Vision Insurance – Defined Contribution Plans
Health insurance is a very important consideration regardless of your age or marital status. Even if you think that you're perfectly healthy right now, there are sudden illnesses that can spring up overnight and cost you major money. In addition, there are many diseases whose early signs can only be detected by a doctor, and your prognosis may be much worse if you wait until you have symptoms. They say “An ounce of prevention is worth a pound of cure,” and that's extremely true when it comes to your body. Regular eye exams, dental visits and other medical care can help you keep your health on the right track.
Traditional insurance benefits are defined by your employer. The coverage that's available, the benefits that are included, the amounts you pay, and what is covered are all defined beforehand with no option to change anything to your own advantage. Regardless of what you need or want, you can either take the insurance you are given, at the price that you are offered, or refuse coverage completely. Most of these plans are paid for by salary-reducing deductions. A traditional insurance coverage plan can have many different features, but typical features include:
- Plans that are defined by the employer only with no input from you, the employee
- Coverage that is defined - including what is covered and what is not, how much it will cost per pay period, how much it will cost out of pocket and what the yearly limits will be
- Preventative exams may or may not be covered and will depend on the actual agreement between the carrier and the employer
Defined contribution plans
Compared to traditional insurance plans, a defined contribution plan (sometimes called a consumer directed plan or self directed health care plan) gives you more freedom of choice not only in the amounts that you pay but in the coverage that you have as well. There are several different types of these plans, but what they all have in common is that they allow you to use a pre-tax portion of your salary to pay for medical expenses, saving you money.
Types of defined contribution plans include the cafeteria plan, flexible spending accounts, health reimbursement arrangements and health savings accounts. Each have different advantages and drawbacks to consider, so if you have any questions about which is right for you, make sure that you speak with your accountant or financial adviser before making your final decision.
Cafeteria plans are given this name because they allow you to choose your benefits from a “menu” of choices. You can choose only those benefits that you need and exclude the ones that you have no use for. For instance, a young bachelor may exclude prenatal testing and child birth insurance. Common features of these plans include:
- The amount that you will spend on a cafeteria plan will depend on the number and type of benefits that you elect to receive.
- The funds of these plans are not released directly to you so the amounts are considered to be tax-free income.
- Most employers will allow you to opt out of these plans if you prefer.
- Typically, you have to opt in or out of these plans at certain times of the year, called open enrollment periods. However, if you have a legal qualifying status changing event, you may be able to modify your plan for a short period afterward. For instance, if you get married, you may be able to change your cafeteria plan for 30 days after the effective date.
Flexible Spending Accounts
The Flexible Spending Account, also known as an FSA, is an employer-sponsored program in which a specific amount of your pre-tax salary is deposited into an account. You can then use this money to pay for allowed health expenses, with choices similar to a cafeteria plan. There are some downsides to this arrangement however:
- The money in the account will not earn interest.
- Any amount left unused in the account at the end of the 12 month period will go back to your employer. (In other words, you will lose that portion of your salary.)
- A Flexible Spending Account usually cannot be used to pay health insurance premiums or for preventative care, such as regular eye exams.
- Things like eyeglasses, contact lenses and LASIK may or may not be covered.
The amount of your salary deposited into the FSA must be agreed upon by yourself and your employer. In order to maximize the benefits you get from this plan, while minimizing your risk of lost salary, you should very carefully evaluate what is covered and calculate how much money you think you will need. If you're not sure, start by looking over your medical records from the past year. That plus your current health needs should give you an idea how much you may need for the following year.
Health Reimbursement Agreements
A Health Reimbursement Agreement (HRA) is similar to an FSA in that it allows you to use pre-tax salary dollars for some of your health care costs, but it has a couple of advantages:
You can use the HRA for preventative care.
You do not lose your funds at the end of the period.
One drawback is that your employer may place certain restrictions on the plan For example, in order to qualify, you may be required to buy into a high deductible insurance plan.
Health Savings Accounts
A Health Savings Account (HSA) can be opened at a bank or other financial institution if you meet certain criteria. This type of account is designed for people who, either independently or through their employer, are enrolled in a high-deductible health plan (HDHP). HDHPs have low premiums, so the idea is that you will take the money that's not needed for that payment and set it aside to put toward your deductible. This way, you will have the money handy when you need to pay for healthcare. In addition, while the money is in the account, it accrues tax-free interest.
The definition of a “high-deductible” health plan is determined by the IRS and U.S. Treasury Department. In 2009 the minimum deductible was $1,150 for an individual and $2,300 for family coverage. They also place a limit on the out-of-pocket amount which can be spent on the HDHP (including deductibles and co-pays). In 2009 this limit was $5,800 for an individual and $11,600 for family coverage. There are also deposit limits for the HSA. For 2009, only $3,000 could be deposited into an individual's HSA, $5,950 for a family's.
Unfortunately, not everyone is eligible for a Health Savings Account. Restrictions include:
- You can't have health insurance other than your HDHP or be enrolled in Medicare. Note that some types of specific insurance, such as dental or vision, are allowed. “Limited Purpose” and “post-deductible” FSAs and HRAs are often allowed also. When in doubt, ask your accountant or other professional.
- You can't be claimed as a dependent on someone's tax return.
- You can't have received health benefits from the Veteran's Administration in the past 3 months.
Some advantages of an HSA:
- You can get an HSA on your own if you're self-employed, your employer doesn't offer one, or even if you're unemployed.
- Any money put into the account belongs to you. It cannot be “lost” or absorbed by your employer, if you have one. You also keep your HSA if you lose your job or change jobs.
- If at some point you no longer have a qualifying HDHP, you won't be able to deposit any more money into your HSA, but you won't lose the money you've already put in either.
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