Employees enrolled in the Federal Employees Health Benefits Program have new health insurance
options to consider for 2005 — among them high-deductible plans with health savings accounts (HSAs).
Available to those who are not enrolled in Medicare or another health plan, the HSA option promises participants the potential benefits of a growing savings account, tax savings, lower insurance premiums and increased control over their health care decisions. One of the latest developments in the health
insurance industry, HSAs are intended to help control the skyrocketing cost of health care and health insurance — by rewarding participants for choosing less expensive care. But the plans carry with them a
high deductible and a significant amount of risk, and that risk should be carefully weighed before making the decision to switch from more traditional insurance.
How HSAs work
An HSA is only one part of a two-part plan. The plan includes the HSA in conjunction with a specially
configured health insurance policy. The health insurance policy must have certain characteristics in order for the HSA to be qualified for special tax treatment. An example may help to clarify a somewhat complex set of rules:
One of the HSA options being offered nationwide is the GEHA High Deductible Health Plan (HDHP). The
annual deductible for family coverage is $2,200 with a catastrophic limit of $10,000 per year. This means
that, with certain exceptions, you, the participant, will be responsible for paying the first $2,200 in medical expenses each year before GEHA will begin to pay. Once the insurance benefits begin, you will be responsible for sharing the cost of insured expenses with GEHA. For example, when services are from preferred providers, GEHA will pay 85 percent of the cost of a physician’s office visit and 70 percent of the cost of certain prescription drugs, and you will pay the rest. Your total costs for meeting the deductible requirement and any co-insurance obligations are limited to $10,000 per year. Once this threshold is reached, GEHA will begin paying 100 percent of each covered expense.
The premium for this coverage is $223.62 per month. Of this amount, GEHA will divert $120 into your
HSA, a special savings account set up on your behalf. This contribution will be made with pretax dollars,
just like any health insurance premiums deducted from your paycheck. Once in your account, the funds
are fully vested to you and accumulate interest that is either tax-free or tax-deferred, depending on how you ultimately use the money.
GEHA’s partner, HSA Bank of Sheboygan, Wis., sets interest rates according to account size. On its Web site, www.hsabank.com, the bank currently quotes rates that range from no interest on accounts with balances under $500 to 3.25 percent on accounts with balances of at least $15,000.
The primary purpose of the HSA is to provide a source of funds to help pay for medical expenses not
covered by the health plan — including deductible and co-payment amounts. If used for this purpose, the
money can be withdrawn tax-free. If the funds are withdrawn for non-medical expenses, there is a 10
percent income tax penalty. Any withdrawals for non-medical expenses after age 65, however, are not
subject to the 10 percent penalty but are subject to income tax. If not withdrawn, the balance of funds is
carried forward from year to year.
Considering the cost
In this example, the $223.62 monthly payroll deduction is a $103.62 insurance premium and a $120
savings contribution. Over 12 months, the savings contributions will total $1,440 plus any earned interest. At this rate, it will probably take up to 1½ years, with minimal medical expenses, to accumulate a fund large enough to cover the current deductible. It would likely take nearly seven years to accumulate a fund large enough to cover the current $10,000 out-of-pocket maximum. Of course, the length of time required to build up your HSA balance is heavily dependent on how much you withdraw to cover any medical expenses you incur during the accumulation period.
To speed up the process of building an HSA balance, participants may also make additional tax-free
contributions as long as the total amount contributed to the account during the year is not more than the
deductible for that year. So, in addition to GEHA’s $120 per month contribution, you could elect to contribute another $63.33 per month, for a total of $2,200 per year. At this rate, your account could cover the cost of the deductible in one year, instead of 1½ years, and cover the out-of-pocket maximum in five years, instead of nearly seven.
One way to put this in perspective is to compare the cost of the HDHP/HSA combination with that of the
alternatives. For example, the premium for family coverage in the GEHA Benefit Plan High, one of the
nationwide fee-for-service options offered under FEHBP, is higher, $392.99 per month. But this plan has
a lower deductible — $350 per person per year — and lower co-insurance contributions. You pay $20 for
preferred provider office visits, $5 for generic drugs and $25 for brand-name drugs, for example.
Comparing your options
While HSAs are an exciting addition to the FEHBP lineup, they carry certain risks that may be
unacceptable to many participants. A participant who cannot afford to cover the high deductible with ease and the out-of-pocket maximum with only some discomfort probably should not consider the HSA option. The best candidates are those who don’t have any large ongoing or anticipated medical expenses. Younger workers are more likely to benefit than older workers, except that the medical costs associated with having or raising children should be considered. As a broad rule of thumb, the best candidates for HSA enrollment are most likely to be workers in their 40s or 50s, who are in good health and have healthy dependents or no dependents, who have substantial savings or excellent credit resources and who plan to continue working for 10 years or more. For these participants, HSAs offer some significant tax advantages — tax-free coverage of medical expenses and tax-deferred growth on the account balance. It’s like having an IRA with more liberal contribution limits in exchange for taking some risk.
Each case is unique, however, and should be carefully considered before proceeding. There is much
more to learn before choosing to participate in the HSA program. Visit www.opm.gov/hsa for more information.
Written by Mike Miles
For the Federal Times
Publication November 15, 2004