Can You Have an HSA with a PPO Plan?

Preferred provider organization (PPO) plans are a popular type of health insurance in the United States. PPO plans offer flexibility in choosing healthcare providers while also providing access to discounted rates through a network of preferred providers.

As healthcare costs continue to rise, many people are looking for ways to save money on their medical expenses. One way to do this is by using a health savings account (HSA) along with a high-deductible health plan. But can you have an HSA if you have a PPO plan?

The short answer is yes, you can have an HSA with a PPO plan, but there are some important requirements. Let’s take a closer look at how HSAs and PPO plans work together.

What is a PPO Plan?

First, let’s make sure we understand what a PPO plan is. PPO stands for “preferred provider organization.” A PPO is a type of health insurance plan that contracts with a network of doctors, hospitals, and other healthcare providers.

Here are some key features of PPO plans:

• Provider Network – PPOs have a network of preferred providers that members can use. Using in-network providers results in lower costs.

• Out-of-Network Coverage – PPOs allow members to use out-of-network providers, but costs will be higher.

• No Referrals – PPO members can see specialists without needing a referral from their primary care physician.

• Annual Deductible – PPO plans have a deductible that must be met before coverage kicks in. Deductibles are usually a few hundred to a few thousand dollars.

• Copays and Coinsurance – Members pay copays or coinsurance after meeting the deductible. This represents a percentage of each claim.

• Out-of-Pocket Maximum – PPOs limit the total out-of-pocket costs per year, providing protection against extremely high medical bills.

The flexibility and comprehensive coverage offered by PPOs come at a cost. Monthly premiums for PPO plans are usually higher than plans with more limited provider networks.

What is an HSA?

Now let’s look at health savings accounts. An HSA is a tax-advantaged savings account that can be used to pay for qualified medical expenses.

Here are some key features of HSAs:

• Must Have HDHP – To contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP).

• Tax-Deductible Contributions – You can contribute to an HSA with pre-tax or tax-deductible contributions, reducing your taxable income.

• Tax-Free Growth – The money in your HSA can grow and compound tax-free.

• Tax-Free Withdrawals – Funds used to pay for qualified medical expenses can be withdrawn tax-free.

• You Own the Account – HSAs are completely portable and owned by you. You keep the HSA even if you change employers, change health plans, or retire.

• Annual Contribution Limits – Contribution limits are set by the IRS each year. For 2023, the limits are $3,850 for individual coverage and $7,750 for family coverage.

HSAs provide a triple tax advantage. The accounts provide a way to save and invest for healthcare expenses in retirement. However, HSAs have to be paired with an eligible HDHP.

HDHP Requirement for HSAs

This brings us to the most important requirement when it comes to having an HSA with a PPO plan.

To be eligible to contribute to an HSA, your PPO plan must be a high-deductible health plan (HDHP).

Internal Revenue Service rules state that you can only contribute to an HSA if you are enrolled in an HDHP. An HDHP has a higher deductible than a traditional health plan. For 2023, to qualify as an HDHP, the deductible must be at least:

• $1,500 for individual coverage
• $3,000 for family coverage

In addition, an HDHP also has an out-of-pocket maximum (including the deductible) of:

• $7,500 for individual coverage
• $15,000 for family coverage

A PPO can meet the requirements to be an HDHP. However, most PPOs do not meet the deductible and out-of-pocket limits to qualify as an HDHP.

Some employers offer PPO plans with deductibles high enough to allow use of an HSA. If the PPO plan is HSA-qualified, the insurance company will state that clearly. You can also check the deductible amounts to verify it is an eligible HDHP.

Advantages of an HDHP with HSA

Why pair a high-deductible health plan with an HSA? Here are some of the biggest advantages:

• Lower Premiums – HDHPs have significantly lower monthly premiums compared to traditional health plans. The premium savings help offset the higher deductible.

• Tax Savings – HSAs provide tax savings on contributions, growth, and withdrawals for medical expenses. Over your lifetime, these can really add up.

• More Control – With an HDHP/HSA, you control how your healthcare dollars are spent instead of the insurance company.

• Ownership – HSAs are completely portable. You keep the account even if you leave your employer or retire. The money is always yours.

• Retirement Savings – HSAs can provide savings for healthcare expenses in retirement. After age 65, funds can be withdrawn for any purpose without penalty.

• Investment Options – Many HSAs allow you to invest balances over $1,000, allowing your HSA to grow.

For many healthy individuals, the premium savings combined with the HSA tax benefits make an HDHP with HSA an attractive option. It provides a cost-effective way to pay for healthcare.

Using Your HSA with a PPO

If you have a PPO plan that is HSA-qualified, here is how you can use the accounts together:

• Use your HSA to pay for out-of-pocket costs like copays, deductibles, prescriptions, dental care, and vision care. Paying these expenses from the HSA leaves more money in your regular bank account.

• Try to cover medical expenses with HSA funds instead of paying out-of-pocket. This allows your contributions to remain invested in your HSA.

• Use your HSA strategically. For minor medical expenses, consider paying out-of-pocket so you can save your HSA balance for larger expenses or to grow for the future.

• Keep records of your HSA distributions and save receipts in case you need to provide documentation for IRS reasons. Qualified medical expenses are tax-free.

• Consider saving your receipts but not distributing the HSA funds. You can reimburse yourself in the future for previously incurred medical expenses if needed.

• Once you have accumulated a good HSA balance, consider investing any amounts over $1,000 to allow your HSA to grow. Choose investment options based on your risk tolerance.

Downsides of High-Deductible Plans

While HDHPs coupled with HSAs can make financial sense, they also have some downsides to consider:

• High Upfront Costs – You’ll need to pay most routine healthcare expenses yourself until the deductible is met. Having an HSA helps mitigate this downside.

• Higher Maximum Out-of-Pocket – If you have a catastrophic medical event, your potential costs are higher with an HDHP until you reach the out-of-pocket max.

• More Planning Required – With the high deductible, you’ll need to budget for healthcare expenses and make contributions to your HSA.

• Preventative Care may have Copays – Some HDHPs charge a copay for certain preventative drugs and services before the deductible.

• Investments Carry Risk – If you invest your HSA balance, the money is subject to market risk and possible losses.

While there are certainly trade-offs to consider, an HDHP/HSA can be an excellent choice for many individuals and families looking to take greater control of their healthcare expenses.

The Bottom Line

Can you have an HSA with a PPO plan? The short answer is yes, as long as the PPO plan meets the IRS requirements for an HDHP with minimum deductible and out-of-pocket limits. Most traditional PPO plans won’t qualify, but some employers are starting to offer PPOs paired with HSAs.

When considering healthcare options, be sure to look at the details of your PPO plan to see if it is HSA-compatible. If so, then coupling a high-deductible PPO with an HSA can provide valuable tax savings while also giving you more control over your healthcare spending.

Just remember that enrolling in an HDHP plan means you will have higher upfront medical expenses until you meet your deductible.