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Types of Consumer Directed Health Plans

As employers look for ways to cope with rising health care costs, consumer directed health plans (CDHP) continue to increase in popularity. According to CNNMoney.com (See References 2), more than 51 percent of employers offered CDHPs to their employees in 2008, up from 47 percent the prior year. A CDHP offers high-deductible insurance coverage with a type of savings plan that can be used to pay for medical expenses.

  1. Health Savings Accounts

    • A health savings account (HSA) combines a high-deductible major medical health insurance plan with a savings vehicle. The high deductible helps reduce the cost of the insurance, while the savings account accrues funds that may be withdrawn to pay for covered medical expenses on a tax-free basis. Consumers can contribute to the account up to a predetermined limit, and the money in the account grows on a tax-deferred basis. When the consumer reaches the age of 65, any remaining funds in the account can be used to help fund retirement, or for any other purpose the consumer wishes.

    Flexible Spending Arrangements

    • Another type of CDHP is a flexible spending arrangement (FSA). Under an FSA, an employer allows employees to set aside money from each paycheck on a pre-tax basis. Money that has accrued during the year can be withdrawn on a tax-free basis to pay for covered medical expenses. Unlike an HSA, any type of insurance plan offered by the employer can be used in conjunction with an FSA, or it can be offered as a stand alone vehicle. An FSA also differs from an HSA in that any funds that are unused by the end of the year are forfeited and cannot be rolled over into the next year. This places the burden of having to estimate health care costs for the year on the employee.

    Health Reimbursement Arrangements

    • Under a health reimbursement arrangement (HRA), an employer agrees to set aside funds to help pay for an employee's medical expenses. Unlike an FSA, employees are not permitted to make contributions. The employer determines how much money is to be set aside to pay for medical expenses. An HRA is typically used in conjunction with a high-deductible major medical plan, but can be used with any type of health plan offered by the employer. Like an FSA, an HRA can also stand alone. With an HRA, the employer determines whether any money remaining in the account at the end of the year can be carried over or must be forfeited.

    Archer Medical Savings Accounts

    • An Archer medical savings account (MSA) is available to companies with 50 or less employees or to self-employed individuals. Employees and their employers can both contribute to the plan, but only one or the other can contribute during any given year. Like an HSA, the account must be used in conjunction with a high-deductible health insurance plan. The funds can be rolled over from year to year, and tax-free withdrawals can be made to cover qualified medical expenses.

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