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FSA, HSA, HRA, and HIA are all specific forms of what is more generally referred to as Consumer Directed Health Plans (CDHP). A CDHP is simply an evolved form of Self Directed Health Plan (SDHP) which, in turn, simply reflects a further refinement of what is called a “Cafeteria plan”. The SDHP and Cafeteria plans are both health care programs that apply specifically to employer group type plans. The term Consumer Directed Health Plan is more general because it also includes Individual/Family plans as well as employer groups.
The primary benefit a CDHP is that they provide a means to allow employers to offer their employees what appears to be greater control over the choice and cost of medical services provided as well as tax incentives. An employer also reduces the cost of the Health Care Plan premiums as the qualifying plans are required to be a high-Deductible plan (HDHP). The employer offsets the negative impact to the employee of a High-deductible health plan by funding (at least partially) a savings account that the employee can use to reimburse themselves eligible medical expenses incurred as a result of the high-deductible plan. The employer benefits, the employee most often benefits at the expense of the taxpayer. All variations of CDHP plans (FSA, HSA, HRA, and HIA) really should be thought of as having two parts:
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A high-deductible plan health care plan with no or limited first-dollar benefits; and
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A tax advantaged savings account.
When it comes to those covered under an employer group plan the concept is quite sound and easy to understand how employers and employees both can benefit from a tax advantaged plan. It is also important to understand that it is one thing for an employer to cut their Premium costs to the coverage provider or Insurance company and to then fund the savings account for the employee and another for an individual to do so. From the employer’s perspective, the reduction in premium costs is often great enough to then fund the employee saving account (FSA, HSA, HRA) both of which are tax deductible. It also means that the employer appears to be offering greater plan flexibility to the employee because the employee can use the savings account to have greater control of the select and payment of more modest medical expenses as they see fit.
Clearly CDHP plans are well suited for most people in an employer group situation, but may not be as ideal for a person or family with an individual/family plan as the savings in premium is substantially offset when the related medical savings account is actually funded. Part of the problem comes from knowing whether or not it is realistic to expect a net cash savings. One must remember that, on order to obtain the tax advantages you are required to fund not only the premiums for an eligible plan, but to actually fund the accompanying tax savings account. Consider the fact that the savings trend in the US is at an all time low of less than 2% of income per year and that the saving plan interest rates are also at historic lows (HSA and other general savings accounts are not good investments). The average family does not have the liquid assets they once did. Just a little more than a decade ago family savings rates were approaching 12% of annual income.
The importance of being able to fund your own medical savings account is that it allows you to use the funds built up in the medical savings account to pay for services they may need which are not longer covered by most heath care plans today such as chiropractic, infertility, massage therapy, non-traditional medicine, and etc. Plan holders may see the physician of their choice for routine medical care as they are paying for it from the savings account as these services are not covered by the high-deductible plan. These plans are also well suited for those who typically do not require regular health care. Those who don’t visit the doctor’s office often benefit from an SDHP because this plan allows its members to have Health Insurance, but not pay a premium to cover services that they don’t anticipate needing.
The important thing to take away from this whether you are an employer or an individual is that whenever there are tax laws involved you should not only contact a Licensed Certified Field Broker/Agent (
Click Here) who is informed about the these plans and is aware of the options available in your areabut you should also contact a certified tax advisor. A mistake in the choice of plan, funding the savings account, or properly filing taxes can eliminate any or all of the advantages you may hope to obtain. Not all health care plans can be associated with a tax advantaged medical saving account
For forther details on each of CDHPs options available select from the following list:
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FSA, HSA, HRA