Thursday, December 1, 2011

Understanding Consumer Directed Health Plans

Knowledge is the most important thing in most circumstances, but when choosing a health plan that will protect you and your family you need to know everything there is to know about your costs vs your payments. Consumer-Directed or Consumer-Driven Health Plans that include health savings accounts, (HSA) flexible spending accounts (FSA) and health reimbursement accounts (HRAs) could save you money and help you plan wisely for unexpected health expenses. 

Health savings accounts are like personal savings accounts, but the money in an HSA can only be used for health care expenses. Both employees and employers can contribute to an HSA up to an annual amount limit, set by a statutory cap: @$3,000 for a single individual and @5,000 for a family. (

Employee contributions to an HSA are made on a pre-income tax basis and some employers arrange for contributions through payroll deduction. However, individuals own and control the money in an HSA. Once deposited, this money cannot be accessed by your employer or your insurer. The money is not taxed, and you can invest it in stocks, bonds and mutual funds. . Further, you don’t have to spend the money put into the account by year end or otherwise lose whatever is left. Money can be rolled over from year to year which enables you to accumulate tax free dollars that can be withdrawn at age 65.

 To be eligible to open an HSA,  you must have a special type of health insurance called a high-deductible plan.  High-deductible plans act like a safety net if you need extensive medical care. Like any health care option, HSA’s have advantages and disadvantages. When considering an HAS, you must review your anticipated health care expenses, your financial situation and how much control you want over your health care spending. If you're generally healthy and want to save for future health care expenses, an HSA may be an attractive choice. However, if you anticipate needing expensive medical care in the next year and would find it hard to meet a high deductible, an HSA might not be your best option.

The Flexible spending account is another tax-advantaged financial account and allows you to set aside a portion of your earnings to pay for qualified expenses, most commonly for medical expense but often for dependent care as well. Money is deducted from your paycheck into an FSA and is not subject to payroll tax, resulting in a substantial payroll tax savings. FSAs are commonly offered with more traditional health plans and do not require you to enroll in a high deductible plan. Most people who have an FSA use it to pay for medical expenses not paid for by insurance, usually deductibles, copayments, and coinsurance. Prior to January 1, 2011, over-the-counter (OTC) items such as bandages, rubbing alcohol, first aid kits, and other medical expenses not distinguished as a drug or medicine were reimbursable under health care FSA plans. The Patient Protection and Affordable Care Act changed the rules, allowing reimbursement for these items only when purchased with a doctor's prescription. FSAs can also be established to pay for care for dependents who live with you and need care while you are at work. This includes child care, for children under the age of 13, or for children of any age who are physically or mentally incapable of self-care, as well as adult day care for elderly dependents. The dependent care FSA is federally capped at $5,000 per year, per household. The minimum annual amount you can elect is $250 per account. One significant disadvantage to using an FSA, unlike the HSA, is that funds not used by the end of the plan year cannot be rolled into the next year.

Health Reimbursement Accounts are medical care reimbursement plans established by employers and used by employees to pay for health care. Employers typically commit to a specific amount of money to be available in an HRA for an individual to pay premiums and other medical expenses. Unspent funds in an HRA are usually carried over to the next year; however, employees do not take their HRA balance with them if they leave the job. HRAs are initiated by the employer and serviced by a third-party administrator or plan service provider. The employer may provide in the HRA plan document that a credit balance in an employee's HRA account can be rolled over from year to year like a savings account. This is an individual employer decision.

The money set aside in health savings accounts, flexible savings accounts and health reimbursements accounts provide a cushion and a comfort against unexpected health care expenses and are worth investigating. Choosing the right iteration is an individual decision based on projecting your health needs for the coming year. It is important that you arm yourself with as much information as possible to make the best choices. 

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