Hershner Hunter Attorneys

CONSUMER DIRECTED HEALTH PLANS

CONSUMER DIRECTED HEALTH PLANS

Hershner Hunter, LLP

Estate and Business Planning Practice Group

Consumer directed health plans have become popular as healthcare costs have continued to increase. They are popular because, unlike traditional health insurance, consumer directed health plans put more of the costs of healthcare decisions on patients, who have considerable control over those decisions, rather than on insurers. The three major types of consumer directed health plans are health reimbursement arrangements (HRAs), health savings accounts (HSAs), and flexible spending arrangements (FSAs). HRAs and FSAs have been around for years, while HSAs are relatively new. HSAs and FSAs can be funded by both employees and the employer and can be offered through a cafeteria plan. Only the employer can fund HRAs.

The decision of whether to implement a consumer directed health plan, and of the type of plan to implement, requires understanding the limitations and advantages of each type of plan and careful consideration of which plan, if any, will fit the employer’s resources, goals, and concerns. The table below provides basic information and compares the different consumer directed health plans.

COMPARISON OF THE DIFFERENT CONSUMER DIRECTED HEALTH PLANS

	HRA	HSA	FSA
Who can establish it?	Employer	Employer or employees	Employer
Who can participate?	Current and former employees	An employee who is a “qualified individual”[1]	Current and former employees
Can spouses and dependents of participating employees receive benefits?	Yes	Yes	Yes
Must other coverage be offered?	No	Yes	No
	HRA	HSA	FSA
What other coverage is offered?	Often offered with an HDHP	Must be offered with an HDHP [2]	Often offered with health insurance
Who can contribute?	Employer only	Employer, employee and others	Employer and employee
Can contributions be made through a cafeteria plan?	No	Yes	Yes
Is there a contribution limit?	No	Yes	No
What is the contribution limit?	No limit, but HIPAA portability rules may apply if contributions exceed $500 per participant	The lesser of the annual deductible of the HDHP or the statutory limit[3]	Employer contributions should not exceed $500 per participant, or HIPAA portability rules may apply
Can funds be used for non-medical purposes?	No	Yes	No
Are payments or reimbursements by the plan taxable?	No	Only if used for non-medical purposes[4]	No

	HRA	HSA	FSA
Can funds not used in one year carry over and accumulate?	Yes[5]	Yes	No[6]
Can employees receive benefits from the plan after terminating employment?	Yes, funds may remain available for a period after termination of employment[7]	Yes, an employee for whom an HSA is established owns the HSA, and can continue to use it after terminating employment	Yes, funds may remain available for a period after terminating employment[8]
How can the plan be used during retirement?	HRAs can remain available during retirement or can be set up to become available only during retirement	No contribution can be made once the HSA owner becomes eligible for Medicare, but HSA funds remain available	Contributions are made through salary reductions by current employees, so generally not used for retirees

USING MORE THAN ONE TYPE OF PLAN

It is possible to use more than one type of consumer directed health plan together to provide benefits to employees. However, if two ore more consumer directed health plans are offered, careful coordination is needed to ensure that the benefits of one plan do not become disqualified or unavailable because of the other plan. Also, coordination is needed to provide ordering rules about which plan pays first.

CONCLUSION

Choosing the appropriate consumer directed health plan can be difficult and requires careful consideration of the advantages and disadvantages of each in light of the employer’s resources, goals, and concerns. Please contact Jeff Kirtner, in our employee benefits department, for more information about consumer directed health plans.

Jeffrey D. Kirtner

Direct: (541) 431-1404

jkirtner@hershnerhunter.com

[1] An employee is a “qualified individual” if covered by a high deductible health plan (HDHP) and not by another plan that is not an HDHP. See note 2 for the definition of HDHP. An employee is not a qualified individual in any year in which he or she is claimed as a dependent on another taxpayer’s tax return.

[2] An HDHP is a health plan with an annual deductible of $1,050 or more for individual coverage and $2,100 or more for family coverage (2006 amounts). An HDHP also has maximum annual out-of-pocket limits of $5,250 for individual coverage and $10,500 for family coverage (2006 amounts). These amounts are indexed for inflation. An HDHP may provide “permitted insurance” and “permitted benefits.” “Permitted insurance” is insurance for workers compensation liability, tort liability, or liability relating to ownership or use of property, insurance for a specific disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization. “Permitted benefits” are benefits for accidents, disability, dental care, vision care, or long-term care. Preventive care can be provided before the deductible is satisfied without disqualifying the plan as an HDHP.

[3] In 2006 the statutory limit is $2,700 for individual HDHP coverage and $5,450 for HDHP family coverage. These amounts are indexed for inflation.

[4] Funds withdrawn from an HSA for non-medical purposes are taxable, and if withdrawn for non-medical purposes before retirement are also subject to a penalty tax.

[5] Whether funds can carry over and accumulate is up to the employer sponsoring the HRA. The employer can limit the amount that can carry over from year to year and also the total accumulation.

[6] Funds not used during one plan year are forfeited. Under new IRS rules, employers can allow a short grace period after the plan year to use the funds before they are forfeited.

[7] Employers may allow employees to spend down their HRAs after terminating employment. An HRA is subject to COBRA, so an employer may need to offer COBRA continuation coverage for the HRA when an employee terminates employment.

[8] An FSA is subject to COBRA, so an employer may need to offer COBRA continuation coverage for the FSA when an employee terminates employment.

This article provides general information and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. If you have specific legal questions, you are urged to consult with counsel concerning your own situation.