What are high-deductible plans?

A deductible is the amount that you must pay before your insurance covers care. Its purpose (and the purpose of any cost-sharing, such as coinsurance and copayments), is to encourage consumers to use care more judiciously, weighing the costs and benefits.

High-deductible plans (HDHPs), sometimes also called consumer-directed health plans, generally have a deductible that is at least $1,300 for an individual and $2,600 for a family, though it is not unusual for the deductible to be thousands of dollars higher. In return for not covering medical care up front, insurers offer a lower monthly premium.

Although HDHPs have been around for decades, a provision in a 2003 law (the Medicare Modernization Act) substantially increased enrollment by authorizing the creation of health savings accounts in order to help pay for health care expenses associated with high HDHPs. Prior to the existence of health savings accounts, there were other types of accounts that existed to help pay for the initial high-cost sharing associated with HDHPs, but they were owned by the employer, not the individual. Here, I explain the three main types of accounts that people use to pay for medical care expenses. Note that none of these accounts may be used to pay for insurance premiums:

Health savings account (HSA): An account owned by an individual, funded with pre-tax dollars by the individual (and her employer, if her employer has such an arrangement), to pay for out-of-pocket expenses associated with a HDHP. Because the account is individually-owned, funds roll over from year to year, and an individual may take the account with her from job to job and into and out of jobs.

Health reimbursement arrangement/account (HRA): An account owned by an employer, funded with pre-tax dollars by the employer to pay for some pre-specified medical expenses not covered by insurance. Funds may roll over from year to year, depending on employer rules.

Flexible spending arrangement/account (FSA): An account owned by the employer, jointly funded with pre-tax dollars by the employer and employee to pay for most qualified medical and dental expenses not covered by insurance. Generally, funds do not roll over from year to year – (some FSAs allow $500 to roll over, and others have a few month “grace period” in which they allow the funds to roll over into the next year).

Pros and cons of different accounts

Although all three types of accounts can be funded with pre-tax dollars, only the HSA is owned by the individual, which gives it several key features: 1) it can be carried from job to job or from job to unemployment or retirement; 2) its funds roll over from year to year; 3) because funds roll over from year to year, HSAs may earn interest, which accrue to you; and 4) you need not be employed to set up an HSA. Rather, you can set one up with a trustee, such as an insurer or bank.

You may enroll in multiple types of accounts, such as an HSA and a [post-deductible] FSA,* or an HSA and a [post-deductible] HRA,* but you will have to decide how you want to split your contributions into these accounts. Further, while you must enroll in an HDHP to enroll in an HSA, anyone offered an HRA or FSA can enroll.

*You may not simultaneously enroll in an HDHP and a general purpose FSA/HRA, which reimburses all types of medical expenses. Rather, to enroll in both types of accounts, the FSA/HRA must be a limited purpose FSA/limited purpose HRA, and the employer must specify that the [limited] purpose is to reimburse expenses after the deductible is met. This particular type of limited purpose account is called a post deductible FSA/post-deductible HRA. The benefit of a post-deductible account is that it reimburses qualified medical expenses after you have met the minimum federal deductible ($1,300 for an individual/$2,600 for a family in 2017) – even if this deductible is lower than your plan’s deductible.

How much can my employer and I contribute to each type of account?

Contribution limits for all accounts change each year.

In 2017, the contribution limit for an HSA is $3,400 for an individual HDHP and $6,750 for a family HDHP. Note that the minimum deductible for an individual HDHP is $1,300 (with a maximum out-of-pocket limit or stop-loss of $6,550) and that the minimum deductible for a family plan is $2,600 (with a stop-loss of $13,100). Those with HSAs who are older than 55 may contribute an additional $1,000 to their HSA, for either type of plan (called a catch-up contribution).

Employees may contribute up to $2,600 to an FSA. The employer may contribute up to $500 or instead, arrange to make payments that do not exceed the employee’s contributions.

There is no employer contribution limit for HRAs, and employees may not contribute.

Summary

HSAs were introduced as a way to increase uptake of high-deductible health plans. They offer several advantages over FSAs and HRAs, which are employer-owned, do not accrue interest, and may not roll over funds from year to year. Enrolling in both an employer-owned plan and an HSA may offer benefits to those in HDHPs, especially for those in very high HDHPs who do not think that they will meet their deductible, because employer-owned plans reimburse qualified medical expenses after the federal minimum deductible has been met.