How to Use a High Deductible Plan The Diocese of Kansas is offering a High Deductible Health Plan / Health Savings Account (HDHP/HSA) for 2012. You can find the details of this plan in the Summary Plan Description that will arrive with your open enrollment packet; the following is a brief explanation of the major components of the plan and how it works. In addition, Toni Marie Sutliff, Regional Relationship Specialist with the Medical Trust, will be in the Diocese of Kansas on Saturday, November 12, 2011 to answer your questions. 1. How does the HDHP plan differ from traditional plans? The Medical Trust s high deductible health plan is similar to traditional plans in many ways. It is designed on a PPO platform, meaning that it offers both in-network and outof-network benefits. You pay less if you get services from in-network providers. You must meet a deductible before benefits are available by individual and by family, and separately for in-network and out-of-network services, and it has a maximum out-ofpocket cap to your annual expenses again by individual and family, and for in-network and out-of-network services. The HDHP does differ in significant ways, however: Deductible Amount. As the name indicates, the deductible for the HDHP is higher than a traditional plan. The Medical Trust s plan s deductibles for in-network services are $2,700 for an individual and $5,450 for a family. You will pay 100% of the cost of services until you have met the appropriate deductible. Please note that you pay the negotiated cost of service, not the provider s general list price. Copay vs. Coinsurance. Copays and coinsurance are the amounts you pay when you seek medical services. Copays are specific dollar amounts, such as $25 for an office visit or $60 for a prescription. Coinsurance is the percentage you pay for service, such as 20% of hospitalization. Most traditional plans have a combination of copays and coinsurances. The HDHP has no copays; you pay a coinsurance a percentage of the negotiated cost when you seek services. Maximum Out-of-Pocket Expenses. Most plans have a maximum out-of-pocket cap, but with the high deductible plan, the cap is an absolute maximum. Under most traditional plans, copays do not accumulate toward the out-of-pocket maximum. Because the HDHP has only coinsurance, all payments you make for services accumulate toward the maximum out-of-pocket cap. 1
As noted above, in the HDHP you will pay 100% of the negotiated cost until you reach the deductible, after which you will pay 20% of the negotiated cost until you reach the maximum out-of-pocket. For the rest of the year, you will then pay nothing for covered expenses. For example, if you experience a major medical event early in the year, you will likely reach the maximum out-of-pocket quite early in the year. For the rest of the year, your covered medical expenses, including prescriptions, will cost you nothing. 2. What is the Health Savings Account? When HDHP plans were introduced into the medical insurance world, the IRS created health savings accounts as a tax-favored means of providing resources to meet the high deductible amounts in those plans. HSAs are subject to strict tax regulations and offer a way to save for medical expenses in retirement. Some specific provisions of HSAs: Eligibility. To be eligible to establish and contribute to a health savings account, you must be enrolled in a qualifying high deductible health plan (the Medical Trust plans qualify), you must not be claimed on another s tax return, and you must not have other medical coverage, including Medicare (except for specific coverage such as AFLAC-type plans). You may not use a flexible spending account at the same time (except for certain specific FSAs). How to set up an HSA. You can set up an HSA at any financial institution that can set up retirement accounts such as IRAs. The Medical Trust has a relationship with Mellon Bank that allows you to set up an HSA and avoid paying set-up and monthly maintenance fees. Your employer may designate another financial institution, or you may choose your own, but in those cases, you will be responsible for any set-up and maintenance fees. Please note that the account belongs to you; you must set it up and keep track of the deposits and withdrawals. You will be responsible for any overdraft and ATM fees, and for all IRS-required paperwork. How the HSA differs from an FSA. Flexible Spending Accounts are funded by money designated at the beginning of the year, and if the money is not used, it forfeits. The entire designated amount is available as of the first day of the year. Funds do not accrue interest. Health Savings Accounts belong to the employee. Deposits can be made at any time, and funds are not available unless they have been deposited into the account. Amounts not used during the year are not forfeited but roll-over year to year until used. Amounts in the account accrue interest. 2
The tax benefits of an HSA. The HSA is often compared to an IRA for retirement medical savings. If you have money left in your account when you retire, you can use that for your medical expenses and for those of your spouse. Any funds your employer deposits into your HSA are not taxable to you. Funds you deposit into the account are pre-tax, which lowers your taxable income. Interest earned by funds in the account is not taxable to you. And, finally, if you use the funds for qualifying medical expenses for yourself or your spouse or dependents, the funds are not taxable. In two circumstances the HSA funds become taxable. First, if you use the money for a non-qualifying purpose, you will pay income tax on the funds used, and you will pay a 20% excise tax penalty. The penalty is waived once you reach the age of 65. Second, if you die and the account goes to anyone other than your spouse, the account loses its tax-favored status and the market value at the time of death is taxable to the beneficiary whether your estate or another person. 3. How much should I deposit into my health savings account? The IRS publishes annual limits on the amount that can be deposited into a health savings account, from any source. For 2012, those limits are $3,150 for an individual on an employee-only high deductible plan and $6,250 for those on a family plan. Note that anything other than single coverage is considered family coverage for purposes of the HSA. The annual contribution limits are different if you are not covered by a qualifying high deductible plan for the entire year. The details are complicated. Please talk to your tax advisor or call the Medical Trust if you need information specific to your situation. For 2012, the Diocese of Kansas has decided that your employer must contribute to your HSA an amount that will effectively reduce your deductible to that of the Empire BCBS EPO 90 plan. So, for example, for single coverage, the EPO 90 plan has a $200 deductible, while the high deductible plan has a $2,700 deductible. Your employer will contribute $2,500. Similarly, the family deductible under the EPO 90 is $500 and under the high deductible plan is $5,450. Your employer will contribute $4,950 to your health savings account. The difference between the amount your employer contributes and the maximum amount allowed by the IRS for 2012 represents an opportunity for you to deposit your own money, thus reducing your taxable income. In fact, anyone can deposit money into your account, but remember that you are responsible for ensuring that total annual contributions do not exceed the limit. You will pay income tax and a penalty on any amounts over the maximum allowed. 3
The IRS does not limit the amount that can accrue in your HSA. So, if any funds remain in the account at the end of the year, they roll over, and you (and your employer and others) can contribute funds in succeeding years, up to the maximums set by the IRS for those years. Please note that when you have reached 55 years of age, you can contribute a catch-up amount of $1,000 per year. This provision applies only to the account holder, who is generally the employee. If both spouses want to contribute the extra $1,000, each must establish a separate health savings account. As noted above, deposits can be made into your HSA at any time during the year, and in fact up to April 15 of the next year. Your employer may decide to deposit its whole share at the beginning of the year, or may decide to make regular deposits during the year. Either way, the funds deposited are yours, even if you terminate employment during the year. And remember, only funds that have actually been deposited are available to be used! 4. How does the HDHP/HSA work at the doctor s office or hospital? The major difference between your traditional insurance plan and the high deductible plan is that you should not pay anything at the time of service. Your doctors may be used to collecting a copay, but this plan has no copays. Empire BCBS must first process the doctor s or hospital s claim before it can determine whether you have met the deductible and the maximum out-of-pocket and what your coinsurance amount is. Therefore, when you go to the doctor or hospital, show your insurance identification card, which will clearly show that you have a high deductible plan. Most providers now understand that you are not required to make any initial payment. If your provider insists, however, you can either call our Client Engagement Center to have a representative speak to your provider, or you can pay the amount requested. Anything you pay will be accounted when the claim is processed. The process is as follows: You visit your doctor or hospital for medical services. Your provider sends its claims to Empire BCBS for processing. Empire BCBS reviews the claims, determines the negotiated amount payable, and determines whether you have met your deductible and your out-of-pocket maximum. It then sends both you and the provider an Explanation of Benefits (EOB), showing the amount claimed, the negotiated amount, and the amount to be applied to the deductible or out-of-pocket maximum, as appropriate. If you have not yet met your deductible, the EOB also shows the amount that is your responsibility (100%). 4
If you have met your deductible, but have not yet reached your maximum out-ofpocket, the EOB shows payment by the Medical Trust to the provider (80%) and the amount that is your responsibility (20%). If you have met your out-of-pocket limits, the EOB shows payment by the Medical Trust to the provider (100%). Your provider sends you an invoice for the amount you owe. That amount should match the amount shown on the EOB. You can use your HSA funds, if available, to pay the invoice, or you can pay out of your own pocket. 5. How does the HDHP/HSA work at the pharmacy? The process is similar, except that the pharmacy can electronically access your account and determine immediately whether you have met the deductible or the out-of-pocket limit. Therefore, you will pay for your prescriptions when you receive them. If you have not met the deductible (by a combination of medical and prescription expenses), you will be responsible for 100% of the negotiated cost of your drugs. If you have met the deductible, you will be responsible for a percentage of the negotiated cost. If you have met your out-of-pocket maximum, you will not pay anything. Again, you can use your HSA funds, if available, or money from your own pocket to pay for your prescriptions. 6. How do I access the funds in my Health Savings Account? When you establish your HSA, you can ask for checks, a debit card, or both. So, you can pay providers invoices using a check or the debit card from the HSA account. Or, you can use cash, a check, or debit card from any other of your accounts, and later write a check to yourself out of the HSA to reimburse yourself for your expenses. Remember, however you use the account, you must keep documentation to show that the funds were used for qualifying expenses. 7. What are qualifying expenses? Generally, qualifying expenses are those that you could claim on your tax return, and include deductibles, dental expenses, vision care expenses. The IRS publishes a guideline each year that outlines what qualifies. Note that you may not use HSA funds to pay for your medical policy premiums, but you can use them to pay for long-term care insurance premiums. You also may not use the funds to pay for over-the-counter drugs or health club memberships. You may use your HSA funds for your spouse and your dependents (defined as those that you claim on your federal tax return), but not for your domestic partner. You may 5
use the funds even when you are no longer enrolled in a high deductible plan, including in retirement, when you can use the funds to pay for your Medicare Part B premium. 8. What kind of paperwork is involved with an HSA? The HSA is your account, and you are responsible for keeping track of deposits and withdrawals, just as you are with any bank account. You should review your monthly statements to ensure that you understand each deposit and withdrawal, and to ensure that deposits do not exceed the annual maximum allowed by the IRS. When you file your tax return, you will also complete and file an extra form, Form 8889, which details deposits, withdrawals, and the balance at the end of the tax year. You will receive forms from your bank showing the deposits and withdrawals, and you will receive information on your W-2 from your employer showing amounts the employer contributed and any amounts you contributed through payroll deduction. You will use the information to complete the Form 8889. 9. How do I know whether I should sign up for a high deductible plan? The high deductible is the part of this plan that scares many people. Fortunately, the Diocese of Kansas s policy for 2012 is that your employer must contribute an amount to your health savings account that will effectively make your deductible the same as it has been for the Empire BCBS EPO 90, so you need not worry about that factor. The best way to determine which plan will better suit your needs is to review your actual out-of-pocket expenses over the last two or three years, and consider what you anticipate your medical needs will be for the coming year. In general, if you are relatively healthy and generally only visit a doctor for your annual physical, you will be better off taking the high deductible plan. You will be able to save the funds your employer deposits into your health savings account for the future when your medical needs may be higher. If you are a heavy user of the medical system because you have a serious chronic illness or if you anticipate major surgery during the upcoming year, you may be better off taking the high deductible plan. This is because the plan has an absolute cap on ourof-pocket expenses for the year, while the traditional Empire BCBS EPO 90 does not. If you are fairly healthy, but perhaps do have some maintenance medications and do have several office visits during the year, you will want to review your history of out-ofpocket costs carefully to see which plan is better for you. The advantage in this case to the high deductible plan is that if you have a better-than-average year, you will be able to save the money in your health savings account. If, on the other hand, you have a catastrophic year, you are protected by the out-of-pocket maximum in the high deductible plan. 6
10. Where can I find additional information on high deductible plans and health savings accounts? The IRS and other entities publish good material on high deductible plans and health savings accounts. U.S. Treasury Department Health Savings Accounts http://www.treas.gov/offices/public-affairs/hsa/ The HSA section of the US Treasury Department website contains links to informational brochures, up-to-date regulations, frequently asked questions, press releases, IRS forms and publications and technical guidance. IRS Health Savings Accounts http://search.irs.gov/web/query.html?col=allirs&charset=utf-8&qp=&qs=- Wct%3A%22Internal+Revenue+Manual%22&qc=&qm=0&rf=0&oq=&qt=HSA The HSA section of the IRS website contains publications, bulletins and tax filing instructions. Publication 502 http://www.irs.gov/publications/p502/index.html Publication 502 provides a list of qualified medical expenses. U.S. Government Office of Personnel Management http://www.opm.gov/hsa/ Although primarily intended for government employees, this site is also a good resource for finding information about HDHPs and HSAs. HSA Insider (a division of Canopy Financial) HSA Road Rules http://www.hsainsider.com/roadrules.aspx You will need to login to download the HSA Road Rules. This brochure includes a Table of Contents making it very user friendly. It also appears that this brochure is kept up to date with government regulations. In addition to the Road Rules, the HSA Insider site contains other valuable information 7