Should I Join a High Deductible Plan in the FEHB Program?
Over a dozen national and some local carriers offer High Deductible plans (HDHP), with at least two or three of these plans available to most enrollees. These plans provide a savings account for health care expenses, financed on a tax-free basis through the premium paid to the plan and, in some cases, through additional contributions by enrollees. In a HDHP, the annual health savings account (HSA) account contribution paid through the plan premium is typically about $1,000 for a self-only enrollment, and twice as much for a self-plus-one or self & family enrollment. During the year, you can use this account to pay for any of your qualified health care expenses, including expenses that the plan does not otherwise cover, such as a hearing aid. If you use up the account on other expenses (or decide to save it rather than use it), you face a high deductible, often almost twice as much as the premium paid savings account for that year. After the deductible has been met, you typically pay 10 or 15 percent of expenses, up to an out-of-pocket spending limit. The focus of these plans is to encourage you to be a prudent purchaser. If you are relatively healthy and spend wisely, you may avoid any out-of-pocket health care expenses. Furthermore, your unused account balance "rolls over" and you can build up a substantial cushion that even earns interest or investment returns. Your total cost under these plans can be LESS than your tax-preferred premium share, taking into account your year-end HSA balance after just one year.
Two other important features that these plans share is that routine preventive care does not count against either the spending account or the deductible, and you have good catastrophic expense protection.
The HDHPs start with a contribution to an official and tax protected HSA, paid monthly form the plan's premium received from your employing agency. You can also make voluntary contributions and the total annual amounts from both sources in 2023 are $3,850 for self-only enrollment and $7,750 for self-plus-one or self & family enrollment. HSA funds can then be invested in stocks or bonds and are best though of, and used as, long-term investments. An HSA not only lets you accumulate these funds, but also lets you retain the savings account when you change plans or retire. Moreover, you can earn interest or investment gains, tax-free, for decades to come.
Your HSA carries over from year to year and if you spend little on health care beyond an annual physical, an occasional doctor or dentist visit, and a few inexpensive drugs you will soon accumulate a substantial balance. The "high deductible" is in most of these plans around $2,000 for an individual and $4,000 for a family. As high as these amounts are, they are far less than the amounts you can save and earn each year. Within a few years of low to moderate health care expenses, the HSA will be far more than is ever needed for paying the deductible or for paying your share of even very high medical bills in the tens of thousands of dollars. Bills above the deductible will be paid mainly by the health plan just as in any other FEHB plan type. In those years in which you do spend some of your HSA on paying expenses with the deductible level, that spending will be tax free. In sum, the HSA amounts are tax-free going in, tax-free when growing, and tax-free when spent on health care. Some federal employees have grown their HSA balances to $50,000 or more.
In contrast, there is another kind of health plan with a savings account in the FEHB program call a "Consumer-Driven" plan (CDHP). These plans also have high deductibles and provide a "Health Reimbursement Arrangement" (HRA), or "Personal Care Account" as it is called in some plans. An HRA can grow each year if it is not used up, but belongs to the plan and terminates if you change plans. In that case, the unspent balance remains with the plan. Unlike HSAs, HRAs do not let you grow the account through earning interest or investment returns and you can't make additional voluntary contributions to an HRA. You can use an HRA, but not an HSA, if you are covered by other health insurance, such as TRICARE, a spouse's plan, or Medicare.
But there is a connection between the two types of savings plans. You can join an HDHP plan at any age, but cannot invest additional amounts into your HSA account if you have other health insurance coverage, such as a spousal plan or Medicare Part A or Part B. Instead, in the HDHP plans, annuitants with Medicare get an HRA in the same amount as the HSA received by other enrollees. As a result, an annuitant who had been enrolled in an HDHP plan can have two accounts in retirement: one the previously accumulated HSA account, and one a new HRA account. The HRA account can then be spent first, while the HSA account continues to grow over time through investment returns. Another retirement arrangement would be to join an FEHB plan with a large Medicare Part B premium reimbursement and a Medicare Advantage plan with "free" medical care (besides prescription drugs). The HSA would then pay any prescription drug costs and provide a reserve should long-term care ever be needed.
An HSA is also a better arrangement for most than a Flexible Spending Account (FSA), because there is no "use or lose" penalty or carry-over balance limitation. If you have an HSA you can, however, set-up a limited expense FSA (LEX HCFSA) for dental and vision expenses, preserving your HSA for other medical expenses or to keep your funds invested and growing over time.
With all these advantages for employees with usually low health care expenses, which is another way of saying most federal employees, HDHPs should be attracting more enrollees. Their HSA's are sometimes described as "Trifecta" benefits because the contribution is tax-free, the account grows tax-free, and disbursements from the account are tax-free when spent for health care.
As a final example of flexibility, a young couple who love their HDHP and HSA may wonder how best to handle a planned pregnancy for the coming year. During Open Season they can switch to a traditional health plan that offers "free" maternity care in which the obstetrician is a preferred provider. The HSA balance will be untouched and still growing. After the baby arrives, switch back into the HDHP during the following Open Season, and resume building the HSA balance. This option is additionally attractive because most of the baby's routine health care will be paid at not cost to the couple, through the plan's preventative care benefit. They will probably pay one or two hundred dollars more in premium since their enrollment will now be self & family instead of self-plus-one, but this cost is insignificant compared to the annual growth in the HSA.