Q What is the first thing I should know about buying California medical insurance coverage?
A Your aim should be to insure yourself and your family against the most serious and financially disastrous losses that can result from an illness or accident. If you are offered health benefits at work, carefully review the plans’ literature to make sure the one you select fits your needs. If you purchase California individual coverage like Blue Cross of California, buy a policy that will cover major expenses and pay them to the highest maximum level. Save money on premiums, if necessary, by taking large deductibles and paying smaller costs out-of-pocket.
Q Can I buy a single California health insurance policy that will provide all the benefits I’m likely to need?
A No. Although you can select a California health plan such as a Blue Cross of California plan or buy a policy that should cover most medical, hospital, surgical, and pharmaceutical bills, no single policy covers everything. Moreover, you may want to consider additional single-purpose policies like long-term care or disability income insurance. If you are over 65, you may want a Medicare supplement policy to fill in the gaps in Medicare coverage.
Q I’m planning to keep working after age 65. Will I be covered by Medicare or by my company’s California health insurance?
A If you work for a company with 20 or more employees, your employer must offer you (through age 69) the same California health insurance coverage offered to younger employees. After you reach age 65, you may choose between Medicare and your company’s plan as your primary insurer. If you elect to remain in the company plan, it will pay first—for all benefits covered under the plan—before Medicare is billed. In most instances, it is to your advantage to accept continued employer coverage.
But be sure to enroll in Medicare Part A, which covers hospitalization and can supplement your group coverage at no additional cost to you. You can save on Medicare premiums by not enrolling in Medicare Part B until you finally retire. Bear in mind, though, that delayed enrollment is more expensive and entails a waiting period for coverage.
Q I’ve had a serious health condition that appears to be stabilized. Can I buy California individual health coverage such as Blue Cross of California?
A Depending on what your condition is and when it was diagnosed and treated, you can probably buy California health insurance. However, the insurer may do one of three things:
- provide full protection but with a higher premium, as might be the case with a chronic disease, such as diabetes;
- modify the benefits to increase the deductible;
- exclude the specific medical problem from coverage, if it is a clearly defined condition, as long as the insurer abides by state and federal laws on exclusions.
Q One of my medical bills was turned down by the California insurance company (or health plan). Is there anything I can do?
A Ask the California insurance company why the claim was rejected. If the answer is that the service isn’t covered under your policy, and you’re sure that it is covered, check to see that the provider entered the correct diagnosis or procedure code on the insurance claim form. Also check that your deductible was correctly calculated.
Make sure that you didn’t skip an essential step under your plan, such as pre admission certification. If everything is in order, ask the insurer to review the claim.
Whether you end up choosing a fee-for-service plan or a form of managed care from Blue Cross of California or others, you must examine a benefits summary or an outline of coverage—the description of policy benefits, exclusions, and provisions that makes it easier to understand a particular policy and compare it with others.
Look at this information closely. Think about your personal situation. After all, you may not mind that pregnancy is not covered, but you may want coverage for psychological counseling. Do you want coverage for your whole family or just yourself? Are you concerned with preventive care and checkups? Or would you be comfortable in a managed care setting that might restrict your choice somewhat but give you broad coverage and convenience? These are questions that only you can answer.
Here are some of the things to look at when choosing and comparing health insurance plans such as one from Blue Cross of California.
California Health Insurance Checklist
Covered medical services
- Inpatient hospital services
- Outpatient surgery
- Physician visits (in the hospital)
- Office visits
- Skilled nursing care
- Medical tests and X-rays
- Prescription drugs
- Mental health care
- Drug and alcohol abuse treatment
- Home health care visits
- Rehabilitation facility care
- Physical therapy
- Speech therapy
- Hospice care
- Maternity care
- Chiropractic treatment
- Preventive care and checkups
- Well-baby care
- Dental care Other covered services
Are there any medical service limits, exclusions, or preexisting conditions that will affect you or your family?
What types of utilization review, pre authorization, or certification procedures are included?
How much is the premium from Blue Cross of California or another provider?
Are there any discounts available for good health or healthy behaviors (e.g., non-smoker)?
How much is the annual deductible from Blue Cross of California or other providers?
$_________________________________ per person
$_________________________________ per family
What coinsurance or co-payments apply?
_________________________________% after I meet my deductible
$_________________________________copay or % coinsurance per office visit
$_________________________________copay or % coinsurance for “wellness” care (includes well-baby care, annual eye exam, physical, etc.)
$_________________________________% copay or coinsurance for inpatient hospital care
Other Forms of California Health Insurance
In addition to broad coverage for medical, surgical, and hospital expenses, there are many other kinds of California health insurance.
Hospital-surgical policies, sometimes called basic California health insurance, provide benefits when you have a covered condition that requires hospitalization. These benefits typically include room and board and other hospital services, surgery, physicians’ non surgical services that are performed in a hospital, expenses for diagnostic X-rays and laboratory tests, and room and board in an extended care facility.
Benefits for hospital room and board may be a per-day dollar amount or all or part of the hospital’s daily rate for a semi-private room. Benefits for surgery typically are listed, showing the maximum benefit for each type of surgical procedure.
Hospital-surgical policies may provide “first-dollar” coverage. That means that there is no deductible, or amount that you have to pay, for a covered medical expense. Other policies may contain a small deductible.
Keep in mind that hospital-surgical policies usually do not cover lengthy hospitalizations and costly medical care. In the event that you need these types of services, you may incur large expenses that are difficult to meet unless you have other California health insurance.
Catastrophic coverage pays hospital and medical expenses above a certain deductible; this can provide additional protection if you hold either a hospital-surgical policy or a major medical policy with a lower-than-adequate lifetime limit. These policies typically contain a very high deductible ($15,000 or more) and a maximum lifetime limit high enough to cover the costs of catastrophic illness.
Specified or dread disease policies provide benefits only if you get the specific disease or group of diseases named in the policy. For example, a policy might cover only medical care for cancer. Because benefits are limited in amount, these policies are not a substitute for broad medical coverage. Nor are specified disease policies available in every state.
Hospital indemnity insurance pays you a specified amount of cash benefits for each day that you are hospitalized, generally up to a designated number of days. These cash benefits are paid directly to you, can be used for any purpose, and may be useful in meeting out-of-pocket expenses not covered by other insurance.
Hospital indemnity policies frequently are available directly from California insurance companies by mail as well as through insurance agents. You will find that these policies offer many choices, so be sure to ask questions and find the right plan to meet your needs.
Some policies contain limitations on preexisting medical conditions that you may have before your California health insurance takes effect. Others contain an elimination period, which means that benefits will not be paid until after you have been hospitalized for a specified number of days. When you apply for the policy, you may be allowed to choose among two or three elimination periods, with different premiums for each. Although you can reduce your premiums by choosing a longer elimination period, you should bear in mind that most patients are hospitalized for relatively brief periods of time.
If you purchase a hospital indemnity policy, periodically review it to see if you need to increase your daily benefits to keep pace with rising health care costs.
Medicare supplement insurance, sometimes called Medigap or MedSup, is private insurance that helps cover some of the gaps in Medicare coverage.
Medicare is the federal program of hospital and California medical insurance primarily for people age 65 and over who are not covered by an employer’s plan. But Medicare doesn’t cover all medical expenses. That’s where MedSup comes in.
All Medicare supplement policies must cover certain expenses, such as the daily coinsurance amount for hospitalization and 90 percent of the hospital charges that otherwise would have been paid by Medicare, after Medicare is exhausted. Some policies may offer additional benefits, such as coverage for preventive medical care, prescription drugs, or at-home recovery.
There are 10 standard Medicare supplement policies, designated by the letters A through J. With these standardized policies, it is much easier to compare the costs of policies issued by different insurers. While all 10 standard policies may not be available to you, Plan A must be made available to Medicare recipients everywhere.
Insurers are not permitted to sell policies that duplicate benefits you already receive under Medicare or other policies. If you decide to replace an existing Medicare supplement policy—and you should do so only after careful evaluation—you must sign a statement that you intend to replace your current policy and that you will not keep both policies in force.
People who are 65 or older can buy Medicare supplement insurance without having to worry about being rejected for existing medical problems, so long as they apply within six months after enrolling in Medicare.
Long-term care policies cover the medical care, nursing care, and other assistance you might need if you ever have a chronic illness or disability that leaves you unable to care for yourself for an extended period of time. These services generally are not covered by other health insurance. You may receive long-term care in a nursing home or in your own home.
Long-term care can be very expensive. On average, a year in a nursing home costs about $40,000. In some regions, it may cost much more. Home care is less expensive, but it still adds up. (Home care can include part-time skilled nursing care, speech therapy, physical or occupational therapy, home health aides, and homemakers.)
Bringing an aide into your home just three times a week—to help with dressing, bathing, preparing meals, and similar chores—easily can cost$1,000 a month, or $12,000 a year. Add in the cost of skilled help, such as physical therapy, and the costs can be much greater.
Most long-term care policies pay a fixed dollar amount, typically from$40 to more than $200 a day, for each day you receive covered care in a nursing home. The daily benefit for at-home care is usually half the benefit for nursing home care. Because the per-day benefit you buy today may be inadequate to cover higher costs in the future, most policies also offer an inflation adjustment feature.
Keep in mind that unless you have a long-term care policy, you are not covered for long-term care expenses under Medicare and most other types of insurance. Recent changes in federal law may allow you to take certain income tax deductions for some long-term care expenses and insurance premiums.
Disability insurance provides you with an income if illness or injury prevents you from being able to work for an extended period of time. It is an important but often overlooked form of insurance.
There are other possible sources of income if you are disabled. Social Security provides protection, but only to those who are severely disabled and unable to work at all; workers’ compensation provides benefits if the illness or injury is work-related; civil service disability covers federal or state government workers; and automobile insurance may pay benefits if the disability results from an automobile accident. But these sources are limited.
Some employers offer short- and long-term disability coverage. If you are self-employed, you can buy individual disability income insurance policies. Generally:
- Monthly benefits are usually 60 percent of your income at the time of purchase, although cost-of-living adjustments may be available.
- If you pay the premiums for an individual disability policy, payments you receive under the policy are not subject to income tax. If your employer has paid some or all of the premiums under a group disability policy, some or all of the benefits may be taxable.
Whether you are an employer shopping for a group disability policy or someone thinking of purchasing disability income insurance, you will need to evaluate different policies.
Here are some things to look for:
- Some policies pay benefits only if someone is unable to perform the duties of their customary occupation, while others pay only if the person can engage in no gainful employment at all. Make sure that you know the insurer’s definition of disability.
- Some policies pay only for accidents, but it’s important to be insured for illness, too. Be sure, as you evaluate policies, that both accident and illness are covered.
- Benefits may begin anywhere from one month to six months or more after the onset of disability. A later starting date can keep your premiums down. But remember, if your policy only starts to pay (for example) three months after the disability begins, you may lose a considerable amount of income.
- Benefits may be payable for a period ranging anywhere from one year to a lifetime. Since disability benefits replace income, most people do not need benefits beyond their working years. But it’s generally wise to insure at least until age 65 since a lengthy disability threatens financial security much more than a short disability.
A Final Word
If you get California health care coverage at work, or through a trade or professional association or a union, you are almost certainly enrolled under a group contract. Generally, the contract is between the group and the insurer, and your employer has done comparison shopping before offering the plan to the employees. Nevertheless, while some employers only offer one plan, some offer more than one. Compare California health plans carefully!
If you are buying California individual insurance, or any form of insurance that you purchase directly, read and compare the policies you are considering before you buy one, and make sure you understand all of the provisions. Marketing or sales literature is no substitute for the actual policy. Read the policy itself before you buy.
Ask for a summary of each policy’s benefits or an outline of coverage. Good agents and good insurance companies want you to know what you are buying. Don’t be afraid to ask your benefits manager or insurance agent to explain anything that is unclear.
It is also a good idea to ask for the insurance company’s rating. The A.M. Best Company, Standard & Poor’s Corporation, and Moody’s all rate insurance companies after analyzing their financial records. These publications that list ratings usually can be found in the business section of libraries.
And bear in mind: In some cases, even after you buy a policy, if you find that it doesn’t meet your needs, you may have 30 days to return the policy and get your money back. This is called the “free look.”
California Health Insurance – An Introduction
If you have ever been sick or injured, you know how important it is to have health coverage. But if you’re confused about what kind is best for you, you’re not alone.
What types of California health coverage are available? If your employer offers you a choice of health plans, what should you know before making a decision? In addition to coverage for medical expenses, do you need some other kind of insurance? What if you are too ill to work? Or, if you are over 65, will Medicare pay for all your medical expenses?
These are questions that today’s consumers are asking; and these questions aren’t necessarily easy to answer.
This booklet should help. It discusses the basic forms of health coverage and includes a checklist to help you compare plans. It answers some commonly asked questions and also includes thumbnail descriptions of other forms of health insurance, including hospital-surgical policies, specified disease policies, catastrophic coverage, hospital indemnity insurance, and disability, long-term care, and Medicare supplement insurance.
While we know that our guide can’t answer all your questions, we think it will help you make the right decisions for yourself, your family, and even your business.
Making Sense of California Health Insurance
The term health insurance refers to a wide variety of insurance policies. These range from policies that cover the costs of doctors and hospitals to those that meet a specific need, such as paying for long-term care. Even disability insurance—which replaces lost income if you can’t work because of illness or accident—is considered health insurance, even though it’s not specifically for medical expenses.
But when people talk about California health insurance, they usually mean the kind of insurance offered by employers to employees, the kind that covers medical bills, surgery, and hospital expenses. You may have heard this kind of health insurance referred to as comprehensive or major medical policies, alluding to the broad protection they offer. But the fact is, neither of these terms is particularly helpful to the consumer.
Today, when people talk about broad health care coverage, instead of using the term “major medical,” they are more likely to refer to fee-for-service or managed care. These terms apply to different kinds of coverage or health plans. Moreover, you’ll also hear about specific kinds of managed care plans: health maintenance organizations or HMOs, preferred provider organizations or PPOs, and point-of-service or POS plans.
While fee-for-service and managed care plans differ in important ways, in some ways they are similar. Both cover an array of medical, surgical, and hospital expenses. Most offer some coverage for prescription drugs, and some include coverage for dentists and other providers. But there are many important differences that will make one or the other form of coverage the right one for you.
The section below is designed to acquaint you with the basics of fee-for-service and managed care plans. But remember: The detailed differences between one plan and another can only be understood by careful reading of the materials provided by insurers, your employee benefits specialist, or your agent or broker.
This type of coverage generally assumes that the medical provider (usually a doctor or hospital) will be paid a fee for each service rendered to the patient—you or a family member covered under your policy. With fee-for-service insurance, you go to the doctor of your choice and you or your doctor or hospital submits a claim to your California insurance company for reimbursement. You will only receive reimbursement for “covered” medical expenses, the ones listed in your benefits summary.
When a service is covered under your policy, you can expect to be reimbursed for some, but generally not all, of the cost. How much you will receive depends on the provisions of the policy on coinsurance and deductibles. Here’s how it works:
- The portion of the covered medical expenses you pay is called “coinsurance.” Although there are variations, fee-for-service policies often reimburse doctor bills at 80 percent of the “reasonable and customary charge.” (This is the prevailing cost of a medical service in a given geographic area.) You pay the other 20 percent—your coinsurance. However, if a medical provider charges more than the reasonable and customary fee, you will have to pay the difference. For example, if the reasonable and customary fee for a medical service is $100, the insurer will pay $80. If your doctor charged $100, you will pay $20. But if the doctor charged $105, you will pay $25. Note that many fee-for-service plans pay hospital expenses in full; some reimburse at the 80/20 level as described above.
- Deductibles are the amount of the covered expenses you must pay each year before the insurer starts to reimburse you. These might range from $100 to $300 per year per individual, or $500 or more per family. Generally, the higher the deductible, the lower the premiums, which are the monthly, quarterly, or annual payments for the insurance.
- Policies typically have an out-of-pocket maximum. This means that once your expenses reach a certain amount in a given calendar year, the reasonable and customary fee for covered benefits will be paid in full by the insurer. (If your doctor bills you more than the reasonable and customary charge, you may still have to pay a portion of the bill.) Note that Medicare limits how much a physician may charge you above the usual amount.
- There also may be lifetime limits on benefits paid under the policy. Most experts recommend that you look for a policy whose lifetime limit is at least $1 million. Anything less may prove to be inadequate.
The three major types of managed care plans are health maintenance organizations (HMOs), preferred provider organizations (PPOs), and point-of-service (POS) plans.
Managed care plans generally provide comprehensive health services to their members, and offer financial incentives for patients to use the providers who belong to the plan. In managed care plans, instead of paying separately for each service that you receive, your coverage is paid in advance. This is called prepaid care.
For example, you may decide to join a local HMO where you pay a monthly or quarterly premium. That premium is the same whether you use the plan’s services or not. The plan may charge a copayment for certain services—for example, $10 for an office visit, or $5 for every prescription. So, if you join this HMO, you may find that you have few out-of-pocket expenses for medical care—as long as you use doctors or hospitals that participate in or are part of the HMO. Your share may be only the small copayments; generally, you will not have deductibles or coinsurance.
One of the interesting things about HMOs is that they deliver care directly to patients. Patients sometimes go to a medical facility to see the nurses and doctors or to a specific doctor’s office. Another common model is a network of individual practitioners. In these individual practice associations (IPAs), you will get your care in a physician’s office.
If you belong to an HMO, typically you must receive your medical care through the plan. Generally, you will select a primary care physician who coordinates your care. Primary care physicians may be family practice doctors, internists, pediatricians, or other types of doctors. The primary care physician is responsible for referring you to specialists when needed. While most of these specialists will be “participating providers” in the HMO, there are circumstances in which patients enrolled in an HMO may be referred to providers outside the HMO network and still receive coverage.
PPOs and POS plans are categorized as managed care plans. (Indeed, many people call POS plans “an HMO with a point-of-service option.”) From the consumer’s point of view, these plans combine features of fee-for-service and HMOs. They offer more flexibility than HMOs, but premiums are likely to be somewhat higher.
With a PPO or a POS plan, unlike most HMOs, you will get some reimbursement if you receive a covered service from a provider who is not in the plan. Of course, choosing a provider outside the plan’s network will cost you more than choosing a provider in the network. These plans will act like fee-for-service plans and charge you coinsurance when you go outside the network.
What is the difference between a PPO and a POS plan? A POS plan has primary care physicians who coordinate patient care; and in most cases, PPO plans do not. But there are exceptions!
HMOs and PPOs have contracts with doctors, hospitals, and other providers. They have negotiated certain fees with these providers—and, as long as you get your care from these providers, they should not ask you for additional payment. (Of course, if your plan requires a copayment at the time you receive care, you will have to pay that.)
Always look carefully at the description of the plans you are considering for the conditions of payment. Check with your employer, your benefits manager, or your state department of insurance to find out about laws that may regulate who is responsible for payment.
Your employer may have set up a financial arrangement that helps cover employees’ health care expenses. Sometimes employers do this and have the “health plan” administered by an insurance company; but sometimes there is no outside administrator. With self-insured health plans, certain federal laws may apply. Thus, if you have problems with a plan that isn’t state regulated, it’s probably a good idea to talk to an attorney who specializes in health law.
HMOs, PPOs, and fee-for-service plans often share certain features, including pre authorization, utilization review, and discharge planning.
For example, you may be asked to get authorization from your plan or insurer before admission to a hospital for certain types of surgery. Utilization review is the process by which a plan determines whether a specific medical or surgical service is appropriate and/or medically necessary. Discharge planning is an approach that facilitates the transfer of a patient to amore cost-effective facility if the patient no longer needs to stay in the hospital. For example, if, following surgery, you no longer need hospitalization but cannot be cared for at home, you may be transferred to a skilled nursing facility.
Almost all fee-for-service plans apply managed care techniques to contain costs and guarantee appropriate care; and an increasing number of managed care plans contain fee-for-service elements. While the distinctions among plans are growing increasingly blurred, the number of options available to consumers increases every day.
How Do I Get California Health Coverage?
California Health insurance is generally available through groups and to individuals. Premiums—the regular fees that you pay for health insurance coverage—are generally lower for group coverage. When you receive group insurance at work, the premium usually is paid through your employer.
California group insurance is typically offered through employers, although unions, professional associations, and other organizations also offer it. As an employee benefit, group health insurance has many advantages. Much—although not all—of the cost may be borne by the employer. Premium costs are frequently lower because economies of scale in large groups make administration less expensive. With California group insurance, if you enroll when you first become eligible for coverage, you generally will not be asked for evidence that you are insurable. (Enrollment usually occurs when you first take a job, and/or during a specified period each year, which is called open enrollment.) Some employers offer employees a choice of fee-for-service and managed care plans. In addition, some group plans offer dental insurance as well as medical.
California individual insurance is a good option if you work for a small company that does not offer health insurance or if you are self-employed. Buying individual insurance allows you to tailor a plan to fit your needs from the insurance company of your choice. It requires careful shopping, because coverage and costs vary from company to company. In evaluating policies, consider what medical services are covered, what benefits are paid, and how much you must pay in deductibles and coinsurance. You may keep premiums down by accepting a higher deductible.
Many people worry about coverage for preexisting conditions, especially when they change jobs. The Health Insurance Portability and Accountability Act (HIPAA) helps assure continued health insurance coverage for employees and their dependents. Starting July 1, 1997, insurers could impose only one 12-month waiting period for any preexisting condition treated or diagnosed in the previous six months. Your prior health insurance coverage will be credited toward the preexisting condition exclusion period as long as you have maintained continuous coverage without a break of more than 62 days. Pregnancy is not considered a preexisting condition, and newborns and adopted children who are covered within 30 days are not subject to the 12-monthwaiting period.
If you have had California group health coverage for two years, and you switch jobs and go to another plan, that new health plan cannot impose another preexisting condition exclusion period. If, for example, you have had prior coverage of only eight months, you may be subject to a four-month, preexisting condition exclusion period when you switch jobs. If you’ve never been covered by an employer’s group plan, and you get a job that offers such coverage, you may be subject to a 12-month, preexisting condition waiting period.
Federal law also makes it easier for you to get individual insurance under certain situations, including if you have left a job where you had group health insurance, or had another plan for more than 18 months without a break of more than 62 days.
If you have not been covered under a group plan and have found it difficult to get insurance on your own, check with your state insurance department to see if your state has a risk pool. Similar to risk pools for automobile insurance, these can provide health insurance for people who cannot get it elsewhere.
What Is Not Covered?
While HMO benefits are generally more comprehensive than those of traditional fee-for-service plans, no health plan will cover every medical expense.
Very few plans cover eyeglasses and hearing aids because these are considered budgetable expenses. Very few cover elective cosmetic surgery, except to correct damage caused by a covered accidental injury. Some fee-for-service plans do not cover checkups. Procedures that are considered experimental may not be covered either. And some plans cover complications arising from pregnancy, but do not cover normal pregnancy or childbirth.
Health insurance policies frequently exclude coverage for preexisting conditions, but, as explained, federal law now limits exclusions based on such conditions.
You should also remember that insurers will not pay duplicate benefits. You and your spouse may each be covered under a health insurance plan at work but, under what is called a “coordination of benefits” provision, the total you can receive under both plans for a covered medical expense cannot exceed 100 percent of the allowable cost. Also note that if neither of your plans covers 100 percent of your expenses, you will only be covered for the percentage of coverage (for example, 80 percent) that your primary plan covers. This provision benefits everyone in the long run because it helps to keep costs down.
What Happens to My Insurance if I Lose My Job?
If you have had health coverage as an employee benefit and you leave your job, voluntarily or otherwise, one of your first concerns will be maintaining protection against the costs of health care. You can do this in one of several ways:
- First, you should know that under a federal law (the Consolidated Omnibus Budget Reconciliation Act of 1985, commonly known as COBRA), group health plans sponsored by employers with 20 or more employees are required to offer continued coverage for you and your dependents for 18 months after you leave your job. (Under the same law, following an employee’s death or divorce, the worker’s family has the right to continue coverage for up to three years.) If you wish to continue your group coverage under this option, you must notify your employer within 60 days. You must also pay the entire premium, up to 102 percent of the cost of the coverage.
- If COBRA does not apply in your case—perhaps because you work for an employer with fewer than 20 employees—you may be able to convert your group policy to individual coverage. The advantage of that option is that you may not have to pass a medical exam, although an exclusion based on a preexisting condition may apply, depending on your medical history and your insurance history.
- If COBRA doesn’t apply and converting your group coverage is not for you, then, if you are healthy, not yet eligible for Medicare, and expect to take another job, you might consider an interim or short-term policy. These policies provide medical insurance for people with a short-term need, such as those temporarily between jobs or those making the transition between college and a job. These policies, typically written for two to six months and renewable once, cover hospitalization, intensive care, and surgical and doctors’ care provided in the hospital, as well as expenses for related services performed outside the hospital, such as X-rays or laboratory tests.
- Another possibility is obtaining coverage through an association. Many trade and professional associations offer their members health coverage—often HMOs—as well as basic hospital-surgical policies and disability and long-term care insurance. If you are self-employed, you may find association membership an attractive route.
Health Savings Accounts
What Are HSAs and Who Can Have Them?
- What is an HSA? An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan. A number of the rules that apply to HSA are similar to rules that apply to an IRA. Thus, if the individual is an employee who later changes employers or leaves the work force, the HSA does not stay behind with the former employer, but stays with the individual. However, because HSAs differ from IRAs in some important respects, taxpayers cannot use an IRA as an HSA, and cannot combine and IRA and an HSA in a single account.
- Who is eligible to establish an HSA? An “eligible individual” can establish an HSA. An “eligible individual” means, with respect to any month, any individual who: (1) is covered under a high-deductible health plan (HDHP) on the first day of such month; (2) is not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing certain limited types of coverage); (3) is not entitled to benefits under Medicare (generally, has not yet reached age 65); and (4) may not be claimed as a dependent on another person’s tax return.
- Can a self-insured medical reimbursement plan sponsored by an employer be an HDHP? Yes.
What tax implications are there?
- What is the tax treatment of an eligible individual’s HSA contributions? Contributions made by an eligible individual to an HSA (which are subject to the limits) are deductible by the eligible individual in determining adjusted gross income (i.e., “above-the- line”). The contributions are deductible whether or not the eligible individual itemizes deductions. However, the individual cannot also deduct the contributions as medical expense deductions under section 213.
- What is the tax treatment of contributions made by a family member on behalf of an eligible individual? Contributions made by a family member on behalf of an eligible individual to an HSA (which are subject to the limits) are deductible by the eligible individual in computing adjusted gross income. The contributions are deductible whether or not the eligible individual itemizes deductions. An individual who may be claimed as a dependent on another person’s tax return is not an eligible individual and may not deduct contributions to an HSA.
- What is the tax treatment of employer contributions to an employee’s HSA? In the case of an employee who is an eligible individual, employer contributions (provided they are within the limits) to the employee’s HSA are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from the employee’s gross income. The employer contributions are not subject to withholding from wages for income tax or subject to the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Tax Act. Contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions. The employee cannot deduct employer contributions on his or her federal income tax return as HSA contributions or as medical expense deductions under section 213.
- What is the tax treatment of an HSA? An HSA is generally exempt from tax (like an IRA or Archer MSA), unless it has ceased to be an HSA. Earnings on amounts in an HSA are not includable in gross income while held in the HSA (i.e., inside buildup is not taxable). There are other additional rules regarding the taxation of distributions to the account beneficiary.
How Can An HSA Be Established?
- How does an eligible individual establish an HSA? Beginning January 1, 2004, any eligible individual can establish an HSA with a qualified HSA trustee or custodian, in much the same way that individuals establish IRAs or Archer MSAs with qualified IRA or Archer MSA trustees or custodians. No permission or authorization from the Internal Revenue Service (IRS) is necessary to establish an HSA. An eligible individual who is an employee may establish an HSA with or without involvement of the employer.
- Who is a qualified HSA trustee or custodian? Any insurance company or any bank (including a similar financial institution as defined in section 408(n)) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or Archer MSAs is automatically approved to be an HSA trustee or custodian. Other persons may request approval to be a trustee or custodian in accordance with the procedures set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees). For additional information concerning nonbank trustees and custodians, see Announcement 2003-54, 2003-40 I.R.B. 761.
- Does the HSA have to be opened at the same institution that provides the HDHP? No. The HSA can be established through a qualified trustee or custodian who is different from the HDHP provider. Where a trustee or custodian does not sponsor the HDHP, the trustee or custodian may require proof or certification that the account beneficiary is an eligible individual, including that the individual is covered by a health plan that meets all of the requirements of an HDHP.
- When and how do I apply for an HSA? Does the employer or employee do it? Before you can apply for an HSA you must have a qualified High Deductible Health Plan in force. Then, either the employer or employee can contact an HSA administrator, such as HSA Bank, to set-up a qualified Health Savings Account.
Contributions to HSAs
- Who may contribute to an HSA? Any eligible individual may contribute to an HSA. For an HSA established by an employee, the employee, the employee’s employer or both may contribute to the HSA of the employee in a given year. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA. Family members may also make contributions to an HSA on behalf of another family member as long as that other family member is an eligible individual.
- How much may be contributed to an HSA in calendar year 2004? The maximum annual contribution to an HSA is the sum of the limits determined separately for each month, based on status, eligibility and health plan coverage as of the first day of the month. For calendar year 2004, the maximum monthly contribution for eligible individuals with self-only coverage under an HDHP is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $1,000) but not more than $2,600. For eligible individuals with family coverage under an HDHP, the maximum monthly contribution is 1/12 of the lesser of 100% of the annual deductible under the HDHP (minimum of $2,000) but not more than $5,150. In addition to the maximum contribution amount, catch-up contributions may be made by or on behalf of individuals age 55 or older and younger than 65. All HSA contributions made by or on behalf of an eligible individual to an HSA are aggregated for purposes of applying the limit. The annual limit is decreased by the aggregate contributions to an Archer MSA. The same annual contribution limit applies whether the contributions are made by an employee, an employer, a self-employed person, or a family member. Unlike Archer MSAs, contributions may be made by or on behalf of eligible individuals even if the individuals have no compensation or if the contributions exceed their compensation. If an individual has more than one HSA, the aggregate annual contributions to all the HSAs are subject to the limit.
- How is the contribution limit computed for an individual who begins self-only coverage under an HDHP on June 1, 2004 and continues to be covered under the HDHP for the rest of the year? The contribution limit is computed each month. If the annual deductible is $5,000 for the HDHP, then the lesser of the annual deductible and $2,600 is $2,600. The monthly contribution limit is $216.67 ($2,600 /12). The annual contribution limit is $1,516.69 (7 x $216.67).
- What are the “catch-up contributions” for individuals age 55 or older? For individuals (and their spouses covered under the HDHP) between ages 55 and 65, the HSA contribution limit is increased by $500 in calendar year 2004. This catch-up amount will increase in $100 increments annually, until it reaches $1,000 in calendar year 2009. As with the annual contribution limit, the catch- up contribution is also computed on a monthly basis. After an individual has attained age 65 (the Medicare eligibility age), contributions, including catch-up contributions, cannot be made to an individual’s HSA.Example: An individual attains age 65 and becomes eligible for Medicare benefits in July, 2004 and had been participating in self-only coverage under an HDHP with an annual deductible of $1,000. The individual is no longer eligible to make HSA contributions (including catch-up contributions) after June, 2004. The monthly contribution limit is $125 ($1,000 /12+ $500/12 for the catch- up contribution). The individual may make contributions for January through June totaling $750 (6 x $125), but may not make any contributions for July through December, 2004. If one or both spouses have family coverage, how is the contribution limit computed? In the case of individuals who are married to each other, if either spouse has family coverage, both are treated as having family coverage. If each spouse has family coverage under a separate health plan, both spouses are treated as covered under the plan with the lowest deductible. The contribution limit for the spouses is the lowest deductible amount, divided equally between the spouses unless they agree on a different division. The family coverage limit is reduced further by any contribution to an Archer MSA. However, both spouses may make the catch- up contributions for individuals age 55 or over without exceeding the family coverage limit. Example (1): H and W are married. H is 58 and W is 53. H and W both have family coverage under separate HDHPs. H has a $3,000 deductible under his HDHP and W has a $2,000 deductible under her HDHP. H and W are treated as covered under the plan with the $2,000 deductible. H can contribute $1,500 to an HSA (1/2 the deductible of $2,000 + $500 catch up contribution) and W can contribute $1,000 to an HSA (unless they agree to a different division). Example (2): H and W are married. H is 35 and W is 33. H and W each have a selfonly HDHP. H has a $1,000 deductible under his HDHP and W has a $1,500 deductible under her HDHP. H can contribute $1,000 to an HSA and W can contribute $1,500 to an HSA.
- In what form must contributions be made to an HSA? Contributions to an HSA must be made in cash. For example, contributions may not be made in the form of stock or other property. Payments for the HDHP and contributions to the HSA can be made through a cafeteria plan.
- When may HSA contributions be made? Is there a deadline for contributions to an HSA for a taxable year? Contributions for the taxable year can be made in one or more payments, at the convenience of the individual or the employer, at any time prior to the time prescribed by law (without extensions) for filing the eligible individual’s federal income tax return for that year, but not before the beginning of that year. For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made. Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year. Example: B has self-only coverage under an HDHP with a deductible of $1,500 and also has an HSA. B’s employer contributes $200 to B’s HSA at the end of every quarter in 2004 and at the end of the first quarter in 2005 (March 31, 2005). B can exclude from income in 2004 all of the employer contributions (i.e., $1,000) because B’s exclusion for all contributions does not exceed the maximum annual HSA contributions.
- What happens when HSA contributions exceed the maximum amount that may be deducted or excluded from gross income in a taxable year? Contributions by individuals to an HSA, or if made on behalf of an individual to an HSA, are not deductible to the extent they exceed the limits. Contributions by an employer to an HSA for an employee are included in the gross income of the employee to the extent that they exceed the limits or if they are made on behalf of an employee who is not an eligible individual. In addition, an excise tax of 6% for each taxable year is imposed on the account beneficiary for excess individual and employer contributions. However, if the excess contributions for a taxable year and the net income attributable to such excess contributions are paid to the account beneficiary before the last day prescribed by law (including extensions) for filing the account beneficiary’s federal income tax return for the taxable year, then the net income attributable to the excess contributions is included in the account beneficiary’s gross income for the taxable year in which the distribution is received but the excise tax is not imposed on the excess contribution and the distribution of the excess contributions is not taxed.
- Are rollover contributions to HSAs permitted? Rollover contributions from Archer MSAs and other HSAs into an HSA are permitted. Rollover contributions need not be in cash. Rollovers are not subject to the annual contribution limits. Rollovers from an IRA, from a health reimbursement arrangement (HRA), or from a health flexible spending arrangement (FSA) to an HSA are not permitted.
- Can the employer pay for the setup fees for each of the employees and not contribute to the HSA? Yes. The employer can pay the setup fees by sending a separate check with the employee applications accompanied by each employee’s check for the opening contributions.
- How is money deposited into an HSA? What frequency?Employer funded or payroll deduction: Any frequency that employer desires. Most common is that employer mails check with listing of employees with social security numbers so we know how to allocate money. Employer can also request that the bank originate ACH transfers on periodic basis. Or Employer can request to be set up to originate ACH transfers (one time or recurring) themselves via internet called “On Demand Transfer”. All of these options are free. Employee funded: Any frequency that employee desires. Most common is that employee mails check with contribution form (we supply contribution/withdrawal form in customer welcome kit or available to print from our website) or with deposit ticket if they purchased checks. Employee can also request that the bank originate ACH transfers on periodic basis. Or Employee can request to be set up to originate ACH transfers (one time or recurring) themselves via internet called “On Demand Transfer”. All of these methods are free except deposit tickets which can be purchased separately or are included with the check order.
- What discrimination rules apply to HSA contributions? If an employer makes HSA contributions, the employer must make available comparable contributions on behalf of all “comparable participating employees” (i.e., eligible employees with comparable coverage) during the same period. Contributions are considered comparable if they are either the same amount or same percentage of the deductible under the HDHP. The comparability rule is applied separately to part-time employees (i.e., employees who are customarily employed for fewer than 30 hours per week). The comparability rule does not apply to amounts rolled over from an employee’s HSA or Archer MSA, or to contributions made through a cafeteria plan. If employer contributions do not satisfy the comparability rule during a period, the employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs for that period. Example: Employer X offers its collectively bargained employees three health plans, including an HDHP with self-only coverage and a $2,000 deductible. For each employee electing the HDHP self-only coverage, X contributes $1,000 per year on behalf of the employee to an HSA. X makes no HSA contributions for employees who do not elect the HDHP. X’s plans and HSA contributions satisfy the comparability rule.
Distributions from HSAs
- When is an individual permitted to receive distributions from an HSA? An individual is permitted to receive distributions from an HSA at any time.
- How are distributions from an HSA taxed? Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse, or dependents are excludable from gross income. In general, amounts in an HSA can be used for qualified medical expenses and will be excludable from gross income even if the individual is not currently eligible for contributions to the HSA. However, any amount of the distribution not used exclusively to pay for qualified medical expenses of the account beneficiary, spouse or dependents is includable in gross income of the account beneficiary and is subject to an additional 10% tax on the amount includable, except in the case of distributions made after the account beneficiary’s death, disability, or attaining age 65.
- What are the “qualified medical expenses” that are eligible for tax- free distributions? The term “qualified medical expenses” are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in section 213(d) (including nonprescription drugs as described in Rev. Rul. 2003-102, 2003-38 I.R.B. 559), but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under section 213.
- Are health insurance premiums qualified medical expenses? Generally, health insurance premiums are not qualified medical expenses except for the following: qualified long-term care insurance, COBRA health care continuation coverage, and health care coverage while an individual is receiving unemployment compensation. In addition, for individuals over age 65, premiums for Medicare Part A or B, Medicare HMO, and the employee share of premiums for employer-sponsored health insurance, including premiums for employer-sponsored retiree health insurance can be paid from an HSA. Premiums for Medigap policies are not qualified medical expenses.
- How are distributions from an HSA taxed after the account beneficiary is no longer an eligible individual? If the account beneficiary is no longer an eligible individual (e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has an HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary’s gross income.
- Must HSA trustees or custodians determine whether HSA distributions are used exclusively for qualified medical expenses? No. HSA trustees or custodians are not required to determine whether HSA distributions are used for qualified medical expenses. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.
- Must employers who make contributions to an employee’s HSA determine whether HSA distributions are used exclusively for qualified medical expenses? No. The same rule that applies to trustees or custodians applies to employers. Individuals who establish HSAs make that determination and should maintain records of their medical expenses sufficient to show that the distributions have been made exclusively for qualified medical expenses and are therefore excludable from gross income.
- What are the income tax consequences after the HSA account beneficiary’s death? Upon death, any balance remaining in the account beneficiary’s HSA becomes the property of the individual named in the HSA as the beneficiary of the account. If the account beneficiary’s surviving spouse is the named beneficiary of the HSA, the HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to income tax only to the extent distributions from the HSA are not used for qualified medical expenses. If, by reason of the death of the account beneficiary, the HSA passes to a person other than the account beneficiary’s surviving spouse, the HSA ceases to be an HSA as of the date of the account beneficiary’s death, and the person is required to include in gross income the fair market value of the HSA assets as of the date of death. For such a person (except the decedent’s estate), the includable amount is reduced by any payments from the HSA made for the decedent’s qualified medical expenses, if paid within one year after death.
- How do you pay for a service rendered (office visit, Rx)? What is the claims process? Healthcare Provider: Customer still informs provider with proof of insurance w/ insurance card. Customer receives services. Customer can pay at time of visit or wait to be billed. Provider still files claim with insurance carrier like normal. If customer paid too much, either due to discounts or by meeting the high deductible, the provider will credit them. Customer also has the option to pay (at time of service or when invoiced) w/ non-HSA accounts like their personal checking. They can choose to reimburse themselves later by taking funds from their HSA, but they are not required to… ie. they can use their HSA like another retirement account. Rx (Ex. Walgreens): Customers that pay for services where proof of insurance is not required or where insurance claims are not processed need to keep receipts and talk to their insurance agent on how to submit claims to the carrier so that carrier can determine whether claims count towards the deductible or not. Customers will pay upfront (either pay w/ their HSA debit card or HSA checks or choose instead to use non-HSA funds). Again if they used non-HSA funds, the customer can decide later if they want to reimburse themselves by taking the funds out of the HSA (via withdrawal forms, debit card at ATM, or checks).
How Insurance Policies work with an HSA
- What is a “high-deductible health plan” (HDHP)? Generally, an HDHP is a health plan that satisfies certain requirements with respect to deductibles and out-of-pocket expenses. Specifically, for self-only coverage, an HDHP has an annual deductible of at least $1,000 and annual out-of-pocket expenses required to be paid (deductibles, co-payments and other amounts, but not premiums) not exceeding $5,000. For family coverage, an HDHP has an annual deductible of at least $2,000 and annual out-of-pocket expenses required to be paid not exceeding $10,000. In the case of family coverage, a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible. Amounts are indexed for inflation. A plan does not fail to qualify as an HDHP merely because it does not have a deductible (or has a small deductible) for preventive care (e.g., first dollar coverage for preventive care). However, except for preventive care, a plan may not provide benefits for any year until the deductible for that year is met. See additional responses below for special rules regarding network plans and plans providing certain types of coverage. Example (1): A Plan provides coverage for A and his family. The Plan provides for the payment of covered medical expenses of any member of A’s family if the member has incurred covered medical expenses during the year in excess of $1,000 even if the family has not incurred covered medical expenses in excess of $2,000. If A incurred covered medical expenses of $1,500 in a year, the Plan would pay $500. Thus, benefits are potentially available under the Plan even if the family’s covered medical expenses do not exceed $2,000. Because the Plan provides family coverage with an annual deductible of less than $2,000, the Plan is not an HDHP. Example (2): Same facts as in example (1), except that the Plan has a $5,000 family deductible and provides payment for covered medical expenses if any member of A’s family has incurred covered medical expenses during the year in excess of $2,000. The Plan satisfies the requirements for an HDHP with respect to the deductibles.
- What are the special rules for determining whether a health plan that is a network plan meets the requirements of an HDHP? A network plan is a plan that generally provides more favorable benefits for services provided by its network of providers than for services provided outside of the network. In the case of a plan using a network of providers, the plan does not fail to be an HDHP (if it would otherwise meet the requirements of an HDHP) solely because the out-of-pocket expense limits for services provided outside of the network exceeds the maximum annual out-of-pocket expense limits allowed for an HDHP. In addition, the plan’s annual deductible for out-of- network services is not taken into account in determining the annual contribution limit. Rather, the annual contribution limit is determined by reference to the deductible for services within the network.
- What kind of other health coverage makes an individual ineligible for an HSA? Generally, an individual is ineligible for an HSA if the individual, while covered under an HDHP, is also covered under a health plan (whether as an individual, spouse, or dependent) that is not an HDHP. Also see question 4 below.
- What other kinds of health coverage may an individual maintain without losing eligibility for an HSA? An individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage for any benefit provided by “permitted insurance.” Permitted insurance is insurance under which substantially all of the coverage provided relates to liabilities incurred under workers’ compensation laws, tort liabilities, liabilities relating to ownership or use of property (e.g., automobile insurance), insurance for a specified disease or illness, and insurance that pays a fixed amount per day (or other period) of hospitalization. In addition to permitted insurance, an individual does not fail to be eligible for an HSA merely because, in addition to an HDHP, the individual has coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, or longterm care. If a plan that is intended to be an HDHP is one in which substantially all of the coverage of the plan is through permitted insurance or other coverage as described in this answer, it is not an HDHP.
- Can an HSA be offered under a cafeteria plan? Yes. Both an HSA and an HDHP may be offered as options under a cafeteria plan. Thus, an employee may elect to have amounts contributed as employer contributions to an HSA and an HDHP on a salary-reduction basis.
- Are HSAs subject to COBRA continuation coverage under section 4980B? No. Like Archer MSAs, HSAs are not subject to COBRA continuation coverage.
- Can COBRA employees contribute to their HSA? What other factors would be required to allow COBRA employees to contribute to an HSA? An individual can choose to contribute to their HSA as long as they have the High Deductible Health Plan in force.
Information Reported by Trustees and Custodians
- What reporting is required for an HSA? Employer contributions to an HSA must be reported on the employee’s Form W-2. In addition, information reporting for HSAs will be similar to information reporting for Archer MSAs. The IRS will release forms and instructions, similar to those required for Archer MSAs, on how to report HSA contributions, deductions, and distributions.