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Most useful between ages 22 and 64, for anyone picking a workplace health plan during open enrollment.
Every fall, most workers get the same packet: a few health plans, a price for each, and a deadline. The question it is really asking is simple. Which plan costs you the least for the year you are actually going to have? This lesson is the math for answering it.
The simple version
A health plan costs you money in two ways. The premium comes out of every paycheck whether you see a doctor or not. The out-of-pocket costs (the deductible, copays, and coinsurance) only show up when you use care. The real yearly cost of a plan is both of those added together. A plan with a low premium and a high deductible is cheaper in a healthy year and more expensive in a rough one. Open enrollment is picking which of those bets fits your year.
The five numbers on every plan summary
Every plan in the packet lists the same handful of numbers. Here is what each one means in plain English.
- Premium: what you pay to have the plan, usually taken out of each paycheck. You pay it every month, used or not.
- Deductible: what you pay for covered care before the plan starts sharing the cost. Preventive care is usually covered before you meet it.
- Copay: a flat fee for a visit or a prescription, like $30 to see your doctor.
- Coinsurance: your share of the bill after the deductible, as a percent. At 20% coinsurance, a $1,000 bill costs you $200.
- Out-of-pocket maximum: the most you pay for covered, in-network care in a plan year. Hit it and the plan pays 100% for the rest of the year. Premiums do not count toward it.
If any of those terms are still fuzzy, the insurance basics lesson defines each one. This lesson is about using them to compare.
The actual math: two plans, three kinds of years
Here are two plans like the ones in a typical packet. These are illustrative numbers, not any real employer's plans.
| Plan A (lower deductible) | Plan B (high deductible, with HSA) | |
|---|---|---|
| Your premium | $171 a month ($2,052 a year) | $75 a month ($900 a year) |
| Deductible | $1,000 | $3,000 |
| Coinsurance after the deductible | 20% | 20% |
| Out-of-pocket maximum | $4,000 | $6,000 |
| Employer deposit to an HSA | None | $500 |
Now run each plan through three different years. The total is a year of premiums, plus what you pay for care, minus any HSA money the employer puts in.
| Your year | Plan A total | Plan B total | Cheaper plan |
|---|---|---|---|
| Light: $500 of care | $2,552 | $900 | Plan B, by $1,652 |
| Medium: $5,000 of care | $3,852 | $3,800 | About a tie |
| Heavy: $40,000 of care | $6,052 | $6,400 | Plan A, by $348 |
How the medium year adds up
Plan A: $2,052 in premiums, plus the $1,000 deductible, plus 20% of the remaining $4,000 of care ($800). Total: $3,852. Plan B: $900 in premiums, plus the $3,000 deductible, plus 20% of the remaining $2,000 ($400), minus the $500 HSA deposit. Total: $3,800.
Notice the shape. The plan with the scary deductible wins the light year by a lot and loses the worst year by a little. That pattern is common, and it is why the premium alone is a bad tiebreaker.
Read your own year before you read the plans
Before comparing plans, sketch the care you expect next year. You know more than you think.
- Ongoing prescriptions, and what each plan charges for them. The plan's drug list is called a formulary.
- Regular visits: therapy, specialists, physical therapy.
- Anything planned: a surgery, a baby, a procedure you have been putting off.
- Whether your doctors are in each plan's network. Out-of-network care can cost far more and may not count toward the out-of-pocket maximum.
Then ask the worst-year question. If something big happened, could you cover the out-of-pocket maximum from savings? On Plan B above, that is $6,000. If the honest answer is no, that matters as much as the averages do.
Where the HSA and the tax break fit
A high-deductible plan that meets IRS rules can be paired with a Health Savings Account. Money goes in before tax, grows untaxed, and comes out untaxed for qualified medical bills. An employer deposit, like the $500 above, is part of the plan's real price. The full mechanics, including the yearly limits, are in the lesson on how HSAs actually work.
Premiums often come out before tax too. When your employer runs them through a cafeteria plan (Section 125 of the tax code), the premium is left out of your taxable wages and out of Social Security and Medicare tax, so a $171 premium costs you less than $171 of take-home pay. IRS Publication 15-B explains the rule, and your pay stub shows whether yours is pre-tax.
The legal limits for the plan year you are choosing
Open enrollment in the fall usually picks coverage for the next calendar year, so the limits that apply are next year's. These are the federal figures for 2027. Plans with a different plan year follow the limits for the year their plan year starts in.
| 2027 limit | Self-only coverage | Family coverage |
|---|---|---|
| HSA contribution limit (employee and employer combined) | $4,500 | $9,000 |
| Minimum deductible for an HSA-eligible plan | $1,750 | $3,500 |
| Maximum out-of-pocket for an HSA-eligible plan | $8,700 | $17,400 |
| Out-of-pocket cap for most other plans (Affordable Care Act) | $12,000 | $24,000 |
Run the example plans against these. Plan B's $3,000 deductible clears the $1,750 minimum and its $6,000 out-of-pocket maximum sits under the $8,700 ceiling, so it would qualify for an HSA in 2027. Plan A's $4,000 maximum sits well under the $12,000 cap. Your plan summary lists your plan's actual numbers. Its out-of-pocket maximum can be lower than these caps but not higher, and an HSA-eligible plan's deductible can be higher than the minimum but not lower.
The Real Cost lens
Pick plans by premium alone and the habit repeats every year. The gap between the two premiums above is $96 a month, or $1,152 a year. If a light-use worker on Plan B set that difference aside every year and it grew at 7% a year for 30 years, it would reach about $108,800. That is not a promise or a recommendation. It is a measure of what a yearly default is worth once it compounds.
The other side is real too. In a heavy year, the high-deductible plan can cost thousands more out of pocket at the worst possible moment. The Real Cost lens is not 'take the cheap premium.' It is 'run the numbers every year, because the answer changes.'
Common mistakes
- Comparing premiums only. The premium is one of five numbers, and it tells you the least about a bad year.
- Auto-renewing without looking. Plans change their premiums, deductibles, and networks every year. Last year's best plan may not be this year's.
- Ignoring the network. A cheap plan that does not include your doctors is not cheap.
- Leaving out the employer HSA deposit. It is real money and belongs in the comparison.
- Missing the window. Outside open enrollment, you can generally change plans only after a qualifying life event, such as marriage, a birth or adoption, or losing other coverage. For an employer plan, the request window is usually 30 days from the event (U.S. Department of Labor).
Advanced insight
The deductible drives your typical year, and the out-of-pocket maximum drives your worst one. Comparing plans is really asking how likely each kind of year is for your household. When someone on the plan has a known, expensive condition, the out-of-pocket maximum tends to decide the comparison. When the household is healthy and has savings that could cover the maximum, the premium and the HSA deposit tend to decide it.
What this lesson is NOT
This is not a recommendation to choose any plan, insurer, or account. It is not medical advice, and it is not a prediction of your health costs. Plan rules vary by employer, so your plan's Summary of Benefits and Coverage is the document that governs. This lesson is the comparison method. The choice is yours.
Related on this site
- Lessons: Insurance basics and How HSAs Actually Work.
- Glossary: Premium, Deductible, Copay vs. coinsurance, Out-of-pocket maximum, and HSA.
- Tool: Paycheck Calculator, to see what each plan's premium does to your take-home pay.
Frequently asked questions
Is the health plan with the lowest premium the cheapest?
Not necessarily. The real yearly cost is the premiums plus what you pay when you use care. In this lesson's example, the low-premium plan wins a light year by $1,652 and loses a heavy year by $348.
What counts toward the out-of-pocket maximum?
Your deductible, copays, and coinsurance for covered, in-network care during the plan year. Premiums do not count, and out-of-network care may not either. Your plan's Summary of Benefits and Coverage lists the details.
Can I change my health plan after open enrollment ends?
Generally only after a qualifying life event, such as marriage, a birth or adoption, or losing other coverage. For an employer plan, the request window is usually 30 days from the event, according to the U.S. Department of Labor.
Do health insurance premiums come out of my paycheck before taxes?
Often, yes. When an employer runs premiums through a Section 125 cafeteria plan, they are excluded from taxable wages and from Social Security and Medicare tax. IRS Publication 15-B explains the rule, and your pay stub shows whether yours are pre-tax.
Is a high-deductible plan with an HSA worth it?
It depends on the care you expect, the savings you have, and the plan details. The HSA's tax treatment is real, and an employer deposit lowers the plan's true cost. Running a light, medium, and heavy year through both plans shows the trade-off for your own numbers. This is education, not a recommendation.
Quick check on this lesson
Answer each question and we’ll show you why the right answer is right, and why the others aren’t.
- 1.
What is the real yearly cost of a health plan?
- 2.
In the lesson's example, which plan cost less in a light year with $500 of care?
- 3.
Which costs count toward a plan's out-of-pocket maximum?
- 4.
You missed open enrollment and then got married. What generally applies to an employer plan?
0 of 4 answered