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High Deductible Health Plans
- What is a High Deductible Health Plan? (or HDHP?)
An HDHP is sometimes called a, “catastrophic,” health insurance plan; the plan generally doesn’t pay for the first few thousand dollars of health care expenses, but will cover subsequent expenses after you meet your deductible. In order to qualify for a health savings account, as of 2009, you must have a deductible of at least $1,150 for individual coverage or $2,300 for family coverage. In 2010, you must have a deductible of at least $1,200 for individual coverage or $2,400 for family coverage. HDHP’s offer Affordability, you should be able to lower your insurance premium by switching to health insurance coverage with a higher deductible.
The in-network and out-of-pocket maximum, as of 2009, cannot exceed $5,800 per individual or $11,600 for families. In 2010, the out-of-pocket expenses must not exceed $5,950 per individual or $11,900 for family coverage. These amounts increase each year based on IRS Regulations. - What are the advantages of an HDHP?
- Generally lower premiums; affordable alternative-attractive option for small groups that might otherwise not be able to offer employee health benefits.
- Comprehensive Health Care Coverage; Easy to administer basic PPO design with a single, integrated medical/pharmacy deductible.
- Customized contribution strategy-flexibility to adjust employee premiums to meet cost sharing objectives.
- Lower out-of-pocket costs when using network providers.
- Employers may select products in-network or out-of-network services for employees.
- Can be offered alone or in combination with other products, so employers can offer quality health care coverage regardless of varying financial, lifestyle, or health care needs of employees.
- Incentive for employees to manage health benefits wisely-helps reduce employee health care spending leading to lower costs for the employer.
- Plans meet IRS guidelines to allow Health Savings Accounts, Flexible Spending Accounts, and Health Reimbursement Arrangements offering-an added benefit to offer employees opportunity for tax-free savings.
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Health Savings Accounts
- What is a Health Savings Account? (or H.S.A.?)
A tax-free savings account that is primarily designed as a long-term savings vehicle to be used for health-care expenses.
As of 2009, the IRS contribution limit is $3,000 for individual coverage and $5,950 for family coverage. In 2010, the IRS contribution limit is $3,050 for individual and $6,150 for family coverage. However, people over the age of 55 may make an extra contribution of $900. This catch-up contribution (55+) is $1,000 for year's 2009 and 2010.
The money is owned and controlled by the employee and can be spent tax-free on health-care related expenses.
The balance is fully portable if the employee changes jobs or financial institutions. Unused funds accrue interest and rollover from year to year for the employees future use.
The account balance grows tax deferred and after age 65 can be used without penalty for any purpose. - Who is eligible to open an H.S.A.?
Anyone who meets the following four requirements:- Covered by an H.S.A. qualified high deductible health plan.
- Not covered under another health plan that is not a HDHP (including their spouses plan where he/she has selected family coverage.)
- Not covered by Medicare.
- Not eligible to be claimed on another individual’s tax return.
- How do you use an H.S.A.?
Most financial institutions provide a debit card and/or check writing access to the H.S.A. accountholder.- Use the debit card to pay physician, pharmacy, or health-care facility directly.
- Authorize payment by check from the H.S.A. account
- Pay the provider through alternative sources and reimburse himself/herself.
- The employee may choose to not use the funds and save them for future medical expenses.
- Advantages of an H.S.A.
- HSA’s offer Security, for high or unexpected medical bills.
- HSA’s offer Flexibility, cover medical expenses that your insurance may not cover.
- HSA’s offer Portability, your account stays with you.
- HSA’s offer Tax Savings, Pre-tax dollars can be used to contribute into your account.
- HSA’s offer Control, you make the decision about your health care options.
- HSA’s offer Ownership, funds remain in your account and roll over year to year.
- HSA’s offer Retirement Vehicle’s, very similar to an IRA you can invest your money.
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Health Reimbursement Arrangements
- What is a Health Reimbursement Arrangement? (HRA?)
A special reimbursement arrangement established and maintained by employers, funded solely by employers, for the purpose of paying medical expenses not covered by the employer’s health plan.- They are not portable from job to job like HSAs, but the money left in an HRA at the end of the year can roll over to the next year.
- Employers establish and maintain for the benefit of its common law employees that are eligible to participate (as determined by the employer). It is a group health plan subject to certain federal laws such as Internal Revenue Code, and if you are a private employer, the Employee Retirement Income Security Act (ERISA).
- What are the advantages of HRAs?
- Unlike HSAs, amounts allocated may rollover from year to year to the extent permitted by the employer. However, if you terminate employment and do not elect COBRA, you generally forfeit the amount remaining in your account.
- Only employers can contribute as much as they want (subject to anti-discrimination rules).
- Employees can submit claims for whatever expenses they choose, but the employer (or its designee) must require the employee to provide substantiation of each expense to ensure that it is for qualifying medical expenses eligible for reimbursement under the HRA.
- Generally only code section 213(d) medical care expenses may be paid from the HRA other than long term care services. The employer may decide to further restrict the scope of eligible expenses.
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Flexible Spending Accounts
- What is a Health Flexible Spending Account? (FSA?)
A special reimbursement arrangement established by employers to allow employees to set aside pre-tax money on an annual basis to pay for qualified medical expenses (as defined in code section 213(d) and code section 125) incurred during that year.- FSAs can be offered in conjunction with any type of health insurance plan. The employees pay is automatically reduced each pay period equal to a pro-rata share of the employees annual election, however the full annual election amount is available to them on the first day of coverage.
- Any unused contribution remaining at the end of the plan year (or following the grace period, if adopted by the employer) will be forfeited.
- Employers establish and maintain FSAs for the benefit of its common employees that are eligible to participate (as determined by the employer). It is a group health plan subject to certain federal laws as the Internal Revenue Code, and if you are a private employer, ERISA.
- What are the advantages of an FSA?
- While the money does not roll over from year to year and unused contributions are forfeited, (as are amounts left if the employee leaves the job) employers may allow employees up to 2 1/2 months after the plan year (grace period) ends to use up those funds from the previous year for expenses incurred during the grace period.
- Employees contribute to their FSAs with pre-tax dollars, and depending upon how the employer sets up the program, the employer may also contribute.
- It is up to the employer to set any limits on how much can be contributed to an FSA. There are no statutory limits; however, employers generally establish a maximum contribution limit in light of the uniform coverage rule, which requires the full annual election to be paid without regard to the contribution paid by the employee. Within those limits, the employees can decide how much to contribute to their account. Amounts may apply to the deductible.
- Although employees can submit claims for whatever expenses they choose, the employer (or its designee) must require employees to provide substantiation of each expense to ensure that it is for a qualifying medical expense eligible for reimbursement under the Health FSA.
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Comparison
- What are the differences between an H.S.A., an FSA, and an HRA?
- Contributions can be made to an employee’s H.S.A. by the employee, employer, both employee and employer, and others. Contributions can be made to a FSA by the employer or employee through a salary reduction agreement, but only the employer can make contributions to an HRA.
- The tax benefits for an H.S.A. include being triple tax free: contributions are tax deductible, earnings are tax free, and withdrawals for qualified medical expenses are tax free. FSA contributions are tax deductible, and withdrawals are tax free if used for qualified medical expenses. HRA contributions from the employer are not included in the employees income, and the withdrawals are tax free if used for qualified medical expenses.
- Limits on contributions to an H.S.A. are determined by federal law, however there are no limits to FSAs and HRAs.
- The unused balance on an H.S.A. carries forward to the next year and accumulate, as does the balance on an HRA. The unused balance on a FSA is forfeited at the end of the year.
- If the employee leaves a job, the money in an H.S.A. stays accessible to the employee wherever they are, even if not employed or retired. The money in a FSA is forfeited and in an HRA the money is returned to the employer..
View Comparison Chart
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Qualified Medical Expenses
- What are some qualified medical expenses?
This is a quick reference list of expenses that can be reimbursed from a health savings account (HSA) or a health reimbursement arrangement (HRA).
Medical expenses allowed as deductions are determined by Section 213 (d) of the Internal Revenue Code. This list applies to reimbursement under an HSA as well. However, eligible medical expenses under an HRA draw from this list of deductible medical expenses, but will exclude some expenses in the plan design. For more detailed information, please refer to IRS Publication 502 titled, “Medical and Dental Expenses,” Catalog Number 15002Q. You can order the publication by calling (800) TAX FORM or see it online at www.irs.gov/pub/irs-pdf/p502.pdf.
For tax advice, please seek the services of a competent professional.
- Some Qualified Medical Expenses
Abortion Eyeglasses Out-of-pocket expenses Acupuncture Eye Surgery Operations Alcoholism Treatment Fertility Enhancement Optometrist Ambulance Guide Dogs Oral Surgery Artificial Limb Hearing Aids Organ Donors Bandages Home Care Osteopath Birth Control Pills (prescription) Hospital Services Oxygen Breast Reconstruction Surgery (mastectomy) Insurance Premiums Prosthesis Braces Laboratory Fees Psychiatric Care Braille Books and Magazines Lead -Based Paint Removal Psychoanalysis Chiropractor Learning Disability Psychologist Contact Lenses Legal Fee (mental illness treatment) Sterilization Crutches Lodging (Hospital) Stop-Smoking Programs Dental Treatment Long-Term-Care Therapy Diagnostic Devices Medicines (prescribed) Vaccines Disabled Dependent Care Expenses Non-prescribed medicine (insulin) X-Ray Drug Addiction Treatment Nursing Services Refer to: IRS Publication 502 - Some Non-Qualified Medical Expenses
Babysitting Electrolysis Maternity Clothes Controlled Substances Funeral Expenses Teeth Whitening Cosmetic Surgery Hair Transplants Weight-Loss Program Dancing Lessons Health Club Dues Refer to: IRS Publication 502
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Cafeteria Plan
- What is a Cafeteria Plan?
A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements and regulations of section 125 of the Internal Revenue Code (IRC). Section 125 allows employees to pay for a variety of benefits with pretax dollars, thus reducing the amount of their wages that are subject to federal income and employment taxes. Employers also get a tax savings because their share of employment taxes is also reduced. The "qualified" benefits that may be provided through Section 125, or flex or cafeteria, plans include health insurance, disability insurance, group term life insurance, group legal services coverage, elective contributions to 401(k) plans, adoption assistance, and medical and child care reimbursements.
The Internal Revenue Service (IRS) says that both a health savings account (HSA) and a high deductible health plan (HDHP) associated with the HSA may be offered as options under a cafeteria plan. Thus, an employee may elect to have pretax salary reductions contributed as employer contributions to an HSA and an HDHP.
Certain benefits such as long-term care insurance may not be funded with pretax dollars through a 125 plan. The written plan must specifically describe all benefits and establish rules for eligibility and elections.
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