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Consumer Driven Health Plans: Know your Options

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Benefits Consultants
Lumity, Inc.

Health care costs are at an all time high.  As premiums and employee medical claims continue to rise you may be considering an alternative to traditional health insurance plans. Many employers are turning to consumer driven health plans to soften the blow of bloated health care costs. These plans typically combine high deductible health insurance with a tax-advantaged account that can be used to pay deductibles and other expenses.  Four of the main types of consumer driven health plans are Health Reimbursement Arrangements (HRAs), Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and Medical Savings Accounts (MSAs). All accounts have similarities and differences.  The difficulty is in deciding which approach is best for you.

Medical Savings Accounts:  Tired and Restricted
The Arches Medical Savings Account (MSA) is the original consumer-driven health plan. Established in 1993, it's designed to work hand in hand with a high deductible health insurance policy. The high deductible policy works as a safeguard against catastrophic medical bills, while the medical savings account covers routine health services.  It seems like a marriage made in heaven, however after a 23 long years there are some issues that can’t be ignored.  For example, tax-free MSAs are only available to the self-employed and the employees of small businesses. If you employ more than 50 people, count yourself out. In addition, employers and employees can’t contribute to the employee’s MSA in the same year.

While established MSA accounts may continue to be used and receive contributions, no new accounts may be established.  Effectively eliminating these accounts from your list of options.

Health Savings Account: A More Flexible Approach
If you like the foundation of the MSA but aren’t so keen on the restrictions, Health Savings Accounts (HSAs) might be the way to go. Established in 2003, the HSA has worked through some of the issues associated with its older brother and offers a more attractive option to many employers and employees. HSAs can typically be established by non-dependent individuals who are covered by high deductible health plan. HSAs can be set up by an individual or the employer and unlike the MSA, both of you can make contributions in the same year. Like the MSA, the high deductible health plan is designed to protect you against catastrophic loss, but gives you the freedom to roll over unspent funds in the account from year to year. Since the HSA is owned by you, you may keep the account upon termination or retirement.

Flexible Spending Accounts: The not-so-flexible HSA
On paper, Flexible Spending Accounts (FSAs) provide a means for employees to considerably reduce their income tax liability through salary reduction. Employees can contribute a portion of their own salary to an account designated to pay for health care expenses. These pre-tax contributions are exempt from income and payroll taxes same as an HSA. The irony in the name of this account becomes apparent when you consider the restrictions that have made it an unpopular choice for many people. One of the most unattractive features of this option is the use-it-or-lose-it provision. You'll have to guess your medial expenses at the beginning of the year and elect a specific amount of salary deduction. In the absence of a crystal ball or data insights, it is impossible to predict yearly expenses and over-funded accounts are commonplace. Additionally, FSAs are also difficult and confusing to set up and administer.  They are often too cumbersome an option for small and midsize employers to contemplate. Employees may also face difficulties when claiming reimbursements.

Health Reimbursement Arrangements: The Employer Owned Option
Health reimbursement arrangements are becoming a popular way for employers to limit their health care costs and could be the solution you are looking for. Only the employer contributes to an HRA account. A maximum contribution per employee is set each year and unused amounts are never spent and are saved by the employer. This allows you to limit your health care costs. As the employee spends money on medical expenses, you write them a reimbursement check on a tax-free basis. Because HRAs are linked to group health plans, they are subject to laws such as HIPAA and COBRA. If an employee leaves, they may continue to access unused funds within the HRA by electing COBRA. Under COBRA, the employer may also be required to continue contributions during the COBRA coverage period. The requirement to continue contributions and comply with HIPAA is a deterrent for employers to choose HRAs.

Deciding on the Right Approach
Introducing consumerism into your health plan requires an evaluation of the benefits and disadvantages of HSAs, FSAs and HRAs. No single solution is right for every employer. In light of the complexities of choosing the right consumer-driven health plan, many employers continue to take a wait-and- see approach.

Many of the inherent difficulties in understanding which medical savings account to use can be alleviated with insights into your groups expected medical expenses. The risks to both you and your employees of HSA, FSA, and HRAs can be greatly diminished with data insights provided by Lumity.

If your organization is considering implementing a consumer-driven health plan, contact a Lumity representative to tell you about the options available with your benefits solution.

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