High-Deductible Health Plan (HDHP)

Taxpayers must be covered by an HDHP to be able to take advantage of HSAs. An HDHP generally costs less than traditional health care coverage. These cost savings can then be put into the HSA.

An HDHP is health coverage with a:

• Higher annual deductible than typical health plans and
• Maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that the taxpayer must pay for covered expenses. Out-of-pocket expenses include co-payments and other amounts but do not include premiums.

The IRS has ruled that an HDHP can cover certain types of preventive care without a deductible, or with a deductible that is less than the annual deductible applicable to all other services. Generally, preventive care services do not include any service, benefit, or medication to treat an existing illness, injury, or condition. In situations where the treatment is incidental or ancillary to a preventive care service or screening, the treatment may fall within the safe-harbor for preventive care. See IRS Notice 2004-50, Internal Revenue Bulletin 2004-33, available on www.irs.gov, for details on these situations.

If an HDHP has a deductible for preventive care expenses, those expenses, up to the deductible, are qualified medical expenses for HSA purposes. If the HDHP has no deductible for these preventive services, the plan—not the HSA—covers the expenses.

In addition to preventive care, the high deductible requirements are not necessary for dental or vision coverage.