Consumer-driven health plan A general term describing a plan that allows consumers to create tax-free savings accounts to pay medical expenses. Plans are typically combined with high-deductible, lower-premium health insurance policies. Health savings accounts (see below) are the consumer-driven plans getting the most attention this year. While consumer-driven plans cost less upfront, provide members with more choices for care and create incentives to shop the medical marketplace for cost and quality, they also expose those who need extensive care to considerable out-of-pocket costs.
Flexible spending account (FSA) An account set up by employees with traditional, employer-sponsored health insurance and earmarked for medical expenses not covered by their health insurance, including over-the-counter and prescription drugs. The portion of employees' pay that is diverted into the account is not subject to federal tax. Unspent FSA funds are forfeited to the employer at the end of the year. Having a health savings account makes you ineligible for an FSA.
Health reimbursement arrangement (HRA) Businesses -- not individuals -- fund these accounts for employees to use for medical expenses. These plans are typically offered with catastrophic health coverage that is available after significant out-of-pocket spending. Unspent money is carried over from year to year.
Health savings account (HSA) The newest of the consumer-driven plan options combines a tax-exempt account for medical expenses with a high-deductible health plan (minimum deductible: about $1,050 annually for individuals, $2,100 for families).
Policyholders are allowed to pay all medical expenses from their HSA accounts, but there is a cap on how much consumers can deposit into their accounts in a given year ($2,600 for individuals, $5,150 for families). After they reach the plan's deductible, conventional coverage kicks in, with most plans paying 80 to 90 percent of expenses. Once a federally set cap on out-of-pocket costs is reached ($5,000 for individuals, $10,000 for families), the plan covers all further expenses.
Any plan savings can be rolled over for future use and invested.
Funds -- including any employer contributions -- are portable, so the worker keeps the account even if he changes jobs. After age 65, the plan turns into a retirement account. Withdrawals for nonmedical expenses incur a penalty before age 65. After age 65, no such penalty applies, but the policyholder must pay income tax on funds spent for non-health purposes.
Medical savings account (MSA) This predecessor to the HSA allowed participants to draw from an account to pay for uncovered medical expenses. With the advent of HSAs, consumers can no longer sign up for MSAs, though a recent legislation extension permits existing MSA account holders to keep their plans until 2005.
-- January W. Payne
Sources: Society for Human Resource Management (SHRM) and Jerome Mattern, member of SHRM's compensation and benefits panel