Converting your Group Health Policy to a HSA/HDHP Plan

If you are like most people, you read the title, scratched your head and was bewildered. Trust me, you are not alone in that boat! First, let’s define those terms so that they make a little more sense. There is the Health Savings Account, which allows money to be saved for future health needs. These are tax deferred accounts that are part of the HDHP plan. You must be enrolled in one to have the other.

The HDHP is a high deductible health plan to cover serious illnesses or injury as well as preventive health care. The plan can be either a PPO or HMO type plan, and you usually have your choice of in-network or out of network providers. The advantage to using an in-network provider is of course that it is cheaper. Except for preventive care, you must meet your annual deductible. A smaller deductible may apply for some instances of preventive care, and there may be a dollar amount limit on these charges.

The secondary part of this tandem can either be a Health Savings Account, or a Health Reimbursement Arrangement. Both are tax deferred, and both provide for future health care needs. There are limits, and some very confusing terms involved, so talk to a professional about the plans benefits and drawbacks as they apply to your own personal situation.

For instance, you can not have the HRA or the Health Savings Account without enrollment in the HDHP plan first. You also do not qualify for either if you are Medicare eligible, are covered by a spouses or other group insurance plan, or can be claimed as a dependant on someone else’s tax form. Again, review all of these and any others with a licensed insurance agent before making any decisions.

But, what if you need that money now and what if it isn’t medical? You can use the money for a non medical emergency, but there will be a 10% tax penalty on top of regular tax on the amount used if you are under the age of 65. There are no taxes on qualified medical expenses such as braces, hearing aid batteries, glasses and eye exams and out of pocket medical expenses. Prescription drugs are also considered a qualified medical expense.

You are still allowed certain types of insurance with a Health Savings Account, such as vision, dental, disability and long term care, and there are others that are not allowed. Again, you cannot have this account if you have insurance through your spouse or certain other types of insurance.

You must be aware of what your maximum allowable contribution is per year, and what exactly your benefits are. Be a wise consumer and educate yourself about the terms and the amounts of your plan. Careful record keeping is necessary if the IRS should want to audit part or all of your Health Savings Account records. Keep all medically necessary receipts, including those for hearing aid batteries for example.

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