to year are attractive. But an even more complete option could be merging an HSA with an HRA.

While HRAs and HSAs both help keep medical care costs low, they have some key differences. If you think offering an HRA is a better fit than an HSA, PeopleKeep can help! Simply schedule a call, and we'll get you started.

This article was originally published on May 21, 2020. It was last updated on June 20, 2024.

1. https://www.irs.gov/pub/irs-drop/rp-23-23.pdf
2. https://www.irs.gov/publications/p969