Every year, between September and November, full-time employees across the country are eligible to participate in Open Enrollment season with their healthcare providers. During this time these employers allow their employees to re-enroll in their group benefit programs and adjust the benefits based on needs. This article will walk you through some of the basic components associated with the healthcare related portion of an employer’s employee benefits, and what to consider when selecting coverage.
Employee Medical and Dental Plans
For something that the government deems mandatory, (depending on when you are reading this article) one would hope it would be easy to understand. This couldn't be further from the truth. When looking at medical and dental plans we have to navigate what can often feel like a foreign language. Co-pays, co-insurance, deductibles, maximum family out of pocket, coverage limits, and the oh-so-frustrating concept of "in-network vs out-of-network", can leave your head spinning. Some universities actually created a Medical Billing certification to train people in how to input the thousands of codes correctly in order to hopefully avoid billing issues - which is one of the most annoying arguments to have with a medical provider. So what does it all mean? Well in order to select a plan most appropriate to you, you need to understand some of the basics, so let's define the terms mentioned above:
Co-Pay - Used as a way to share an incurred medical expense with the patient, insurance companies created a co-payment for certain medical plans such as PPO, POS, and a few others. If those acronyms do not look familiar then your employer probably doesn't offer them. On the other hand if they are familiar to you then you have experienced this co-payment requirement every time you visited your primary care physician, Urgent Care, or hospital. It is important to know that your co-payments are usually NOT applied to your individual or family deductible. While it might not seem like a big problem in the moment to spend $20 per visit, for families of three or four this can add up over a year and can lead to a lot of money spent out of pocket.
Deductible - This is the amount you are required to pay out of pocket before your insurance company will begin to share in a percentage of your out of pocket expenses. In other words, in an attempt to reduce "moral hazard" the insurers tell their patrons to pay the first chunk of money upfront and once the deductible is met they will start to pay a portion of the medical bills going forward. If you didn't catch that, I said "a portion". That is where co-insurance comes in…
Co-Insurance: Just when you think your out of pocket expenses are done because you've reached your deductible limit, co-insurance kicks in and slaps you in the face with additional medical expenses. Usually reduced to a percentage of the outstanding bill, co-insurance continues until you hit your individual or family out of pocket maximum (in most cases) - which can seem astronomical depending on your medical plan.
Maximum Out of Pocket Expenses: If this was a rough year medically for you or your family, there is a silver lining. For "in-network" coverage there is a maximum you will be required to pay for covered medical expenses. However, it is important to note two key words in the previous sentence; "covered" and "in-network".
An often misunderstood fact is that only expenses that are covered by your insurer will reach this ceiling AND only those expenses incurred by a provider who accepts your insurance are deemed in-network. So why is this important? Well, unless you know every medical procedure covered by your insurance provider there may be a few that are not covered which would not be applied to your maximum out of pocket expenses. Therefore, it is strongly recommended for you to request the provider submit a pre-authorization request to your insurer as often as deemed appropriate by your provider in order to make sure a prescribed treatment is covered under your insurance plan. Now this doesn't mean you need to submit a request before receiving every treatment, but if/when you plan to have a certain procedure done make sure the provider sends the pre-authorization to the insurer.
Flexible Spending Accounts vs. Health Savings Accounts
Now that you have a better understanding of the terms used by insurers, let’s talk about the accounts that can help you manage these different expenses. In the world of employee benefits there are two primary “pre-tax” (accounts created by the government to allow individuals to save money before it is subject to payroll taxes and FICA taxes). These accounts have some common threads but each offers distinct differences that the other does not. In order to understand the nuances we need to break them down:
Established in the 1970’s, Flexible Spending Accounts were created by the IRS to help families pay for medical and dependent care expenses that were not covered by their employer. Essentially, the IRS allowed employees to contribute pre-tax dollars into an account that could then be used to pay for certain expenses. While many people currently still use these accounts today there are a few drawbacks you should be aware of, specifically:
- Each year at open enrollment employees are asked to decide how much they want to contribute to their FSA account(s) for the upcoming year. This can be tricky because it may be hard to project how much you will spend in the subsequent year, especially if you are relatively healthy or do not have many dependent care expenses planned.
- When you elect to contribute a specified dollar amount to the Healthcare, and/or Dependent care, FSA you are required to use those funds completely otherwise you are subject to the “use it or lose it” rule. This rule states that all funds remaining in the respective FSA account at the end of a calendar year will be forfeited. In other words, you could lose your hard earned money because you inaccurately projected your expenses.
- Contributions to a Healthcare FSA are significantly lower than those allowed to be contributed to an Health Savings Account (HSA). Additionally, most FSA accounts are not compatible with HSA accounts. In other words, unless your employer allows you to contribute to an FSA with post-tax dollars, or your FSA is HSA-Compatible, you cannot contribute to a FSA and HSA simultaneously.
Created in 2003 for individuals with “high-deductible” health plans. These accounts while similar to FSA accounts, allow individuals to contribute income on a pre-tax basis to an account and later use those funds tax-free for qualified medical expenses. These accounts require the insured person to maintain a medical plan with a higher deductible limit than those limits associated with POS, PPO, or HMO plans. High-deductible medical plans essentially require the insured to shoulder a larger portion of the out of pocket costs upfront. Along with typically lower monthly premiums, high-deductible medical plans provide access to Health Savings Accounts which provide the following benefits:
- During open enrollment you may be offered the opportunity to enroll in a high-deductible medical plan and a corresponding HSA account. Doing this requires you to select how much you intend to contribute to the HSA account in the subsequent year, but you do have some flexibility. For example, at open enrollment you can elect to contribute $100 per month to your HSA account. However if you find yourself wanting to contribute more throughout the year for increased medical expenses or to shelter income from taxes you can make contributions to the account on your own. While these supplemental contributions are not tax-deductible at the time of contribution, you can record them on your taxes when you file at the end of the year and receive the deductible adjustment.
- Unlike the FSA account, HSA accounts do not have a “use it or lose it” option. This means that at the end of any given calendar year any remaining funds in the accounts can roll over to the following year without penalty or limiting your subsequent year’s contribution.
- Contribution limits to HSA accounts are larger than FSA limits. In 2017 the FSA maximum contribution limit is $2,600 whereas the HSA contribution limit was $3,400 for an individual and $6,750 for a family. There are a few additional eligibility qualifications that will determine if you are eligible for the maximum contribution level.
While the aforementioned lists do not detail all of the benefits associated with FSA and HSA accounts, it does point out some important differences between the two accounts. It is important to note a large difference between the two accounts. When comparing the two accounts, the FSA offers a significant feature the HSA does not. At the start of each new year your employer is required to make the entire amount committed to the FSA available on January 1st. This means if you experience an FSA qualified expense you would not need to take money out of your emergency fund to pay that medical bill. On the other hand, the HSA account does not offer the same requirement of employers. Instead, if you experience a HSA qualified medical expense on January 1st and you do not have enough rolling over from a prior year then you would need to withdraw funds from another source to pay that medical bill. This is where proper financial planning with a well funded emergency fund would help level the field and allow the upfront expenses to be met from savings.
So what does all of this mean in terms of evaluating your benefits? Whether you are about to take part in open enrollment or are considering a job offer, you need to understand how to minimize out of pocket expenses. If you are reviewing your benefits for open enrollment consider the following:
- Review your medical claim history for the prior year and current year. Barring extraordinary expenses, consider taking an average of the two years and add 10% to adjust for inflationary healthcare related increases. This trick will allow you to evaluate which Savings Account is better suited for your needs in the upcoming year.
- After reviewing your prior year’s claim history, if you were on a PPO, POS, or HMO plan consider adding up the number of co-payments, co-insurance payments, and premiums to determine if switching to a high-deductible plan would reduce your out of pocket expenses and allow you to re-direct pre-tax funds into a qualified Savings Account.
For those considering a change in employment, make sure to review the following:
- Before beginning the interview process have a good grasp on your current medical benefits package as it stands today. Understand the nuances of your current premiums, co-pays, deductibles, and network coverage limits. The last thing you want to do is join a new company that offers insurance incompatible with your current providers, which could mean finding new providers or bills being deemed “out-of-network”.
- When you receive your offer letter ask the hiring manager, or recruiter, for a copy of the new company's benefits summary and cost structure. With this information you can appropriately assess, prioritize, and compare employee benefits between both firms. This will also help you determine if you will incur additional “soft dollar costs” which will take away from the base compensation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Your specific situation may vary.