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HRA, HSA, and a Little History of Insurance

Money-Guy 10-29-2010

Today’s show is very timely considering how much health insurance has been in the news lately. It is a topic that affects every man, woman, and child in this country and is not always a straight-forward and easy thing to understand.

Because I have done extensive research on the topic in trying to select which plan I will use for my family, I wanted to share what I’ve learned. If you have been paying attention, then you have probably noticed that there has been a progression as to what type of health insurance plans are popular. In recent memory, we have transitioned from PPOs to HMOs. Individuals liked the idea of co-pays and being able to visit their doctor and then the insurance company would cover the rest.

Two new players have recently entered the scene, however. These new types of plans (Health Reimbursement Accounts and Health Savings Accounts) now make you a more active participant in your healthcare. These plans have become popular now because they charge a lower premium, but you have to cover more of the cost up front. This is great because it provides the incentive to not treat healthcare as an “all you can eat buffet”. With these plans you now have some skin in the game.

As you listen to the show, I describe the differences between these two types of plans:

HRA

  • Your employer primes the pump by allocating free money into your HRA account
  • You cover 100% until deductible is reached (you could very well save this amount with the lower premiums)
  • Once you’ve met the deductible, you’re responsible for co-insurance (i.e 85/15) until you reach your out-of-pocket limits
  • If one family member is the main use of medical, then HRA is better than HSA when considering the out-of-pocket limit
  • Under this type of plan, you may want to consider using a Flexible Spending Account to cover the donut hole, co-insurance, or uncovered items such as dental exams.
  • These plans usually offer some sort of incentive for good behavior (annual physical)

HSA

  • These plans have significantly lower premiums
  • You pay everything until deductible is reached (no co-pay or donut hole)
  • You get above the line tax deductions (direct decrease to income) for contributions made to this type of plan
  • Co-insurance is even more favorable than HRA (i.e 90/10)
  • This plans offer the potential to save for the future with Uncle Sam funding part of the bill through tax savings
  • You probably won’t use an FSA with this type of account

The most important thing you can do when selecting an insurance plan is to understand how the plan works and what your responsibilities are under the  plan. If you can understand this, it becomes much easier to select the plan that is most advantageous to your particular situation.

As you listen, I go very in depth to explain the inner workings of each of these plans and why one or the other may or may not be suitable for you. If you do elect to use the HSA plan, you can use this website to research the various custodians that offer HSA accounts.

To close out the show, I share a new venture that Cheryl Holland and I have created called Advisor Skills. If you are in the financial industry, or are thinking about one day entering into this industry, or are maybe just curious about this industry,  you should definitely check it out!

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