Finding the right health insurance plan for you can feel daunting. One of the questions you may be considering is whether you should get an HSA or PPO. The good news is that you might not have to choose at all. Here’s what you need to know about both and how you can utilize them to maximize your health savings.

HSA vs PPO: Why not both?

Before we get into the details of each option, let’s clear something up. A Health Savings Account (HSA) is a tax-advantaged account that allows you to save for qualified medical expenses — it’s not a health insurance plan.

On the other hand, a preferred provider organization (PPO) is a type of health insurance plan that provides access to health care in a certain way.

In fact, you can have a PPO plan and an HSA at the same time. Here’s how they both work.

Preferred Provider Organizations

A PPO refers to the network coverage your health plan gives you access to. If you get your healthcare with providers who are in the network of your healthcare plan, you pay less for healthcare than with providers outside the network. However, you may still get some coverage with out-of-network providers.

One major benefit of a PPO is that you don’t have to get a referral from your primary care physician to visit with a specialist. Simply check if they’re in your plan’s network and book an appointment with them directly.

HMOs are a big competitor to PPOs. With HMOs, you work closely with your main doctor for healthcare, but you have fewer choices of providers.

Health Savings Accounts

An HSA is a type of health savings plan that allows you to set aside money to pay for medical costs, up to a maximum each year which is set by the IRS.

Contributions to an HSA are tax-deductible, and your earnings in the account grow tax-free. If you use the funds for eligible medical expenses, the distributions are tax-free, which is known as a triple tax advantage.

To contribute to an HSA, you must have a high-deductible health plan (HDHP). HDHPs have higher deductibles and out-of-pocket maximums compared to regular health plans. In exchange, they charge lower monthly premiums.

Can you get an HSA on a PPO plan?

In a lot of the information you may find online, it can sound like HDHPs, PPOs and HMOs are all separate types of health plans. But HDHPs are defined only by their deductibles and out-of-pocket maximums and have nothing to do with your network of providers.

In fact, the beauty of all of it is that it’s possible for an HDHP to be on a PPO network. That’s not to say the two are synonymous, though. Many PPO plans have low deductibles and out-of-pocket maximums, which are usually paired with higher premiums.

Let’s get to the heart of the matter. The question isn’t whether an HSA is better than a PPO. The question is really whether you want an HDHP that qualifies for an HSA or a low-deductible plan?

What is an HDHP?

As previously discussed, a high-deductible health plan is one where you have higher deductibles and out-of-pocket maximums than traditional plans, but also lower premiums.

The limits are determined each year by the IRS. These figures are sometimes much higher than what you’ll find with a traditional health plan. But the option to contribute to an HSA helps soften the blow a bit, especially if you have a high income and can benefit greatly from the tax breaks HSAs provide.

An HDHP can also be a good choice if you don’t have a history of needing medical care often. While there is a risk of ending up with a higher payment in some circumstances, you’ll have the certainty of lower monthly payments.

What do traditional PPO and HMO plans offer?

These traditional plans charge higher premiums than HSA-eligible plans, but they also have lower deductibles and out-of-pocket maximums. In fact, some PPO and HMO plans have no deductible at all. They’re great if regular office visits are part of your health regimen.

The difference between a PPO and an HMO is how the provider network works. With an HMO, you’ll deal with your primary doctor most of the time and need to get a referral if you want to see a specialist. A PPO, on the other hand, gives you options to see other doctors and specialists without needing to go through your primary care physician.

Why should you get an HDHP?

The biggest benefit of an HDHP is that it gives you the option to contribute to an HSA. To give you an idea of the potential savings, let’s say you have a family plan and can contribute $7,200 this year.

If your effective tax rate for the year is 15%, that contribution cut $1,080 off your tax bill for the year — of course, as long as you don’t use your HSA funds for ineligible expenses.

In addition to saving for upcoming health care costs, you can also use an HSA to save for retirement. Health care is one of the most expensive aspects of retirement, and is estimated to cost an average couple $300,000 to $400,000 to pay for it.

Even if you don’t want to use your HSA for medical expenses in retirement, you can take withdrawals without the typical 20% tax penalty once you reach age 65. That said, the distributions will be subject to income taxes.

HDHPs can also be good if you’re young or generally healthy and don’t expect to spend a lot on medical care throughout the year. Of course, there’s no guarantee you won’t need an expensive procedure or visit to the emergency room.

Even with most doctor visits, you have to pay the full bill before your insurance coverage kicks in. As a result, HDHP plans are best if your risk tolerance is high.

Why should you get a traditional PPO or HMO plan?

A traditional health plan won’t give you access to an HSA. But it can be great if you expect to make regular doctor visits or to get medication frequently throughout the year.

Their lower deductibles mean you’ll hit your limit sooner, and your insurance coverage will kick in earlier. For instance, they’re great if you’re pregnant as you’ll be doing regular check-ups with your doctor while you’re expecting.

Also, it’s possible to get access to a Flexible Spending Account (FSA) with a traditional health plan. FSAs are another type of health savings plan, but you can only contribute to one if your employer offers it as a benefit.

FSAs have some of the same benefits as HSAs, including pre-tax contributions (not the same as deductible contributions, but it’s the same concept). Also, when you designate how much you want to contribute over the next plan year, you’ll receive that amount at the beginning of the year instead of waiting to build up the balance through your payroll deductions.

The biggest drawback of an FSA is its use-it-or-lose-it provision. This means that if you don’t use all of the money you contributed during the plan year, you could lose the remaining balance.

Employers are allowed to make some exceptions, such as giving you more time to incur qualified expenses or allowing you to carry over some of the balance into the new year. But that’s not guaranteed.

Also, your FSA stays with your employer, so if you get laid off or move to another employer, you lose the money you’ve saved.

Pros and cons of HDHP plans

Before you pull the trigger on a new health insurance plan, it’s important to understand both the benefits and drawbacks. Here’s a summary of what you need to know about HDHPs.

Pros of HDHP plans

• You’ll pay lower premiums than with traditional plans.

• You can contribute to an HSA and enjoy the tax benefits.

• HSAs don’t have a use-it-or-lose-it provision like FSAs.

• HDHPs can also be PPOs and HMOs, giving you more flexibility with your options.

Cons of HDHP plans

• Deductibles can be high, which can be a colossal financial setback if you’re unprepared.

• Even simple doctor visits can be a major expense, especially if they include tests and screenings.

• You may find it difficult to contribute to an HSA if your out-of-pocket expenses are high every month.

How to work out what plan is best for you

When deciding which health plan to choose, you’ll want to take a thorough look at the following factors:

• Do you expect to visit the doctor often?

• What is your risk tolerance?

• Will you be able to afford an expensive medical bill if an unexpected event happens?

• How big of a network do you need?

• Can you max out an HSA every year?

Take a clear look at the math of the plans you’re weighing up. Sometimes even though the deductible for a traditional plan is lower, it doesn’t make financial sense if the employer contribution to the HSA in the HDHP plan is high.

At the end of the day, no-one can tell you what plan is best for you. Only you know your unique situation and your risk tolerance. Consider speaking with a tax advisor to get personalized advice to help you make the choice that’s best for you.

Frequently asked questions