Health insurance plans offer tax savings options

When electing health insurance coverage this open season, federal workers have access to tax-preferred accounts that will reduce their out-of-pocket health care expenses.

Participants in the Federal Employees Health Benefits Program can use flexible spending accounts, health reimbursement arrangements and health savings accounts to cover eligible medical expenses and reap tax benefits in the process.

"All three are tax-advantaged, all are a way to reduce spending on health care by a third based on your marginal tax rate," said Walton Francis, author of the Consumers' Checkbook 2011 Guide to Health Plans for Federal Employees. "It's a bigger savings than most people realize."

Flexible spending accounts allow participants in any FEHBP plan to make pretax contributions to a savings account to pay for medical and dependent care. Contributions do not roll over at the end of the year, so participants must spend the entire account balance, or lose it. The program does, however, have a two and a half month grace period for employees to spend leftover money.

There are three types of flexible spending accounts: Health Care FSAs, which can be used to pay for qualified medical costs and health care expenses that FEHBP or other insurances don't cover; Limited Expense Health Care FSAs, used for eligible dental and vision costs; and Dependent Care FSAs, which pay for child care or adult dependent care expenses that are necessary to allow an employee and his or her spouse to work, look for work, or attend school full time. Enrollees can contribute up to $5,000 annually to each account.

Health reimbursement arrangements, offered as part of consumer-driven health plans, allow pretax contributions and accumulate money over time, so the balance does not expire. But enrollees cannot carry the account with them if they leave federal employment, or change health plans, Francis said. Reimbursements for eligible expenses are tax-free.

Health savings accounts -- the most flexible option -- are available to high-deductible health plan participants. Contributions are tax-deductible and distributions for qualified medical expenses tax-free. According to Francis, enrollees own the account and can take it with them regardless of plan or employment changes, add additional funds throughout the year, and put the money in stocks or other investments. While retirees cannot contribute to HSAs, users can make catch-up contributions as they age -- from age 55 to age 65, participants can contribute an additional $1,000 annually until they enroll in Medicare.

"They're like an IRA on steroids," he said. "Money goes in tax preferred, grows tax preferred, and if you use it for health care, it comes out tax preferred. It's a lifetime savings vehicle."

For access to an HRA or HSA, employees must join a consumer-driven or high-deductible plan, said Francis, noting these plans are good buys and offer a lot of flexibility, particularly for unforeseen expenses. It's possible for enrollees to end the year with more money than they paid for their insurance, depending on their premiums and expenses, he added.

"It's often argued that these plans are good for healthy young people and not for older, sicker people, and that's just wrong, wrong, wrong," Francis said. "They are good for any age and any health status."

The one caveat is for patients who have regular expenses of $2,000 to $4,000 annually, Francis said. If those expenses are the same year in and year out, enrollees will use up the money set aside in savings and be hit with high-deductible payments.

Open season runs until Dec. 13.