Understanding High Deductible Health Plans and the Role of: Health Savings Accounts Health Reimbursement Arrangement

1. Understanding High Deductible Health Plans and the Role of: Health Savings Accounts Health Reimbursement Arrangements UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

2. OPM is pleased to offer a new health care option. HDHPs will give the Federal Team additional opportunities to save and better manage their hard-earned dollars. The Federal Team will be able to enroll in HDHPs this Open Season. High Deductible Health Plans (HDHP) and Open Season

3. High Deductible Health Plans – Part 1 Part 1: High Deductible Health Plan Intended to cover serious illness or injury Preventive Care First dollar coverage, or co-payment or a limited benefit amount Or Part 2A: Health Savings Account Dollars for healthcare expenses Part 2B: Health Reimbursement Arrangement Credits for healthcare expenses

4. High Deductible Health Plans (HDHP) provide insurance coverage. Service delivery in HDHP programs may be offered with a: Preferred Provider Organization (PPO) Health Maintenance Organization (HMO) Point of Service (POS) Depending on the HDHP, you may have the choice of using in-network or out-of-network providers. Using in-network providers will save you money. The Basics of High Deductible Health Plans

5. With the exception of preventive care, the annual deductible must be met before plan benefits are paid. An exception is made for preventive care services which are paid after a small deductible or co-payment. A maximum dollar amount (up to $300, for instance) may apply. An HDHP with a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA): Helps to build savings for future medical expenses Allows greater flexibility over how you use your health care dollars The Basics of High Deductible Health Plans Cont.

6. HDHPs must have minimum deductibles of: $1,050 for Self-Only coverage $2,100 for Self and Family coverage HDHPs have higher annual out-of-pocket limits than many plans. The maximum in-network, out-of-pocket limits for HDHPs in the FEHB Program are: $5,000 for Self coverage $10,000 for Self and Family coverage The Basics of High Deductible Health Plans Cont.

7. How Out-of-Pocket Costs Are Counted Towards the Catastrophic Limits Which expenses count towards the catastrophic limit?

8. Health Savings Account – Part 2A Part 1: High Deductible Health Plan Intended to cover serious illness or injury Preventive Care First dollar coverage, or co-payment or a limited benefit amount Or Part 2A: Health Savings Account Dollars for healthcare expenses Part 2B: Health Reimbursement Arrangement Credits for healthcare expenses

9. A Health Savings Account (HSA) and a Health Reimbursement Arrangement (HRA) provide a tax-advantaged way to save for future medical expenses. An HSA is a component of a High Deductible Health Plan (HDHP). You must be enrolled in an HDHP to have an HSA. Insurance + Tax-Advantaged Savings Vehicle = HDHP/HSA An HSA is an account that you own for the purpose of paying qualified medical expenses for yourself, your spouse, and your dependents. The Basics of a Health Savings Account

10. Your HSA may be funded up to your HDHP’s deductible through the “premium pass through” and your voluntary contributions. Your voluntary contribution is made directly to an IRS approved trustee administering the HSA. Plan $$ + member’s own contribution $$ + earned interest = HSA Funding Your HSA

11. By law, you must enroll in an HDHP to be eligible for an HSA. By law, you are not eligible for an HSA if you: are enrolled in Medicare, are covered by another health care plan that is not an HDHP, can be claimed as a dependent on someone else’s tax return, are enrolled in a general Health Care Flexible Spending Account (or covered by a spouse’s FSA), are covered by a non-HDHP such as TRICARE and TRICARE For Life, or are covered by VA benefits and have used VA medical services within the previous 3 months. The HDHP helps you determine your eligibility for an HSA. If you do not qualify for an HSA, your HDHP will establish a Health Reimbursement Arrangement (HRA) for you. Eligibility for aHealth Savings Account

12. Tax-deductible contributions Your own HSA contribution – deductible on your income tax return (applies with either itemized or standard deduction). Annual contributions may be made any time during the calendar year up to April 15 of the following year (tax return due date). The health plan’s “premium pass through” is not taxable. The annual maximum contribution is established by law and generally cannot be greater than the HDHP deductible. The Features of a Health Savings Account

13. Catch-Up Contribution to HSA Year Amount 2005 $600 2006 $700 2007 $800 2008 $900 2009+ $1,000 In addition to the maximum contribution, (the plan’s annual deductible) individuals between the ages of 55 and 65, can make “catch-up” contributions to the HSA each year.

14. Features of a Health Savings Account HSA Tax-free growth Earnings Health plan “premium pass through” Voluntary Contributions No tax on the “premium pass through.” Voluntary contributions are not taxed. Contributions Tax-Free Distributions (For Qualified Medical Expenses) Regular Tax* (Non-Medical expenses over age 65) * Plus a 10% Tax Penalty for Non-Qualified medical expenses before age 65

15. Tax-free withdrawals for “qualified medical expenses.” Qualified medical expenses include: Dental treatment such as fillings, braces, extractions Hearing aids including batteries Prescription drugs and over-the-counter drugs Eye exams, eyeglasses and contact lens Premiums for qualified long term care insurance (dollar limits may apply) Out-of-pocket expenses including deductibles, coinsurance and co-payments Acupuncture The Features of a Health Savings Account

16. Tax-free interest Interest accrues on the HSA balance. Rollover of funds Unused funds and interest carry over, without limit, from year to year. Portability The HSA is yours to keep—even when you retire, leave the Federal government, or change health plans. Funds held with a qualified trustee or custodian Example: Bank, insurance company, Federal credit union. The FEHB member may select a different trustee or custodian for voluntary contributions. The Features of a Health Savings Account

17. Other Types of Insurance Coverage Insurance Allowed with an HSA: • Long-term care • Specified disease or illness • Insurance that pays a fixed amount per day of hospitalization • Limited HCFSA (not currently offered under FSAFEDS) • Accident • Disability • Dental care • Vision care Insurance or Accounts Not Allowed with an HSA: • Health Care Flexible Spending Account (HCFSA) or a Spouse’s FSA • Medical coverage by a non-HDHP • TRICARE or TRICARE For Life • Any VA benefits used within previous 3 months • Part A and/or Part B Medicare

18. Determining the Maximum Allowable Contribution to an HSA Account • The maximum allowable contribution is determined by the HDHP’s effective date.

19. To calculate the maximum allowable contribution: Divide the annual deductible by 12 Multiply the result by the number of full months remaining in the year, after the effective date of the HDHP. Determining the Maximum Allowable Contribution to an HSA Account

20. An FEHB member enrolls in an HDHP with an HSA. The annual deductible for Self and Family coverage is $2400. Example 1: Determining the Maximum Allowable Contribution to an HSA Account The maximum allowable contribution is $2200

21. Example 1: Calculating the Annual Maximum HSA Contribution for FEHB Members Paid Biweekly An FEHB member enrolls in an HDHP with an HSA.The annual deductible for Self and Family coverage is $2400. The “premium pass through” is $1200 per year. The member’s HDHP enrollment effective date is 1/9/05.

22. An FEHB member enrolls in an HDHP with an HSA. The annual deductible for Self and Family coverage is $2400. Example 2: Determining the Maximum Allowable Contribution to an HSA Account The maximum allowable contribution is $1200

23. Example 2: Calculating the Annual Maximum HSA Contribution Mid-Year Enrollment An FEHB member enrolls in an HDHP with an HSA.The annual deductible for Self and Family coverage is $2400*. The “premium pass through” is $700 per year. The member’s HDHP enrollment effective date is 6/10/05. *The member will have to meet the entire deductible.

24. An FEHB member enrolls in an HDHP with an HSA. The annual deductible for Self and Family coverage is $2400. Example 3: Determining the Maximum Allowable Contribution to an HSA Account The maximum allowable contribution is $2400

25. Example 3: Calculating the Annual Maximum HSA Contribution for FEHB Members Paid Monthly An FEHB member enrolls in an HDHP with an HSA.The annual deductible for Self and Family coverage is $2400. The “premium pass through” is $1200 per year. The member’s HDHP enrollment effective date is 1/1/05.

26. HSA trustees or custodians are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs should maintain records of medical expenses to show distributions have been made exclusively for qualified medical expenses should the IRS request them. Each HSA trustee will have specific instructions on the qualified distribution of qualified or non-medical expenses. HSA Distribution Process

27. Health Reimbursement Arrangement – Part 2B Part 1: High Deductible Health Plan Intended to cover serious illness or injury Preventive Care First dollar coverage, or co-payment or a limited benefit amount Or Part 2A: Health Savings Account Dollars for healthcare expenses Part 2B: Health Reimbursement Arrangement Credits for healthcare expenses

28. An HRA is a savings credit that works hand-in-hand with an HDHP. The HDHP credits a portion of the health plan premium to the HRA (some plans will credit the annual amount at the beginning of the plan year). The HDHP helps determine eligibility. If you are not eligible for an HSA, your health plan will enroll you in an HRA. A limited HRA (called a Personal Care Account) is also available with Consumer Driven health plan. The Basics of a Health ReimbursementArrangement

29. Tax-free withdrawals for qualified medical expenses only. Must provide documents of medical expense to health plan. Carryover of unused credits from year to year. Credits in an HRA do not earn interest. Credits in an HRA are forfeited if you switch health plans or leave Federal employment, except for retirement. Voluntary contributions to an HRA are not allowed. HRAs are more limited on tax advantages, forfeitures, expense distribution, and voluntary contributions than HSAs. The Features of a Health Reimbursement Arrangement

30. The Differences Between an HSA and HRA

31. Health Care Flexible Spending Account (HCFSA)Dependent Care Flexible Spending Account (DCFSA) • Will an HCFSA and/or an DCFSA affect the member’s eligibility to an HSA or HRA? • A DCFSA is permitted with an HCFSA, HSA or HRA. • An FSAFEDS HCFSA is not allowed with an HSA. • An FSAFEDS HCFSA is permitted with an HRA.

32. Features of a Health Reimbursement Arrangement HRA Credits Credits to the HRA Credits are not taxable Tax-Free Distributions (For Qualified Medical Expenses)

33. Example of an Enrollment, Set-Up, Contribution, and Distribution Process Open Season election form completed by FEHB member. HDHP/HSA or HRA set-up begins with receipt of enrollment form. Trustee/custodian/or health plan paperwork sent to FEHB member. The first “Premium Pass Through” deposited to the HSA, or credits to HRA by the health plan. Trustee/custodian paperwork completed by the FEHB member & returned to health plan. Only medical expenses incurred on or after the HSA or HRA is set-up are reimbursable through distributions. Enrollee may begin voluntary contributions after the HSA is set-up. 1 2 3 4 5 6 7

34. List of High Deductible Health Plans GEHA and Mail Handlers are available nationwide.

35. List of High Deductible Health Plans

36. FSAFEDS www.fsafeds.com; 1-877-FSAFEDS(372-3337) or TTY 1-800-952-0450 OPM Web address for HSAs www.opm.gov/hsa U.S Treasury Department for HSAs www.ustreas.gov/offices/public-affairs/hsa 2005 Guide to Federal Employees Health Benefits Plans and 2005 individual health plan brochures http://www.opm.gov/insure/health/index.asp For a list of qualified medical expenses that can be reimbursed through an HSA or HRA: www.irs.gov/pub/irs-pdf/p502.pdf Note: Over-the-counter drugs and insurance premiums are qualified medical expenses. Resources: Search the Web, Refer to the 2005 Plan Brochures and 2005 Guides