Choosing the Right High-Deductible Health Insurance Plan

Whether you agree with it or not, the government has got involved with the insurance industry. If you’re wondering who will pay for your insurance, how to get coverage, or what will happen to your premium, you’re not alone.

High-deductible health plans (HDHPs) are supposed to help minimize your monthly premiums. However, the out-of-pocket expenses are greater, due to the high deductible, compared to the co-pay fee at the time of a physician office visit ($25 or $50, or $500 or more for a hospital visit).

Not all HDHPs are created equal. Your insurance agent can review with you different plan options to help you save money with lower premiums. You should establish a deductible that fits your needs and financial capabilities.

Two types of savings accounts can be established with an HDHP: a health reimbursement account (HRA) and a health savings account (HSA). An HRA is an employer-funded plan, owned by the employer and not portable to the employee. In other words, should you leave your employer, you can’t take your HRA with you.

An HSA is owned by the individual. Each plan has different IRS tax benefits, which should be weighed when choosing one. And if you change jobs or get laid off, you can take your HSA account with you.

The money deposited into an HSA or HRA is above the premium paid to the insurance company. These contributions are considered “triple tax-free,” because the deposits are tax-deductible, the money grows tax-deferred, and the withdrawals are tax-free. The money in your HSA or HRA is intended to pay for medical expenses not covered by your HDHP.

You can establish a savings account with any bank or credit union, or with the insurance company that holds your HDHP. However, it is very important that you tell them specifically that it’s an account for an HDHP according to the Internal Revenue Code specific to either an HRA (IRC 105[h]) or an HSA (IRC 223).

How much tax-free money can you put aside?

The 2011 contribution limits remain unchanged from 2010:

Individuals can deposit up to $3,050 annually to their savings account.
A family can deposit up to $6,150 annually.
Catch-up provision: Anyone over age 50 can deposit up to an additional $1,000.

Benefits of an HSA

Portability: You can take your plan with you if you leave your job.
Flexibility: Your contributions (over the premium dollars) can be used for any medical treatments, not just doctor visits, such as dental and orthodontia. The contributions never expire. You can roll over the balance to the next year without penalty. However, beginning in 2011, over-the-counter drugs are excluded.
Tax savings: The money in an HSA is tax-deductible and grows tax-deferred, and withdrawals are tax-free.

Benefits of an HRA

The employer experiences lower premiums.
Funds reimbursed from an HRA are exempt from employer payroll taxes and Social Security taxes.
Participants become more aware of the real cost of medical care, ideally encouraging a healthier lifestyle.
HRA account balances roll over to the following year.
If an employee terminates, the funds are refunded to the employer at the end of the year.
An employee has the right to continue paying monthly HRA contributions, including an allowable administration fee charged by the employer, in order to meet allowable COBRA provisions.

Drawbacks of an HSA or HRA

When choosing an HRA or HSA, consider how the account will be maintained. If you have an HSA, make sure you keep all your receipts and do careful bookkeeping to track your deposits and expenditures.

If you’re an employer trying to set up an HRA, choose a trusted plan administrator to service the plan for you and your employees. Check with your accountant to see if it makes sense for your finances to have this type of plan for your business, and ask your insurance agent for the extensive list of qualified and ineligible medical expenses that can be paid for by your HSA or HRA savings account.

Linda Rey is a licensed insurance agent at Rey Insurance with a broad spectrum of expertise in life, accident, health, property and casualty insurance as well as retirement planning and college funding strategies.