What Is a High Deductible Health Plan (HDHP)?

A high deductible health plan (HDHP) is a type of health insurance that features lower monthly premiums and higher deductibles than traditional plans. The Internal Revenue Service (IRS) defines an HDHP as a plan with at least a $1,650 deductible for individual coverage or $3,300 for family coverage. These plans are the only type that qualifies for pairing with a health savings account (HSA), offering significant tax advantages.

HDHPs have grown in popularity over the past two decades due to their premium affordability and the long-term savings potential of HSAs. However, they come with trade-offs, including the financial burden of covering most healthcare expenses out of pocket until the deductible is met.

This guide outlines how HDHPs work, who they benefit most, how they compare to other plan types like PPOs and HMOs, and what to consider before enrolling.

HDHP Qualification Criteria and 2025 Limits

To qualify as an HDHP, a plan must meet IRS-defined thresholds that set the minimum deductible and maximum out-of-pocket expenses.

For 2025, an HDHP must include:

• A minimum deductible of $1,650 for self-only coverage or $3,300 for family coverage
• A maximum out-of-pocket limit of $8,300 for individuals and $16,600 for families

These plans offer lower premiums because the insurer assumes less risk upfront. However, policyholders are responsible for the full cost of non-preventive care until the deductible is met.

Under federal rules, HDHPs must fully cover preventive services like annual check-ups, immunizations, and certain screenings—regardless of deductible status. This applies to services rated “A” or “B” by the U.S. Preventive Services Task Force.

HDHPs can be structured as HMOs, PPOs, EPOs, or POS plans. The key difference is not the provider network but the plan’s cost-sharing structure and HSA eligibility.

How an HDHP Works

HDHPs follow a distinct cost-sharing progression. Understanding how these costs interact helps consumers evaluate whether this plan type fits their healthcare needs and financial situation.

• Deductible phase: You pay 100% of non-preventive medical expenses until the deductible is met.
• Cost-sharing phase: After the deductible, you typically pay coinsurance (e.g., 20%) or fixed copays until you reach your plan’s out-of-pocket maximum.
• Full coverage phase: Once you hit the out-of-pocket maximum, the plan pays 100% of covered services for the rest of the year.

Preventive care is exempt from these phases and is fully covered under federal law. This includes services like screenings, vaccines, and wellness visits.

HDHP premiums are generally lower than PPO or HMO plans. According to Kaiser Family Foundation data, these savings often amount to several hundred dollars annually, which many consumers use to fund their HSAs.

HDHP Eligibility and HSA Integration

One of the key reasons many consumers choose a high deductible health plan (HDHP) is its compatibility with a health savings account (HSA). HSAs are tax-advantaged savings accounts designed to help individuals set aside money for qualified medical expenses. However, not everyone can open or contribute to an HSA. The IRS outlines strict eligibility criteria that must be met.

To contribute to an HSA, you must:

• Be enrolled in an HSA-qualified HDHP that meets IRS requirements for minimum deductibles and out-of-pocket maximums
• Have no other health coverage that disqualifies you from HSA participation (coverage limited to dental, vision, disability, or accident policies is permitted)
• Not be enrolled in Medicare
• Not be listed as a dependent on someone else’s federal tax return

These requirements must be met for every month in which you contribute to an HSA. If you become ineligible during the year (for example, by enrolling in Medicare), you must stop making contributions, although existing funds in the account remain available for qualified expenses.

HSA Tax Advantages

HSAs provide a unique set of tax benefits that make them one of the most powerful financial tools for managing both short-term medical expenses and long-term savings goals.

1. Pre-tax contributions: Contributions to your HSA reduce your taxable income. If you contribute through payroll deductions, the money is not subject to federal income tax, Social Security tax, or Medicare tax. If you contribute directly, you can deduct the amount on your tax return.
2. Tax-free investment growth: Many HSA administrators allow account holders to invest their balances in mutual funds, ETFs, or other vehicles once a minimum threshold is met. Any interest, dividends, or capital gains earned in the account are not taxed, allowing your balance to grow over time without erosion from taxes.
3. Tax-free withdrawals: When you use HSA funds for qualified medical expenses, the withdrawals are not taxed. These expenses include doctor visits, prescriptions, dental procedures, vision care, mental health services, and a wide range of other healthcare costs recognized by the IRS.

Together, these three tax benefits—on contributions, earnings, and withdrawals—create what is commonly referred to as a “triple tax advantage.” This combination is not available in any other type of savings or investment account.

2025 HSA Contribution Limits

Each year, the IRS sets limits on how much you can contribute to an HSA. For tax year 2025, the contribution limits are as follows:

• $4,300 for individuals with self-only HDHP coverage
• $8,550 for those with family HDHP coverage
• An additional $1,000 catch-up contribution is allowed for individuals age 55 or older

These limits include both employee and employer contributions combined. It’s important to track your contributions to ensure you stay within the annual limit and avoid tax penalties.

Additional Benefits and Rollovers

Unlike flexible spending accounts (FSAs), HSA balances do not expire at the end of the year. Unused funds roll over indefinitely and remain in your account until you choose to use them. This makes the HSA an excellent vehicle for saving not just for current expenses, but for future healthcare needs as well.

Once you reach age 65, you can use HSA funds for non-medical expenses without incurring the 20 percent penalty, although those withdrawals will be subject to regular income tax. Withdrawals for medical expenses remain tax-free at any age, giving retirees a way to supplement Medicare and other healthcare costs.

Many employers contribute to their employees’ HSAs as part of their benefits package. These contributions typically range from $500 to $2,000 per year and help offset the burden of high deductibles. Employer contributions are not considered taxable income and count toward your annual contribution limit.

Pros of a High Deductible Health Plan

HDHPs offer clear advantages for consumers who use little healthcare and want greater financial control.

• Lower premiums: Monthly savings can total $1,200 to $3,000 annually for individuals.
• HSA benefits: Pre-tax savings, investment potential, and tax-free withdrawals make HSAs valuable tools for short- and long-term planning.
• Employer HSA contributions: These reduce out-of-pocket burden and enhance overall compensation.
• Increased cost awareness: Paying directly often leads consumers to compare prices, limit unnecessary care, and choose cost-effective providers.
• Preventive care coverage: Wellness services remain fully covered before the deductible is met.

Cons of a High Deductible Health Plan

Despite the premium savings, HDHPs carry financial and administrative burdens that may not suit all enrollees.

• High upfront costs: You must pay out of pocket for most services until the deductible is reached.
• Delayed care: Cost concerns may discourage people from seeking timely treatment, including for serious symptoms.
• Poor fit for chronic care: Frequent doctor visits, lab tests, and prescriptions can quickly deplete HSA funds.
• Emergency exposure: A sudden illness or injury may result in thousands in unplanned medical costs.
• More complexity: Managing deductibles, HSA rules, and billing requires more effort than with traditional plans.
• Limited family value: Families with children typically incur higher usage, making the cost structure less advantageous.

Who Should Consider an HDHP

Choosing a health plan requires more than just comparing premiums. HDHPs offer meaningful advantages for some individuals but can create financial strain for others. Understanding who benefits most from this plan type helps you make an informed decision based on your health needs, risk tolerance, and financial situation.

Best Suited For

Healthy Adults with Low Medical Needs

Young individuals in good health typically require minimal medical care beyond annual preventive checkups. Since HDHPs cover preventive services in full and carry lower monthly premiums, they allow this group to reduce fixed healthcare costs while gaining access to tax-advantaged savings through an HSA.

High Earners Seeking Tax Optimization

HDHPs paired with HSAs are particularly attractive to individuals in higher tax brackets. Contributions to an HSA reduce taxable income, and any investment growth is tax-free. This combination enables high-income earners to manage healthcare expenses more efficiently while building long-term savings.

Individuals with Strong Emergency Funds

The financial structure of an HDHP makes it important to have cash reserves. Individuals with at least three to six months’ worth of expenses saved can better absorb unexpected medical bills without compromising other financial goals. This safety net helps mitigate the risk of the plan’s higher deductible and out-of-pocket exposure.

Retirement Savers Using HSAs Strategically

For those prioritizing retirement savings, HSAs offer a unique advantage. After age 65, funds can be withdrawn for non-medical expenses without penalty, making the account function similarly to a traditional IRA. People with low current healthcare expenses can maximize this benefit by allowing their HSA to grow over time through investment.

Not Ideal For

Families with Frequent Healthcare Needs

Households with children often face regular medical visits for vaccinations, illnesses, or injuries. These recurring costs can quickly exceed the deductible, making HDHPs less economical. Plans with lower deductibles and fixed copays generally provide more predictable and manageable expenses for families.

People Managing Chronic Conditions

Chronic illnesses require continuous care, including office visits, tests, treatments, and medications. HDHPs shift these costs onto the patient until the deductible is met, which can lead to significant financial stress. For this group, a traditional plan with lower cost-sharing may offer greater peace of mind and budget stability.

Households with Limited Income or Savings

Without sufficient emergency savings, the high upfront costs associated with HDHPs can be unmanageable. A single urgent care visit or prescription refill may force difficult trade-offs in lower-income households. The inability to comfortably fund an HSA further weakens the plan’s long-term value for this group.

Adults Nearing Medicare Enrollment

Older adults who are close to Medicare eligibility may not benefit from HSA contributions for long enough to justify the trade-offs of an HDHP. Once enrolled in Medicare, new HSA contributions are no longer permitted, limiting the usefulness of the account. A more traditional health plan may provide greater value in the final working years before retirement.

 

Other factors like pregnancy, relocation to high-cost regions, or inconsistent employment, can influence whether an HDHP makes sense for your situation.

HDHP vs PPO vs HMO

Here’s how HDHPs compare to other common plan types:

Feature	HDHP	PPO	HMO
Monthly premium	Lowest	Highest	Low to medium
Deductible amount	High	Low to medium	Low
Provider flexibility	Varies	Broad network	Network-limited
Out-of-network care	Sometimes allowed	Covered at higher cost	Emergencies only
Specialist access	May need referral	No referral needed	Referral from PCP
HSA eligibility	Yes	No	No
Best for	Healthy individuals	Frequent care users	Coordinated care users

While HDHPs carry more upfront risk, their cost savings and HSA integration can provide long-term value when used strategically.

FAQs

What happens if I use my HSA for non-medical expenses?

If you’re under age 65, you’ll owe income tax and a 20% penalty on non-qualified withdrawals. After age 65, you can withdraw for any purpose without the penalty, though non-medical use is still taxed as income.

Are HDHPs bad for people with ongoing health needs?

Yes, in many cases. Chronic care typically requires frequent doctor visits, medications, and diagnostics. These costs add up quickly before reaching the deductible. PPOs or HMOs with lower cost-sharing may provide more predictable expenses in such situations.

Can I switch from an HDHP to another plan type?

Yes. You can typically change plans during open enrollment or after a qualifying life event (e.g., marriage, job change). When switching, HSA funds remain yours and can still be used for qualified expenses, even if your new plan isn’t HSA-eligible.

Do HDHPs cover preventive care?

Yes. Preventive care—including annual exams, cancer screenings, and immunizations—is fully covered under federal guidelines. These services are not subject to the deductible as long as you use in-network providers.

What if I reach my deductible early in the year?

Once your deductible is met, your plan starts covering part of the costs through coinsurance or copays. After you hit the annual out-of-pocket maximum, the plan pays 100% of covered expenses for the remainder of the year.

Can HSA funds be invested?

Yes. Once your HSA reaches a certain threshold (typically $1,000 or $2,000), many providers allow you to invest in mutual funds, ETFs, or other options. This can generate long-term, tax-free growth for future medical or retirement use.

Conclusion

High deductible health plans can be a prudent strategy for managing healthcare costs if you’re financially prepared and don’t need frequent care. They pair well with health savings accounts, offering significant tax benefits and long-term financial flexibility.

Before enrolling, carefully assess your health needs, compare cost scenarios, and review your employer’s HSA contributions. HDHPs aren’t the best fit for everyone, but for the right person, they can provide meaningful savings and control over healthcare spending.

Evaluate all plan options during open enrollment, and use total cost comparisons, including premiums, deductibles, and out-of-pocket limits, to make the most informed decision.