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.
The biggest competitor to PPOs are HMOs (health maintenance organizations), which allow you to coordinate your healthcare with your primary care physician, but at the cost of having access to a smaller network 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. As long as you use the funds for eligible medical expenses, those distributions are tax-free, too — that’s what the experts call a triple tax advantage.
To be eligible to contribute to an HSA, you have to have a high-deductible health plan (HDHP), which has a deductible and out-of-pocket maximum that are higher than traditional 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.
Because this can get confusing, we’ll use the term “typical plan” or “traditional plan” to refer to the low- deductible, high-premium plans you can get on a PPO or HMO network, and we’ll use HDHPs for HSA-eligible plans that you can also get on both networks.
Now, with that out of the way, 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.
Frequently asked questions
Can I have an HSA and a PPO?
Yes! In fact, many HSA-eligible health care plans are part of PPO networks. However, not all PPO plans are HSA eligible. Check if your plan allows you to have an HSA when shopping around.
Is it better to have an HSA or a PPO?
If you’ve come across this question online, it’s important to note that it’s misleading. HSAs are a form of savings account that you can get with some healthcare plans. PPOs refer to the network your health insurance gives you access to.
But people tend to associate HSAs with HDHPs. And they associate PPOs with low deductible plans. The truth is that you can get a PPO plan that’s also an HDHP and, therefore, eligible for an HSA.
Hence the correct question is: Is it better to have a high-deductible or low-deductible health plan? The answer: it depends. It depends on your risk tolerance, how often you expect to visit the doctor, and how much you can afford to save up.
For instance, if you’re young and healthy and don’t expect a lot of doctor visits, an HDHP is an excellent way to save on monthly premiums. It’s also important to consider how much you can actually contribute to an HSA, which determines your tax benefits.
On the flip side, if you’re older, pregnant or have pre-existing medical conditions that require you to need regular check-ups, a traditional health plan may be a better fit, even with higher premiums.
Finally, just because you’re young and healthy, it doesn’t mean you won’t max out your deductible or out-of-pocket maximum. You’re essentially betting that you won’t have to spend more on out-of-pocket costs than what you’re saving by not choosing a traditional plan. As such, HDHPs are better for folks with high risk tolerance.
What’s the difference between HRA and HSA health insurance?
An HRA (Health Reimbursement Arrangement) has a similar premise to an HSA. It’s a savings account that you can use to reimburse medical expenses. The big difference is that HRAs are only available through an employer, and only your employer can make contributions.
In contrast, an HSA belongs to you, and you, your employer or anyone else can make a contribution. Also, HSAs are portable, so you don’t have to worry about losing anything if you leave your company.
With an HRA, if you leave your employer, you lose access to that money because it never really belonged to you.
What’s better, an HSA or an HRA?
Like most things in life, it depends. It depends on you and your needs. HRAs and HSAs also have different benefits for employers and employees.
If you’re an employer, advantages of an HRA include:
- Tax advantages.
- You can integrate them with FSAs.
- Better employee retention.
However, if you want to offer an HSA to your employees instead, your benefits include:
- Tax advantages.
- Flexibility with how much you contribute.
- Less record keeping.
- Your workforce becomes more engaged with their health care and medical expenses.
- Lower expenses.
On the other side of the coin, if you’re an employee, the benefits of an HRA include:
- No need for an HDHP.
- It’s completely funded by your employer.
- You have access to the funds from the first day of coverage.
However, if you choose an HSA instead, here are the advantages:
- Can invest the funds for retirement in mutual funds.
- You get all the tax benefits.
Are all high-deductible plans HSA eligible?
Not necessarily. They need to meet the requirements set by the IRS to qualify as a true HDHP, which is HSA-eligible. Also, true HDHPs will cover preventive care without requiring you to hit your deductible but offers no other benefits until you reach that point.
Also, it’s important to note that in order for you to be able to contribute to an HSA, you must also meet other requirements, including;
- You have coverage under the IRS’s definition of an HDHP on the first day of the last month of the year.
- You have no other health coverage, and you’re not enrolled in Medicare.
- Someone else isn’t claiming you as a dependent on their tax return.
Can I have an HSA if my employer offers an HRA?
Yes, but only under very limited circumstances. Most general HRAs will make you ineligible for an HSA. But if your company offers a “limited purpose” HRA or a “post-deductible” HRA, then you may still be eligible for an HSA. Also, if your employer contributes to an HRA that you can only use when you retire, you may be eligible for an HSA.
A “limited purpose” HRA is one where you can only use it for dental, vision or preventative care. A “post-deductible” HRA is one where you can use it to pay for medical expenses after the IRS deductible is met.
Can I contribute to an HSA without an HDHP?
No. But you can still spend the funds in your HSA or reimburse your medical expenses until the account is empty.
Can I have an HSA if my spouse has an HSA?
If your spouse has an individual health policy and no other form of health insurance, then you can get an HSA for yourself, as long as you meet all the other requirements.
However, if your spouse uses a health care FSA, then you wouldn’t be eligible. This is because your partner can also use their FSA funds to pay for your medical expenses. The devil’s in the details, though. If your spouse’s FSA is a limited purpose FSA (one that covers vision and dental only), then you can get an HSA.
Can an HSA plan have copays?
Yes. The IRS defines copays as an out-of-pocket expense in an HSA-eligible HDHP. HDHPs have to have a max out-of-pocket limit.
Can HRA be used for premiums?
For most employers, the simple answer is no. HRAs were often used by employers to reimburse workers insurance premiums. But, that changed with the Affordable Care Act (ACA). Under the ACA, an HRA can no longer pay for health premiums. There are some exceptions, though.
For example, ACA market reforms do not apply to retirement HRAs and stand-alone. The first option is offered only to retirees, while the second is an HRA with only one plan member. Under these two specific HRAs, you can use them to reimburse health care premiums.
Can HRA funds be rolled over to an HSA?
As of 2012, you can’t roll funds over from an HRA into an HSA.
Can you contribute to an HSA without health insurance?
No. To contribute to an HSA, you must be on a qualified HDHP and not otherwise insured. A family member can contribute on behalf of other family members as long as they are eligible. But to be able to contribute to an HSA, you need to have an HDHP.
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.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.