PPOs, FSAs, HSAs and more—the range of health-care options employers offer can be confusing. Here's a guide to help you decide what might work best for you and your family.
FREE DOCTOR CONSULTATIONS BY TELEPHONE. Subsidized gym memberships and bike-share programs. Smoking-cessation programs. These are just a few of the preventive care health benefits that many companies now offer their employees in addition to health insurance coverage.
Research shows that a healthier, less stressed workforce is a more productive workforce. But the benefits can add up for you, too: The longer you stay healthy, the lower your lifetime health-care costs might be. So consider taking advantage of any preventive care health benefits your employer offers that seem appropriate for you.
The Annual Health Benefits Checkup
You may also find significant savings by reviewing your current health benefits to determine whether you've made the right choice. Making this decision isn't a one-time deal, completed when you're first hired. You have a chance to update your selections every year, and you can also review and change your selections for certain life changes—for example, if you've recently walked down the aisle or become a parent. The guide that follows should help you figure out how to make the most of the health benefits your company offers.
You have a chance to update your selections every year, and you can also review and change your selections for certain life changes—for example, if you’'ve recently walked down the aisle or become a parent.
Your Plan or Your Spouse's?
Because health insurance premiums can be expensive, you want to find the sweet spot between sufficient coverage and over-insuring, says Roger W. Gray, director of Health Benefit Solutions at Bank of America. The first step in making your selection is to consider your health history and your family situation, he says. A young single person with no history of chronic illness can generally afford to choose a higher-deductible plan, which means lower premiums. But for parents with young children, the decision may require a little more thought.
"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," Gray says. As you compare, ask yourself two key questions.
First, what are the deductibles—that is, the amount you'll pay for covered services before the insurer picks up the cost? "With a lower deductible, you will pay higher premiums. If you and your family are reasonably healthy and don't think you'll reach the deductible, you might want to choose the plan with the higher deductible and put the money you've saved with the lower premium into a health savings account (HSA), where the money has the potential to grow," Gray suggests.
That's because an HSA can offer a variety of investment options. For example, an HSA can be an interest-bearing account, or if the HSA 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. You can open an HSA only if your health plan is a qualified high-deductible health plan and you do not have other disqualifying health coverage—for information on health plan deductibles, see our annual Contribution Limits and Tax Reference Guide. In addition, qualified high-deductible health plans must also comply with the rules on annual maximums for out-of-pocket expenses. (See the next paragraph.)
The second question: What's the out-of-pocket maximum? "The out-of-pocket max—or the highest total amount you'll be expected to cover every year—should be part of your evaluation," Gray says. "Consider how likely you are to be racking up medical expenses." These amounts are also covered in our Contribution Limits and Tax Reference Guide.
One of you may have the option of a PPO (preferred provider organization) plan—which offers a lower deductible and a lower out-of-pocket maximum but also has co-payments and higher premiums. If 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 help you keep your annual out-of-pocket expenses down, Gray says. "But if that's your choice," he adds, "you won't be eligible to open an HSA."
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The Advantages of a Health Savings Account
The HSA, generally available to people who are enrolled in a qualified high-deductible health plan, allows you to sock away pretax contributions for future health-care costs. The money in these accounts has the potential to grow tax-free, and withdrawals are also tax-free as long as they are used to pay for qualified medical expenses. For individuals who are Medicare-eligible (age 65), HSA funds can be used to pay for Medicare parts A, B and D and Medicare HMO (health maintenance organization) premiums. They can also be used to pay for qualified long-term care insurance.
If you use your HSA for non-qualified medical expenses, the amount you withdraw is subject to federal income tax and, potentially, an additional 20% federal tax. Be aware as well that there are limits to the amount you can contribute to an HSA in a year. Those limits can also be found in our Contribution Limits and Tax Reference Guide. Those who are 55 and older are also eligible to make annual catch-up contributions.
HSA funds that you don't tap to pay for qualified medical expenses today can continue to grow tax-free until you need to use them for medical expenses in retirement. For more detailed information about HSAs and taxes, visit irs.gov.
Do You Need a Flexible Spending Account?
To make the most of those tax-advantaged HSA savings, consider pairing your HSA with a limited purpose flexible spending account (LPFSA), if your employer offers one. An LPFSA can only be used to reimburse qualified dental and vision expenses. "Instead of depleting your HSA to cover dental and vision expenses, you can cover those costs with your pretax contributions to a limited purpose FSA," says Erin Donnelly, managing director and head of Defined Contribution and Health Benefit Solutions at Bank of America. If your employer’s plan allows, you may be able to carry over up to $550 of unused funds in an LPFSA to the following year.
Look for a Tiebreaker
No one knows what the future might hold when it comes to health, and that can make choosing the right health plan seem a little like guesswork.
After you've considered your family history and crunched all the numbers, if you're losing sleep over the decision, take another look at the preventive care health incentives your company and your spouse's company offer. That free bike-share program just might end up being the tiebreaker.
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Merrill, its affiliates and financial advisors do not provide tax, legal, accounting or benefits consulting advice. You should consult your legal and/or tax advisors before making any financial decisions.
This material should be regarded as general information on health-care considerations and is not intended to provide specific health-care advice. If you have questions regarding your particular health-care situation, please contact your health-care, legal or tax advisor.