High Deductible Health Plans &

Health Savings Accounts, Simplified

By Jothi Nedungadi

HDHP

HDHPs are High Deductible Health Plans that were introduced in 2003 to reduce the increasing cost of health insurance premiums. It is also a consumer-driven product which means it gives the consumer the control over their respective healthcare decisions. There is usually a copayment (payment at the point of service) and a coinsurance (the insurance provider covers a certain percentage and the remainder is paid for by the patient, usually referred to as copay 100/0, 80/20 or 70/30) after the deductible is met. With HDHP, the employer can contribute a specific percentage of the deductible amount, leaving the remaining amount of the deductible to be contributed by the employee to an HSA account. The employer also has the option of contributing a lump-sum or a monthly contribution. The rationale for the lump-sum contribution is, essentially, to help the employees establish an HSA and have the peace of mind of knowing that they have some available money in their accounts before their individual monthly contributions can accumulate and are able to pay for the immediate qualified medical expenses. Due to the cost sharing involved in this set-up, the employee is able to see less money coming out of their monthly paycheck while the money that is contributed is going into an account, tax free. For wage earners in the lower income bracket, this may be of concern especially if they are faced with unexpected medical expenses. They may not be able to meet the upfront medical cost and therefore, it could pose a financial threat. But there can be special arrangements that can be made between the employer and the individuals to mitigate such an event. For the most part, HDHPs cover routine services at a 100%. There are two main types of HDHPs that are offered currently by most Insurance providers: HRAs and HSAs.

HSA

Health Savings Accounts are another consumer-driven means for consumers to take control of their healthcare costs and decisions. An HDHP is required in order for anyone to open an HSA. Though HDHP and HSA are not mutually exclusive, it is advisable for a consumer to open a HSA so that there is no mismanagement of the funds in the account and the expenses and contributions can be treated appropriately for tax purposes. HSAs are a tax free account. The funds in the account can only be used for qualified medical expensestill the age of 65. The contributions to the account are pre-tax contributions. The funds in the account can be rolled over from year to year while accruing interest and, after 65 years of age it can be used for other expenses without any tax implications. There are limits to the contribution amounts into an HSA. The consumer can make individual contributionsto a maximum of $2,850 per year (for 2007 tax year) or make a family contributionto a maximum of $5,650 per year (for 2007 tax year) to cover the deductible that has been selected. The contributions can be shared by the employers and employees equally. If the employer is contributing to the HDHP, then there would be a monthly automatic deposit into the employees HSA account or there would be a lump sum deposit to help the consumer get a head start on their respective medical expenses. But it is important to note that the funds that are deposited into the HSA account belongs to the employee and therefore, if the employee should choose to terminate employment, they would not be held responsible to return any part of the contribution. The money in the interest bearing account can grow and provisions can be made with the banking establishment to invest the money. The money in the account, if untouched can be rolled over from year to year with no tax implications. The HSAs allow consumers to manage the money as they see fit for their qualified medical expenses all while growing the funds if they remain healthy and do not have to use the funds in the account. The fact that the money is accumulating and that they have control over it gives some consumers the satisfaction that there is some return on investment.

Opening an HSA

While the process of opening an account may seem straightforward, there are things that consumers should be aware of. Firstly, all HSA accounts at the banks, credit unions and other financial establishments are structured differently. It does require a bit of investigating to get the best value for the money that you are placing in an interest bearing account. There are often initial set up fees, monthly maintenance fees and investment fees for some of the accounts and yet others that will charge no upfront costs to set up the account but will charge you a maintenance fee if you request a paper statement as opposed to an electronic statement. So, buyers beware! As a consumer, it would be prudent to ask about all the applicable fees related to an HSA before opening an account. Credit Unions have generally been offering the best rates for HSA services. It is customary for the insurance provider/the contributing employer to suggest a bank that would handle HSAs but research shows that shopping around for better rates may be beneficial.

HSAs are a valuable consumer driven solutions to the healthcare insurance plan if you understand how it works and how it can benefit you. But it does require a bit of upfront work to set it up and understand the implications of having a Health Savings Account.