Deciphering the Alphabet Soup of Health Insurance
By Beth Bierbower, Vice President, Product Design & Development
Humana, Inc.
In the acronym-filled world of health care and health insurance, how do you know which plan is right for you? Here’s a quick guide to help you through the alphabetical maze of health insurance options.
HSA – Health Savings Account
The newest entry into the world of health care acronyms is the HSA, or health savings account. An HSA is a tax-deductible account, which allows you to contribute funds that can be used tax-free to pay for qualified medical expenses, including your health plan deductible. Unused money rolls over year after year, allowing you to accumulate savings to cover future medical costs. These accounts are portable and can be taken with you should you leave one company for another.
How do you qualify? You need to be enrolled in a high-deductible health insurance plan (HDHP) with minimum annual deductibles of $1,000 for individuals and $2,000 for families, you cannot be claimed as a dependent on anyone else’s tax return and you cannot be enrolled for Medicare benefits.
The benefits? You have control. You can save tax-free for health care expenses, and there’s no limit to how much you can contribute over time (be aware of annual limitations, however). Both you and your employer can contribute to the account. Most HSAs utilize debit cards for easy fund access. Because you’re enrolled in an HDHP, your monthly premiums are lower. Once you turn 65, your HSA becomes a retirement account, from which you can draw funds tax-free for medical expenses (note: taxes are charged for non-health-care-related withdrawals).
The drawbacks? The enrollment process can be annoying and confusing, so be sure you go with a well-established health insurance provider who can guide you through the process. Some insurers even offer one-step enrollment in both the HSA and HDHP, so finding a plan that offers this feature will save you time and headache. If you have a major illness or “catastrophic event,” you could end up spending more than with a traditional low-deductible health plan.
HRA – Health Reimbursement Account
The HRA, or health reimbursement account, is much like the HSA in that it allows tax-free earnings and is typically coupled with an HDHP. But, that is where the similarity ends. HRAs are solely employer funded, which means you can’t contribute additional money towards the account.
The benefits? With HRAs, unused funds roll over from year to year, enabling you to save for future medical costs. You can use money from your account, even if it hasn’t yet been deposited by your employer. Like an HSA, HRAs are combined with HDHPs, so monthly premiums are typically lower than with a traditional health benefits plan. Since the account is entirely employer-funded, you don’t have to worry about money out of your paychecks.
The drawbacks? Employers set the amount you get; anything beyond that is your responsibility. Once coverage is set, no changes can be made until open enrollment. Unlike with an HSA, contributed funds typically cannot be accessed with a debit card. If you leave your job, the funds stay with your employer – it is not transferable. Since HRAs are employer-funded, you’re not eligible if you’re self-employed.
FSA – Flexible Spending Account
These have been around for a while and you’ve probably heard about them from your employer (sometimes they’re called cafeteria plans). An FSA, or flexible spending account, is an account set up by you for medical expenses not covered by your employer’s health insurance.
The benefits? You can put away money tax-free (you don’t pay income or Social Security tax on the contributions) for any qualified health care expense, including prescription and OTC medications. You determine how much of your pay will be diverted to your account, in accordance with federal guidelines, and you use it when needed.
The drawbacks? Many employers institute limits on contributions, so be sure to ask about them. Any unspent funds are forfeited at the end of the year – you use it or you lose it. If you have an HSA, you typically can’t have an FSA, though there are exceptions. Sorry, if you’re self-employed, you’re not eligible for an FSA.
MSA – Medical Savings Account
MSAs, or medical savings accounts, are the predecessor to the new HSAs and allow you to draw from an account to pay for uncovered medical expenses. With the introduction of HSAs, MSAs are no longer available. However, if you were already enrolled in an MSA, recent legislation allows you to keep you plan until 2005. But be prepared to switch come the end of the year!
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