Why Federal Employees Should Consider High Deductible Health Plans During Open Season

A high deductible health plan (HDHP) is one of the types of health insurance plans offered through the Federal Employees Health Benefits (FEHB) program. An HDHP is associated with a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA). HDHPs also provide flexibility and discretion over how one uses health care dollars today.

HDHPs have higher annual deductibles and out-of-pocket maximum limits than other types of FEHB program insurance plans including Fee for Service (FFS), Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) health insurance plans. With an HDHP, the annual (high) deductible must be met before plan benefits are paid for services other than in-network preventive care services, which are fully covered before the deductible is met.

HDHPs also protect the HDHP participant against catastrophic out-of-pocket expenses for covered services. Once the HDHP participant’s annual out-of-pocket expenses for services from in-network providers, (including deductibles, copayments and coinsurance) reaches the pre-determined catastrophic limit, the plan pays 100 percent of the allowable amount for the remainder of the calendar year. The other important feature associated with an HDHP is the HSA or the HRA.

Health Savings Account (HSA)

An HSA allows individuals to pay for current health expenses and save for future medical expenses on a before-taxed basis. Funds deposited into an HSA are before-taxed dollars, the funds in the HSA accrue earnings and grows tax-free; and HSA funds and accrued earnings can be withdrawn tax-free to pay for qualified medical expenses, including copayments, coinsurance and deductibles both currently and in the future. Unlike a health care flexible spending account (HCFSA) which can be used only by employees and there is a limit of $500 that can be carried over from year to year, the HSA belongs to the owner and stays with him or her, including leaving Federal service and retiring from Federal service. In short, here are the advantages of being enrolled in an HSA:

Tax deductible contributions

Contributions made to the HSA are 100 percent tax deductible, up to the legal limit. This is similar to contributions made to a deductible traditional individual retirement arrangement (IRA). Also, like a deductible traditional IRA contribution, a contribution to an HSA is reported on one’s income tax return as an adjustment to income (an “above-the-line” deduction). In other words, an individual does not have to itemize on his or her income taxes in order to get a tax benefit by contributing to their HSA.

Tax-free distributions

Withdrawals from an HSA to pay for qualified medical, dental, vision or long-term care expenses are not taxed. Qualified HSA withdrawals for the HSA owner and qualified family members can be made currently and in the future, including during the HSA owner’s retirement years.

Tax-deferred earnings

HSAs accrue earnings accumulate tax-deferred. The accrued earnings are tax-free when withdrawn to pay for qualified medical, dental, vision or long-term care expenses.

HSAs therefore have the “trifecta” tax advantage – tax deductible contributions, tax-free investment growth and tax-free withdrawals to pay for qualified medical expenses.

The following employees and annuitants are eligible for an HSA and may contribute to it:

(1) employees and annuitants enrolled in an HDHP and not having additional health insurance associated with a non-HDHP health insurance plan themselves or through a spouse’s non-HDHP insurance;

(2) employees and annuitants not enrolled in any part of Medicare – Medicare Parts A, B, C or D;

(3) employees not claimed as a tax dependent on someone else’s Federal income tax return; and

(4) not covered by one’s own or a spouse’s health care flexible spending account (HCFSA). Note that being enrolled in a Federal-sponsored dental or vision insurance plan, or long-term care insurance plan will not disqualify one from participation in an HSA. “Participation” means being eligible to contribute to one’s HSA.

Each year the IRS announces limits on contributions to HSAs, HDHP minimum deductibles, and for out-of-network spending limits under HDHPs linked to HSAs. The following table summarizes the IRS HSA limits for 2019:

How does an HDHP associated with an HSA work?

In order for an HDHP to work with an HSA, the following must happen:

(1) an employee or annuitant must enroll in an HDHP under the FEHBP program;

(2) the HDHP establishes an HSA with a fiduciary – each HDHP has more information on how this step works in their brochure;

(3) the FEHB plan contributes money into the enrollee’s HSA – the “premium pass through”;

(4) the HDHP enrollee can make additional voluntary tax-deductible contributions into his or her HSA, up to the maximum allowable amount determined each year by the IRS;

(5) HDHP enrollees and enrolled family members can receive “preventive care” – annual well visits, mammograms, etc. – without having to reach the plan deductible first (so-called “first dollar” coverage) when participating plan providers are used;

(6) when non-preventative care is needed, the enrollee pays the full cost of the care with funds from either the HSA (withdrawn tax-free) or out-of-pocket, up to the plan’s high deductible. Health plans negotiate discounts with providers who participate in their health plan network; and

(7) when an enrollee reaches the catastrophic limit, the HDHP will pay for needed care with no charge to the enrollee. It is important to remember that once the catastrophic maximum limit is met, the HDHP enrollee will not incur additional out-of-pocket medical expenses for the rest of the calendar year for in-network care, including doctor visit copayments and prescriptions, which are excluded from some traditional plan’s catastrophic limits. Qualified (tax-free) withdrawals from an HSA include paying Medicare Part B premiums and paying long term care insurance premiums

Health Reimbursement Arrangement (HRA)

HDHP enrollees who are not eligible for an HSA will be provided a Health Reimbursement Arrangement (HRA). An HRA is an employer-funded tax-sheltered account to reimburse allowable medical expenses. The following are features of an HRA:

• Tax-free withdrawals for qualified medical expenses;

• Carryover of unused credits without limit from year to year; and

• HRA is administered by the HDHP.

How does an HDHP associated with an HRA work?

In order for an HDHP to work with an HRA, the following must happen:

(1) an employee or annuitant must enroll in an HDHP under the FEHB program;

(2) the HDHP plan established an HRA for the employee or annuitant (each HDHP has more information on how this step works);

(3) the HDHP will credit a portion of the health plan premium to the HRA at the beginning of the calendar year. The amount for either a self only enrollment or a self and family enrollment will be the same as the amounts that will be deposited in HSAs in the same plan;

(4) when the HDHP enrollee or family member needs preventative care, the plan will provide it without cost to the enrollee, subject to any limits outlined in the plan’s brochure;

(5) when non-preventative care is needed, the enrollee can use funds in the HRA to help pay the HDHP plan deductible. HRA withdrawals can be used to pay Medicare Part B premiums;

(6) when the HDHP enrollee reaches the catastrophic limit, the HDHP will provide needed care with no charge to the enrollee, assuming in-network providers are used.