In the Nov. 15 Money Matters column, I discussed the new health savings account (HSA) option being
offered during the Federal Employees Health Benefits Program open season, ongoing through Dec. 13. In summary, these accounts, which are part of a high-deductible health insurance plan, are similar to IRAs with the added benefit of permitting tax-free withdrawals to pay for qualified medical expenses not
covered by health insurance. While not appropriate for everyone, this option offers an attractive opportunity to reduce income taxes, save on health insurance costs and potentially bank some or all or
those savings for retirement.
Unfortunately, in addition to being financially inappropriate for some federal workers, they are unavailable to others. To participate in an HSA, an applicant must:
- Not be enrolled in Medicare.
- Not be covered by another health plan.
- Not be claimed as a dependent on someone else’s federal tax return.
In cases where an applicant is ineligible to participate in an HSA, he or she will automatically be enrolled
in an alternative plan, called a health reimbursement arrangement (HRA). Like the HSA, the HRA must be opened in conjunction with a high-deductible health insurance plan. The insurer will create a fund into
which a predetermined amount will be credited each time you make a premium payment. The credits in
this account can then be used to pay for qualified medical expenses not otherwise covered by the health
plan.
As an example, if you were to enroll in the HRA under the GEHA high-deductible health plan with family
coverage, the monthly premium would be $223.62: the annual deductible, $2,200; and the annual out-of-pocket maximum, $10,000.
In addition to the deductible, you would be responsible for co-insurance amounts once the deductible is
satisfied. You would also have access to credits of $120 per month, or $1,440 per year, to help cover
your share of the medical costs you incur. There is also a $300 annual allowance for preventive care
services in addition to the monthly credits.
As your medical expenses are incurred during the year, the credits in your HRA may be used to pay
them. So, the first $1,440 of your annual deductible may be covered by the HRA credits. You would pay
the rest of the deductible out of pocket. After your deductible has been met, you pay any co-insurance
amounts until the out-of-pocket maximum has been reached, when the insurer begins paying 100 percent of covered expenses.
Your HRA credits accumulate from month to month if they are not used. Any credits remaining unused at
the end of the year can be carried forward as long as you remain employed by the federal government
and continue in the same health plan. When you switch health plans or leave federal service, your HRA
balance will be forfeited.
There are three key differences between an HRA and an HSA. First, you may not make additional
voluntary contributions to an HRA. Second, HRA credit balances may not be used for any purpose other
than qualified medical expenses. Third, an HRA fund does not earn interest.
The main reasons to consider an HRA plan are to save money on your out-of-pocket health care and
insurance costs, and to gain additional control over your health care decisions. In general, you are more
likely to save money by using the HRA option if you expect your health care needs during the year to be
relatively light. Using a traditional health plan will cost more in premiums than the high-deductible HRA
plan, but will likely cover more of the costs you incur beyond the HRA credit amount. With the HRA, your
first $120 per month in expenses will likely be fully covered, but your obligation for covering costs above
this level will be higher than with a traditional plan, particularly in the first year when you have no credits
to carry forward.
The HRA plan allows you to spend the credits you’ve accumulated to pay for costs incurred from any
provider. You will have incentives to choose the lower rates charged by in-network providers to help stretch your credits as far as possible, but this is not required. So, compared with a traditional plan, the HRA plan offers participants greater control, particularly over the first and most likely expenses incurred
during the year.
Written by Mike Miles
For the Federal Times
Publication November 29, 2004