3 questions that can help you navigate the varied, complex choices your employer may offer, to make appropriate — and cost-effective — decisions
Wading through the world of deductibles, out-of-pocket maximums and co-payments is a challenge many of us face annually as we sift through our employer's menu of healthcare plan options. Figuring out how to efficiently manage health spending for you and your family can seem like a tall order, but if you invest a little additional time and thought into the process, you're more likely to end up with a plan that fits your needs without costing the moon.
“Instead of reflexively choosing the same health plan during open enrollment season each year, it's important to consider all your options,” says Danovan Clacken, health benefit solutions sales manager at Bank of America.
Here are three questions you might want to ask yourself as you go through your options.
How much healthcare coverage do I really need?
Because health insurance premiums can be costly, you want to find the sweet spot between sufficient coverage and over-insuring. That can take a little bit of extra work when you're married, especially if you have children. If both you and your spouse have employer-provided health insurance, compare benefits and premiums with your family's particular health history and needs in mind. For couples with children, it's worth investigating to discern whether the most cost-effective option might be for each spouse to take their own employer-sponsored plan, including the children on the plan that seems to best meet the family's specific needs.
As you go through the options, focus on the following two key elements:
Deductibles. What is the amount you'll pay for covered services before the co-insurance starts? (That's when the insurer begins to share in the cost.) With a lower deductible, you may pay higher premiums. If you and your family have few medical expenses and don't think you'll reach the deductible, you might want to consider a high deductible health plan (HDHP) and put the money you've saved with the lower premiums into a health savings account (HSA). (See more about HSAs below.) You must be enrolled in a qualified HDHP plan to contribute to an HSA (and meet certain other eligibility requirements).
Out-of-pocket maximums. That's the highest total amount you'll be expected to pay in the plan year for covered services — and should be an important part of your evaluation. Beyond the maximum, the insurer picks up all covered expenses, so if a family member has a medical condition that could cause medical costs to balloon, you might think about a plan with a lower deductible and lower out-of-pocket maximum.
One such plan type is a PPO (preferred provider organization), which may be offered by your employer or (if applicable) your spouse's. While it generally offers a lower deductible as well as a lower out-of-pocket maximum, it also has co-payments and usually higher premiums. If, for instance, you're planning on having a baby, expecting to need surgery or anticipating that your active kids will be paying visits to the ER, a PPO plan might be an appropriate choice. A young single person with no history of chronic illness may not need the extra coverage or want the added cost of such a plan.
Make sure you look at both the in-network and out-of-network features of a plan, as there can be separate deductibles, out-of-pocket maximums and co-insurance available depending on whether a provider or facility is in or out of network, and these features vary from plan to plan.
3 most common health accounts
All these tax-advantaged ways to save can be valuable, but they differ in key ways.
HSA
Health
Savings
Account
WHO IS ELIGIBLE: Anyone with an HSA-qualified health plan (and who meets certain other requirements*)
*To be HSA-eligible, an individual cannot also be covered by any other health plan (e.g., spouse's plan, Medicare, military health plan), cannot be claimed as a dependent on another person's tax return, and cannot be covered by a traditional healthcare flexible spending account or health reimbursement arrangement.
TAX BENEFITS: No federal taxes on contributions, earnings or withdrawals for qualified medical expenses
CAN FUNDS BE INVESTED? Yes, typically after a minimum account balance is attained
DO FUNDS ROLL OVER? Yes. Participants own the account
FSA
Flexible
Spending
Account
WHO IS ELIGIBLE: Employees of companies that offer one
TAX BENEFITS: No federal taxes on contributions or withdrawals for qualified medical expenses
CAN FUNDS BE INVESTED? No
DO FUNDS ROLL OVER? Yes, but only up to $610 a year, and only if the employer allows. Your company instead may offer a grace period to use any unspent funds in the new year. The FSA is not portable and terminates when you leave the company, subject to potential COBRA continuation
HRA
Health
Reimbursement
Arrangement
WHO IS ELIGIBLE: Employees who enroll in a qualifying health plan
TAX BENEFITS: Employer funded. Reimbursements may be tax-free for qualified medical expenses.
CAN FUNDS BE INVESTED? No
DO FUNDS ROLL OVER? Yes, if employer allows; you generally lose the funds when you leave the company, but you may be allowed to spend them down.
What are the potential advantages of combining a high deductible health plan with a health savings account?
This combination has grown, while enrollment in traditional plans has declined, according to the CDC. Americans own nearly 34 million HSAs, an increase of nearly 3 million over last year, reports Devenir Research.Jump to Footnote 1 One reason they're popular: You can put funds into an HSA without federal taxes on contributions or qualified withdrawals to use for out-of-pocket medical expenses not covered by your HDHP.
“When an HSA-qualified health plan is selected, participants can save on their health plan premiums and put those savings in an HSA to help pay their healthcare expenses if needed,” says Ed Shehan, senior vice president, Retirement and Personal Wealth Solutions, Bank of America. What's more, he adds, you can invest funds in an HSA, and the earnings, as well as contributions and withdrawals, remain federal tax-free when used for eligible healthcare expenses.
If you choose to invest the money, it can grow tax-free year after year, even into retirement. HSAs offer a variety of investment options. They can be interest-bearing accounts, or, if the provider permits, you may be able to invest your contributions in certain securities such as mutual funds. Note that some HSA providers have minimum account balance requirements before certain investment options are available.
In 2022, workers who were enrolled in a family-coverage HDHP with a savings option paid $1,020 less in premiums on average than those who chose a traditional preferred provider organization, according to the Kaiser Family Foundation.Jump to Footnote 2
You can contribute to an HSA only while you're enrolled in an HSA-qualified HDHP, you do not have other disqualifying health coverage, and you cannot be claimed as a dependent on someone else's tax return. However, you can use your HSA funds to pay for your eligible healthcare expenses in the future regardless of your specific health plan coverage at that time. For information on health plan deductibles, see our annual Contribution Limits and Tax Reference Guide. In addition to having a minimum deductible, health plans must comply with the rules on annual maximums for out-of-pocket expenses to be HSA-qualified. Learn more about how HSAs work and how having one might help your investments last longer in retirement.
Are there other ways my employer can help me keep out-of-pocket costs under control?
Check whether your employer offers an optional health flexible spending account (FSA). An FSA allows you to contribute pretax dollars to pay for eligible out-of-pocket healthcare costs during the plan year but does not let you accumulate funds to save for healthcare in retirement, notes Shehan.
Your employer might also offer a health reimbursement arrangement (HRA). “In the HRA, the employer provides some funding to help employees pay a portion of the deductible,” Shehan says. HRAs, like FSAs, are typically for the specific plan year only. In addition, they don't provide the same potential tax advantages to the account holder as HSAs. Like FSAs, HRAs are generally not portable if you leave your job, he notes, but you may be allowed to spend down the funds after you leave the company.
Finally, some employers also may offer a limited-purpose FSA for dental and vision expenses, typically in combination with an HSA. “Paying vision and dental expenses from a limited-purpose FSA keeps more money in your HSA and allows it to grow,” says Clacken.
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