These health savings accounts, or HSAs; health reimbursement accounts, or HRAs, and flexible spending accounts, or FSAs, "are definitely not your father's health insurance policy," says Gary Thornton, a human resources management consultant in Scarborough, Maine.
"For a lot of people today," Thornton says, "their health plan is the card they carry in their wallet and hand in at the doctor's office, along with their $10 co-pay."
However, more and more companies are switching to health plans that will save them money. As a result, the employees and their families often have to take charge of their own health care and become as picky and price-conscious about health care as they are about anything else they buy.
The problem is, Thornton adds, "they've never had to deal with the question of being responsible for their own health care before."
According to Jordan Schreier, of the Butzel Long law firm in Ann Arbor, Mich., the idea behind "consumer-driven or consumer-directed health care is that it will make employees smart consumers of health care because they will be spending their own money, they will ask questions about what procedures might cost and if there are alternatives."
"It requires education," says MaryJo Pasek, an associate with TWIW Insurance Services in Bakersfield, Calif. People have to understand what they are getting -- and not getting -- for their money. "These programs are not for everybody," she says.
Many people should stay with the traditional health care plans that their companies offer and will continue to offer for the foreseeable future.
The new plans do offer a chance for companies and corporations to cut their share of health insurance costs and help educated employees reduce their own share of the cost, too, says Lillian Collier, another associate and benefits specialist at TWIW. But the employees offered these options "have to know what they are getting into and what they can reasonably expect to pay for health care. If they don't, they could wind up paying more money for less care."
For companies, "it's a cost-driven decision," says Schreier. "We've had double-digit increases in the cost of health care over the past five years or so, double digits each year."
One way companies save money is by buying health insurance with a higher deductible. It's like auto insurance. A policy with a $1,000 deductible -- one where you have to pay the first $1,000 of repairs -- is a lot cheaper than a zero-deductible policy where the insurance company has to pay everything. Some companies are passing those savings on to their employees by "sweetening the pot" to make consumer-directed health insurance more appealing.
It is important to remember that each company runs its own health plan system. Some put more company money into consumer-driven accounts than others. Some also add incentives to encourage employees to get involved in wellness programs. The IRS also sets limits on what you can put into and take out of some of these accounts, and those limits can change every year.
HSAs, health savings accounts
HSAs began in 2004. They are often funded entirely by the employee. According to a report by the Society for Human Resource Management, or SHRM in June 2006, about 6 percent of companies that offer HSAs match their employees' contributions; many other companies put in lesser amounts.
SHRM explains that an HSA helps "individuals save on a tax-free basis for future qualified medical and retiree health care costs." It has to be coupled with a high-deductible health insurance plan, one that doesn't kick in until medical costs have hit at least the $1,050 mark for individual coverage or $2,100 for someone with family coverage.
Many of these plans come with an ATM-like debit card or a checkbook. You use that money for co-payments, prescriptions or any other out-of-pocket medical expense. Once you hit the deductible, your regular insurance takes over, except for any other co-payments or noncovered medical expenses. There are IRS limits on how much can go into an HSA. For 2006, it is up to $2,700 for an individual and up to $5,450 for a family. People 55 or older may add an additional $700.
Schreier says that an "HSA gives you money for the future. It is a hard sell because it's part of a high deductible policy and there are higher out-of-pocket costs. It really favors those in good health who can afford a higher deductible: the healthy and wealthy."
Collier points out that it especially good for the young. "Your 20-year-olds don't use their health insurance. They're young and healthy, so the money builds up over the years. If I were 20, I'd jump right into an HSA."
It is also a good way to reduce your taxable income since that money is not counted as taxable income.
The biggest advantage of an HSA is that any money you do not use in one year -- whether you put it in or your employer did -- is yours to keep, even if you switch jobs. The money earns tax-free interest and, at age 65, or if the plan holder dies or is disabled, the money can be distributed without penalty to the beneficiaries of your estate. You can even withdraw all or some of it for nonhealth reasons, but that is penalized.
"There's a 10 percent immediate excise tax on the money you take out, and that money then becomes fully taxable," Schreier explains. At a certain point, depending on the plan and the way you structure it, the plan can convert into an annuity and send you a regular check.
"It is less beneficial for people on maintenance programs, or those with a lot of kids, or where there is a lot of sickness or chronic care," he says.
HRAs, health reimbursement accounts
A company puts money into every covered employee's health reimbursement account every year, and the employees can use that money for health-related expenses that are not covered by the company health insurance plan. This could be for co-payments, prescriptions, an extra pair of glasses or whatever the company decides is appropriate.
You pay the medical expenses yourself, first and then submit the receipts to get reimbursed. Each company designs its own policies and rules for HRA use, which usually include a deducible that the employee has to reach before being able to claim any reimbursements.
No employee money goes into an HRA. When an employee leaves, any unused money stays with the company. There is no automatic rollover in an HRA. If you do not use all the money that is your account this year the company does not have to leave it there for you to use next year. Some companies will allow individual accounts to build, but most of them start a new account every year.
As a result, many employees look at what's left in their accounts as the year comes to a close and use that money for extra glasses, maybe even teeth whitening, or anything else that the company policy allows to use up the funds.
Some employees "clean out" their HRAs when they know they are going to be leaving the company, getting an extra pair or two of glasses, for example. Since it is their money to use according to company guidelines, they do not have to give any of it back.
Collier points out a common way companies use HRAs to reduce their overall health insurance premiums.
Let's say a company that had a $250 deductible health insurance policy on each employee raised it to a $1,000 deductible in order to lower the company's overall premium costs.
"The company then adds $750 to each HRA. But the employees still have a $250 deductible to pay before they can access their HRAs. They get access to the $750 after they pay the $250. The employer is self-insuring that $750 since some of its employees will not even meet the $250 deductible."
FSAs, flexible spending accounts
An FSA, which some companies call an FSP, or flexible spending plan, is similar to an HRA except that employees can -- and usually do -- put money into it. In some cases companies do, too, but each company sets its own policies.
In a typical company, employees estimate how much their out-of-pocket medical expenses will be for the year, and that is deducted from their pay before taxes and put into the plan. They then use the money -- often through a debit card -- to make the medical and medical-related payments that their health insurance does not cover.
The biggest problem with an FSA is that if an employee does not spend everything in the account by the end of the year, the company gets the money ... even though it's often the employee's own money. That, by the way, is an IRS rule, not a company rule.
The biggest advantage is that the money in the account is pretax, reducing your taxable income.
As with HSAs, when the end of the year draws near, people with money in their FSAs start looking for things to spend it on, such as an extra pair of glasses and so on.
The problem with this, Schreier says, is that, "They are using their money because they have to, not because they need to. The individual would have been better off predicting a lower amount of money to go into the account."
Which plan is right for you?
If your company offers traditional health insurance, you don't have any decisions to make ... yet. But as the price of health insurance increases, more and more companies are switching to nontraditional programs and, in many cases, making their employees make decisions that they've never had to make before.
"Companies do want to keep their employees," Pasek says, "and they do want them to be happy." But these new plans are just that, new ... and confusing. "It's a lot like where we all were when the IRA and the 401(k) were first introduced. Employees didn't really understand them, and it was human resources' job to explain them. And that's the job today, too."
That's why Pasek says that if your company is offering an alternative plan, you need to meet with a benefits specialist in human resources and figure out which is the best one for you, personally. To do that you'll need to know what your health expenses have been in the past and what you can reasonably expect them to be for the next year. If your company will let you bring your spouse to the meeting, do so. |
