INSURANCE 101:Consumer-Driven Health Plans (CDHP)

With the evolution of the healthcare marketplace, many insurers have begun to shift the risk of health insurance from the insurer to the insured.  Essentially, this means that insurers are requiring insured members to take control of their healthcare decisions.  This approach is becoming more commonplace in reducing or eliminating unnecessary procedures and expenses and improving the overall quality of health care.

Franchise Insurance
Health insurance can be provided for groups too small to be considered a group by most state standards.  Generally, this type of insurance is marketed to the employees of a small business or members of an association or professional society.  It provides members with a lower premium group policy with similar provisions for each member; however, each member can customize certain benefits based on his her needs.

Small Employer Plans
Groups of usually 50 or less employees have become expensive to insure with the rising costs of health care.  Recent developments by several states include mandating insurance to be offered to small employers, limits on waiting periods, and guaranteed coverage regardless of pre-existing health concerns.  Plans cannot be canceled due to a rise in health claims, but can be canceled if premium is not paid by the employer.

Health Reimbursement Arrangement (HRA)
Considered a dominant form of consumer-directed health plans, an HRA is a high-deductible health plan associated with a tax favored saving account that an employer creates for each employee.  The plan allows members to use the savings account to pay for health care costs including deductibles, coinsurance, and other covered health care expenses.  Any unused funds in the employer account is usually rolled over and saved for the next year.

IRS 125 Plan (Cafeteria Plan)
Also known as a Flexible Benefits Plan, it is a benefit program under Section 125 of the Internal Revenue Code that offers employees a choice between permissible taxable benefits, including:  cash, and nontaxable benefits such as life and health insurance, vacations, retirement plans and child care. Although a common core of benefits may be required, the employee can determine how his or her remaining benefit dollars are to be allocated for each type of benefit from the total amount promised by the employer. Sometimes employee contributions may be made for additional coverage.

Flexible Spending Account or Arrangement (FSA)
Accounts offered and administered by employers that provide a way for employees to set aside, out of their paycheck, pre-tax dollars to pay for the employee’s share of insurance premiums or medical expenses not covered by the employer’s health plan. The employer may also make contributions to a FSA. Typically, benefits or cash must be used within the given benefit year or the employee loses the money. Flexible spending accounts can also be provided to cover childcare expenses, but those accounts must be established separately from medical FSAs.

Medical Savings Account (MSA)
Savings accounts designated for out-of-pocket medical expenses. In an MSA, employers and individuals are allowed to contribute to a savings account on a pre-tax basis and carry over the unused funds at the end of the year.

FSA vs. MSA
One major difference between a Flexible Spending Account (FSA) and a Medical Savings Account (MSA) is the ability under an MSA to carry over the unused funds for use in a future year, instead of losing unused funds at the end of the year.  Most MSAs allow unused balances and earnings to accumulate.  Unlike FSAs, most MSAs are combined with a high deductible health insurance plan.

High Deductible Health Plan (HDHP)
A type of health insurance plan that is associated with an HSA or MSA and is named after the typically high deductible amounts attached to such plans.  Deductible amounts determine the policy’s premium rate, so the higher the deductible, the lower the premium payment.

Health Savings Account (HSA)
A Health Savings Account (HSA) is a tax-advantaged medical expense savings account that works in conjunction with a qualified high deductible health insurance plan (HDHP) as a means of helping policyholders reduce their overall healthcare costs. It is a relatively new type of savings account that has replaced Medical Savings Accounts (MSAs).

Often set up by employers for their employees or by the self-employed, an HSA provides tax advantages for both contributions to the account and withdrawals from the account for qualified medical expenses that are not covered by the HDHP. It is established through a bank or other financial institution often provided to the policyholder by the insurance company responsible for the HDHP. Withdrawals from the account are made through HSA debit cards or financial institution checks associated with the HSA.

HSA Contributions
In addition to the policyholder, anyone can contribute to a policyholder’s HSA including the policyholder’s employer, family members, and friends.  Contributions made by the policyholder are 100% tax deductible up to his or her annual self-only or family contribution limit.  Contributions made by family members or friends must be payable to the account holder, who in turn, deposits it into his or her HSA account.

Employer contributions and self-employed income contributions are deposited into an HSA with pre-tax dollars and is not considered to be taxable income for the employee or self-employed policyholder.  These pre-tax contributions are not treated as income to the policyholder and therefore are not included in his or her annual taxable income amount.  Unlike a Health Reimbursement Arrangement (HRA), the HSA policyholder controls the account and once deposited into the HSA, contributions become the property of the policyholder, even if he or she changes employment.

Annual Contribution Limits (Self-Only & Family HDHP Coverage)
All contributions, regardless of its source, count towards the annual maximum limit. Annual limits have increased each year since the inception of the HSA in 2004.  The 2018 contribution limit for self-only coverage is $3,450, up from $3,400 in 2017, and for family coverage the 2018 contribution limit is $6,900, up from $6,750 in 2017. Unlike an FSA, funds in an HSA roll over each year and accumulate over time.

Policyholders age 55 and older may make additional annual deposits, called ‘catch-up’ contributions of up to $1,000 on top of the annual contribution limit.

Funding an HSA is similar to funding an IRA in that contributions are invested and grow tax-free over time.  An HSA is also portable from one HDHP to another and if the policyholder dies, the HSA is transferable to the policyholder’s spouse tax-free.  If no spouse exists, the account will pass on to a named beneficiary designated at the inception of the policy; however, unlike transferring to a spouse, the HSA will end on the date of the policyholder’s death and the distribution of the account will be taxed as income to the beneficiary. If no beneficiary exists at the time of the policyholder’s death, the account will be distributed to the policyholder’s estate and taxed as such.

HSA Withdrawals (Qualified vs. Unqualified)
HSA funds are withdrawn from the account through an HSA debit card or checking account that is provided at the time the account is established. Prior approval to withdraw funds is not required and may be done so anytime the policyholder needs to access the account.

HSA withdrawals are either qualified or unqualified, meaning the funds can be withdrawn tax-free or subject to income tax (and an additional penalty tax).

Tax-free qualified medical expenses are those that are not already covered by the HDHP such as the policyholder’s deductible, coinsurance and co-pay expenses.  Several additional medical expenses that are payable using HSA funds include bandages, birth control pills, chiropractor visits, dental treatments, eye exams and elective surgery, stop-smoking programs, prescriptions and certain over-the-counter drugs, as well as many other HSA-qualified medical expenses. However, the HDHP’s policy premium is not a qualified HSA expense.

Withdrawals for non-qualified medical expenses, as well as any other withdrawal, is taxed as ordinary income, and if withdrawn prior to age 65, is also subject to a 20% early withdrawal penalty tax. After age 65, withdrawals made for non-qualified expenses, or any other withdrawals, are taxed as ordinary income but are not subject to the 20% penalty tax.

Self-Insured Plans
Large corporations, labor unions and other qualified groups ‘self-insure,’ paying the more common and less expensive medical expenses incurred by their employees or members to reduce the premium costs involved with providing insurance.  However, an employer usually covers employee claims up to a predetermined stop-loss amount, at which point an insurance company pays the remainder of the claims. This stop-loss is intended to limit the employer’s responsibility for an excessive amount of claims. Although claims are funded by the employer, the employer may still use an insurance company for administrative purposes and claims processing, known as Administrative Services Only (ASO) or Third Party Administrator (TPA). Employees often pay premiums in the form of dues to their employer or group.

Multiple Employer Trust (MET)
Multiple employers within a similar industry or field join and receive health insurance from a series of trusts that are established and maintained to provide insurance to employees of multiple companies at a lower and more affordable rate.

In order to obtain coverage through a MET, an employer must become a member of and subscribe to a trust that brings together a number of small, unrelated employers for the purpose of providing group health coverage.  An insurer or third party administrator (TPA) creates and administers the insurance for the various employers, and all claims are paid through the series of trusts that the insurance was established through.  METs can also be set up as noninsured, meaning that no insurance company is used and claims are paid directly from the trusts.

Multiple Employer Welfare Association / Arrangement (MEWA)
Similar to a MET, a ‘MEWA’ is the technical term under federal law that is used to define any arrangement not maintained pursuant to a collective bargaining agreement (other than a state-licensed insurance company or HMO) that provides health insurance benefits to the employees of two or more private employers.

Essentially, these types of arrangements are usually established by trade associations or other similar groups of employers to combine the purchasing power of several employers in an effort to self-insure employees.  This allows smaller employers with a means of offering more affordable health coverage through participation in the MEWA.