HDHP vs PPO: The Paycheck Math Your Open Enrollment Packet Leaves Out

Every open enrollment packet compares health plans the same way: premium in one column, deductible in the next, out of pocket maximum in a third. It looks like a fair fight. It is not, because none of those three numbers is what the plan actually costs you, and the gap between the sticker figures and the real ones is widest on exactly the question most people are trying to answer: high deductible plan or PPO.

This year the question carries more weight than usual. Employers expect health benefit costs per employee to rise 8.2 percent in 2027, the steepest increase since 2003, and about two thirds of large employers plan to pass more of the premium on to workers. Many are also widening the gap between their plans to push people toward the cheaper high deductible option. If your PPO premium jumped this fall, the HDHP is probably being presented as the escape route. Whether it is depends on arithmetic the packet does not show you.

What actually differs between the two plans

A PPO charges a higher premium in exchange for a lower deductible, copays for routine visits, and a lower ceiling on what you can spend in a bad year. A high deductible health plan, or HDHP, flips that trade: a lower premium, a deductible you pay in full before most coverage starts, and usually a higher out of pocket maximum.

The detail that changes everything is eligibility. Only a plan that meets the IRS definition of an HDHP lets you contribute to a health savings account, and the HSA is where most of the HDHP’s value lives. For 2027 the definition is:

2027 HDHP and HSA figures	Self-only	Family
Minimum deductible	$1,750	$3,500
Maximum out of pocket	$8,700	$17,400
HSA contribution limit	$4,500	$9,000
Extra catch-up at age 55 or older	$1,000	$1,000

Two points about that table. The HSA limit includes anything your employer puts in, so an employer contribution reduces how much of your own pay you can route through the account. And a plan labeled “high deductible” by your employer is not automatically HSA eligible. Check that the plan materials say “HSA qualified” or “HSA eligible” before you count on the account. To turn the 2027 limit into a per-paycheck amount, see how to set your HSA payroll election.

Why the premium gap is smaller than it looks

Employer health premiums are almost always deducted through a section 125 cafeteria plan, which means they come out of your pay before tax. A dollar of premium does not cost you a dollar of take-home pay. It costs you a dollar minus every tax that dollar would otherwise have paid.

That tax is your combined marginal rate: your federal bracket, plus 7.65 percent for Social Security and Medicare, plus your state rate in most states. Take a worker in the 22 percent federal bracket in a state with a 5 percent income tax. Their combined rate is 34.65 percent, so each dollar of premium costs them about 65 cents of take-home pay.

Apply that to the comparison. If the PPO costs $50 a month more than the HDHP, the difference in the paycheck is closer to $33. Over a year, a $600 premium gap shrinks to roughly $392 of actual take-home pay. Every HDHP versus PPO comparison should start from that smaller number, and almost none do. If you are not sure what your combined rate is, our guide to marginal versus effective tax rates shows how to find it, and the pre-tax versus post-tax deduction breakdown covers which taxes a premium deduction escapes.

How the HSA changes the out of pocket math

The premium is not the only thing the tax code discounts. On a PPO, the money you spend on deductibles, copays and coinsurance usually comes out of ordinary take-home pay. On an HDHP with an HSA, you can route that spending through the account first. Payroll contributions to an HSA skip federal income tax and the 7.65 percent payroll tax, and in most states state income tax too. California and New Jersey are the main exceptions: both tax HSA contributions at the state level.

So the HDHP’s higher deductible is also paid with discounted dollars, at the same 65 cents on the dollar in our example. Add the money many employers deposit into the HSA for you, and the first several hundred dollars of care may cost you nothing from your paycheck at all.

There is one limit that matters in a bad year. The tax discount only applies to money that goes through the HSA, and the HSA has an annual cap. If your out of pocket costs exceed what you can contribute, the excess is paid with ordinary take-home pay, just like on the PPO. The HSA also differs from a health FSA in one practical way: you can only spend what is already in the account, so a large bill in February may arrive before the balance has built up. Our FSA and HSA comparison covers that timing in more detail.

Running the comparison across three kinds of year

Here is a realistic pair of 2027 single coverage options, the kind of spread an employer that is raising PPO premiums might offer.

• PPO: $140 a month in premiums, a $750 deductible, then 20 percent coinsurance, with a $3,000 out of pocket maximum.
• HDHP: $90 a month in premiums, a $1,750 deductible, then 20 percent coinsurance, with a $6,500 out of pocket maximum and a $500 employer HSA contribution.

We will use the same 34.65 percent combined tax rate. Premiums are counted at their after-tax cost. PPO out of pocket spending is paid from take-home pay. HDHP out of pocket spending is paid first from the employer’s $500, then from pre-tax HSA contributions up to the annual limit, then from take-home pay. “Medical claims” means the total negotiated cost of the care you use during the year, before the plan pays its share.

Your year	Medical claims	PPO true cost	HDHP true cost	Cheaper plan
Healthy year	$500	$1,598	$706	HDHP by $892
Typical year	$3,000	$2,298	$1,686	HDHP by $612
Bad year	$30,000	$4,098	$5,320	PPO by $1,222

In the healthy year, the employer’s $500 covers every dollar of care on the HDHP, so the only cost is the discounted premium. In the typical year, the HDHP still wins even though you pay more of the bill yourself, because that extra spending is run through the HSA at a discount and the premium savings more than cover it.

The bad year is where the HSA cap bites. Both plans hit their out of pocket maximum. On the HDHP that means $6,500 of spending, of which the employer covers $500. You can put only $4,000 of your own pay through the HSA, because the $4,500 limit already includes the employer’s money. The remaining $2,000 comes straight out of take-home pay. That is what tips the bad year to the PPO.

Where the crossover sits

With these two plans, the HDHP stays cheaper until medical claims reach roughly $19,400 for the year. Below that, the premium savings and the tax discount on HSA spending outweigh the higher deductible. Above it, the PPO’s lower out of pocket ceiling wins.

Your crossover will be different, and three inputs move it most:

• The premium gap. The wider it is, the higher the crossover. Rising PPO premiums in 2027 push it up for most people.
• The employer HSA contribution. Every dollar your employer deposits comes straight off the HDHP’s cost in every scenario.
• The difference in out of pocket maximums. This sets how much worse the HDHP can get in a bad year. If the two maximums are close, the HDHP may win at every level of spending.

A higher combined tax rate also favors the HDHP, because the HSA discount is worth more. A lower one, or living in California or New Jersey, narrows the advantage.

Things that change the answer before the math does

A spouse’s health FSA. If your spouse enrolls in a general purpose health FSA that can reimburse your expenses, you are not HSA eligible, even if they never submit a claim for you. The fix is for the spouse to choose a limited purpose FSA, which covers dental, vision and preventive care, if their employer offers one. This is the most common way couples lose the HSA without knowing it.

Your own health FSA. The same rule applies to you. A general purpose health FSA and an HSA cannot run together, and a carryover or grace period from this year’s FSA can delay HSA eligibility into next year.

Prescriptions. On most HDHPs, drugs count toward the deductible, so a regular brand name prescription is paid at full negotiated price until the deductible is met. Some plans cover certain maintenance drugs for chronic conditions before the deductible. Check the plan’s preventive drug list rather than assuming.

Your doctors. PPOs usually pay something for out of network care, and some HDHPs are built on narrower networks. If a specific specialist matters to you, confirm they are in network before the price comparison means anything.

Medicare. Enrolling in any part of Medicare ends your ability to contribute to an HSA. If you are approaching 65, and especially if you are already collecting Social Security, which typically enrolls you in Part A automatically, the HSA side of the comparison may disappear.

An existing HSA balance. Money already in an HSA from prior years can absorb a bad year without touching your paycheck, which softens the cap problem described above. If you have built a balance and want to keep it growing, the HSA as a retirement account guide covers the long term case.

How to decide before enrollment closes

1. Write down each plan’s monthly premium for your coverage tier, deductible, coinsurance, out of pocket maximum, and any employer HSA contribution.
2. Work out your combined marginal rate: federal bracket, plus 7.65 percent, plus your state rate unless you live in a state with no income tax.
3. Estimate this year’s medical claims honestly, using last year’s explanation of benefits statements if you have them, then add a bad year scenario for comparison.
4. Run the three year comparison above with your own numbers, counting premiums and HSA spending at the after-tax rate.
5. Check the deal breakers: a spouse’s health FSA, your drug list, your doctors, and Medicare timing.

Once you have chosen, the new premium shows up as a pre-tax line on your first paycheck of the plan year. Our guide to reading your pay stub shows where to find it, and the payroll calculator lets you see what your 2027 paycheck looks like after the change. And because you generally cannot switch plans until the next open enrollment, keep in mind that a qualifying life event such as marriage, a birth, or losing other coverage is the main exception.

Common questions