Health Insurance and the Health Savings Account

A serious illness or accident is the most common way a household with no debt suddenly has a lot of it. Health insurance is the defence, but plans are hard to compare: the premium is easy to see, while the number that decides how bad a bad year gets is buried in the plan summary. This chapter explains the five numbers on every plan, how to compare plans on your worst year rather than your average one, how a health savings account turns a high deductible into a tax advantage, and how to avoid gaps in coverage when a job changes.

The five numbers on every plan

Every plan's summary of benefits and coverage lists the same terms:

• Premium. What you pay each month to have the plan, whether or not you use it.
• Deductible. What you pay for covered care each year before the plan starts sharing costs. Preventive care such as screenings and vaccines is generally covered without charge under federal law even before the deductible, when you use an in-network provider.
• Copayment. A fixed charge for a service, such as a doctor's visit or a prescription.
• Coinsurance. Your percentage share of costs after the deductible, often 20% or 30%.
• Out-of-pocket maximum. The most you pay for covered, in-network care in a year. After you reach it, the plan pays 100% of covered costs for the rest of the year. Deductibles, copays and coinsurance count toward it; premiums do not.

The out-of-pocket maximum is the number that makes health insurance work as catastrophe protection. Whatever happens, your yearly cost for covered in-network care is capped at the premiums plus that maximum. Out-of-network care and services the plan does not cover can sit outside the cap, which is why the network matters as much as the price.

Compare plans on your worst year, not your average one

Most people choose the plan with the lowest premium or the lowest deductible. A sounder method looks at three cases for each plan:

1. A quiet year: premiums plus a few routine visits and prescriptions.
2. A typical year for you: premiums plus the care you expect, based on recent years.
3. A bad year: premiums plus the full out-of-pocket maximum.

A plan with a higher deductible and lower premium often wins the quiet and typical years and loses the bad one by less than people expect, especially when an employer contributes to a health savings account. A plan with a low deductible tends to win for someone with steady, predictable medical costs, such as a chronic condition or a planned birth. The HDHP versus PPO calculator runs all three cases with your own premiums, deductibles, out-of-pocket maximums and expected care, including any employer contribution.

Plan types also differ in how you get care. An HMO usually requires in-network care and a primary care doctor who refers you to specialists, and tends to cost least. A PPO lets you see specialists directly and pays something out of network, at a higher premium. An EPO sits between the two. A high-deductible health plan (HDHP) is defined by its deductible, not its network, and is the plan type that opens the door to a health savings account. Before choosing, confirm that your doctors, nearby hospitals and regular prescriptions are covered.

The HSA: three tax breaks in one account

A health savings account (HSA) is available only with an HSA-eligible high-deductible plan and no other disqualifying coverage. For 2026 such a plan must have a deductible of at least $1,700 for self-only coverage or $3,400 for family coverage, and an out-of-pocket maximum no higher than $8,500 or $17,000. Starting in 2026, federal law also treats bronze and catastrophic plans bought on a health insurance marketplace as HSA-compatible.

The account carries three tax advantages: contributions reduce taxable income, growth is not taxed, and withdrawals for qualified medical expenses are tax-free. For 2026 the total that can go in, counting employer contributions, is $4,400 with self-only coverage or $8,750 with family coverage, plus $1,000 more from age 55.

A single filer earning $85,000 owes about $9,870 in federal income tax. Contributing the self-only limit lowers the pay subject to income tax to $80,600 and the tax to $8,902. Because this filer's top bracket is 22.0%, each dollar contributed saves about that share of a dollar in federal income tax. When contributions go through payroll, they also skip Social Security and Medicare tax, and most states exempt them too.

The money does not have to be spent this year. Unused balances roll over indefinitely, and many HSA providers let you invest the balance. A common approach for those who can afford it is to pay current medical bills from regular cash, keep the receipts, and let the HSA grow; qualified expenses can be reimbursed from the account years later, as long as they were incurred after the HSA was opened.

Contributing $350 a month and earning 6.0% a year before inflation, an HSA would hold about $236,701 after 25 years, of which $131,701 is growth that would never be taxed if it is spent on medical care. Health costs in retirement are large and certain enough that this is often the most tax-efficient pot a household has. The HSA retirement calculator compares it with a 401(k) and a taxable account.

The rules to know (IRS Publication 969): money withdrawn for non-medical purposes before 65 is taxed as income plus a 20% penalty; after 65 the penalty goes away and non-medical withdrawals are simply taxed as income, like a traditional IRA. Contributions must stop once you enroll in Medicare. Investing an HSA also means it can fall in value, so many people keep enough in cash to cover their deductible.

Gaps around a job change and before Medicare

Coverage tied to a job is easy to lose at the worst moment. Three routes keep you insured:

• COBRA continuation. Many employer plans must offer to continue your coverage, typically for up to 18 months after a job ends, but you pay the full premium plus up to 2%. It keeps your doctors and your progress toward this year's deductible.
• A marketplace plan. Losing job-based coverage opens a special enrollment period, generally 60 days, to buy a plan through HealthCare.gov or your state's marketplace. Depending on income you may qualify for a premium tax credit. The larger credits available from 2021 expired at the end of 2025, so marketplace costs for many households rose in 2026.
• A spouse's or partner's plan. Losing coverage usually allows a mid-year change to a spouse's employer plan.

Anyone planning to stop work before 65, when Medicare begins, should price this gap carefully; the ACA subsidy calculator for early retirees shows how income decides the cost.