Consumer Driven Health Care Plans
Health care costs rise each year and the problem has caused many to scramble in search of a solution. One attempt to constrain costs was the government response by passing the health care reforms passed in 2010. An alternative solution is to implement “consumer driven” health care plans. “Consumer driven” plans typically involve the individual making deposits in medical accounts and insurance plans with high deductibles. Deposits are often pre-tax money and the account grows tax-free. The four most popular forms of “consumer driven” healthcare plans:
Health Savings Accounts (HSAs) Health Reimbursement Accounts (HRAs) Medical Savings Accounts (MSAs) Flexible Spending Accounts (FSAs)
1. HEALTH SAVINGS ACCOUNTS (HSAs)
HSAs are similar to savings and retirement accounts. Deposits are made automatically and grow with tax-free interest over time. The use of funds was tax-deductible as long as limited to healthcare expenses until the age of 65. After 65, no limitations apply to the accounts and the funds may be used as retirement funds. The “Tax Relief and Health Care Act of 2006” allowed for workers at age 55 to exceed contribution limits with “catch-up” contributions that do not exceed $1000 annually.
The tax deductibility of deposits is limited according to individual or family status. The tax deductible contribution is limited to $3050 for individual accounts and $6150 for families. The contribution limits include employer and employee contributions.
HSAs require participation in a High Deductible Health Plan (HDHP). HDHP plans include high annual deductibles of at least $1200 per individual or $2400 per family. High deductibles are essential for reducing insurance premiums. HSA funds may be used for all forms of health care services including preventive care and prescriptions. HAS funds may not be used to pay health insurance premiums.
HSAs are administered by a trustee such as an insurance company that offers HSA and HDHP plans. Contributions are made to the trustee and the trustee is responsible for administering the accounts. The trustee is responsible for monitoring the eligibility of participants.
Leftover funds in HSAs are not lost at the end of the year. Rather, accounts continue to grow tax-free until age 65. Withdrawals from HSAs for nonmedical expenses are subject to a 10% penalty and to income tax until the age of 65 or due to the death, disability, or Medicare eligibility of the account holder.
2. HEALTH REIMBURSEMENT ACCOUNTS (HRAs)
HRAs are conceptually similar in many ways to HSAs. There are difference between HRAs and HSAs. First, HRAs are controlled by the employer and the employer creates “accounts” for employees. Second, HRA funds can be used to pay insurance premiums. HRAs do not require a HDHP. Employees are not required to pre-fund accounts but employer reimburses the employee for qualified medical expenses from a general operating fund.
HRAs can only be acquired through an employer and must be funded by the employer. The employer owns the account and governs how the funds are managed. The employer decides how to handle carry-over funds in the accounts. The employer decides if HRA funds remaining in an employee’s account are portable should the employee leave the firm.
3. MEDICAL SAVINGS ACCOUNTS (MSAs)
MSAs are health savings accounts for small businesses and self-employed individuals.
4. FLEXIBLE SPENDING ACCOUNTS (FSAs)
FSAs allow employees to pay for qualified medical expenses with pre-tax money. FSAs do not require participation in HDHPs so they do not lower premiums, but FSAs introduce customer choice in providers and how to pay for services.