federal-employee-retirement-benefits

Should Every Federal Employee Have a High Deductible Health Plan?

Picture of David Fei, CFP®, ChFEBC℠, AIF®

David Fei, CFP®, ChFEBC℠, AIF®

Federal-Retirement-Workshop

Why Every Federal Employee Should Consider a High Deductible Health Plan This FEHB Open Season

When I talk to federal employees about their health plans, most say they use the BCBS plan. According to its website, it is the most popular plan for federal employees and covers up to 5.5 million active and retired feds. So why should you consider something else? Financial planning is about understanding what you don’t know. I hope this article helps you understand HDHPs and why they may be a good option for your family. 

 

Understanding the Basics of High Deductible Health Plans (HDHPs)

Healthcare expenses can often be a significant concern for families, especially since we may not know when our health will change or we may have an emergency. High-deductible health Plans (HDHPs) offer cost-saving benefits and opportunities for proactive health management. To better understand the dynamics of HDHPs, it’s crucial to delve into their fundamental aspects and how they differ from traditional health plans, particularly for many federal employees.

 

What is a High Deductible Health Plan?

At its core, an HDHP is a type of health insurance plan with a higher deductible—the amount individuals must pay out of pocket for covered medical expenses before their insurance coverage kicks in—than traditional health plans. The IRS sets minimum deductible amounts each year. The plus side is that HDHPs feature lower monthly premiums, making them an appealing choice for those seeking to reduce their healthcare costs. Additionally, HDHPs are paired with a health savings account (HSA), the biggest missed healthcare and possible retirement savings opportunity.  We will explore more on HSAs. 

 

Key Differences Between HDHPs and Traditional Health Plans for Federal Employees

The main difference between HDHPs and traditional plans lies in how you share costs. Traditional plans typically have lower deductibles but come with higher monthly premiums. Conversely, HDHPs boast lower monthly premiums but require you to shoulder more upfront costs before insurance coverage kicks in. However, both plans cover preventive care services, like annual checkups and vaccinations, with little to no out-of-pocket expense. Moreover, doctors who accept your traditional insurance will also accept the HDHP option.  You need to be careful when you change provider (for example, from BCBS to GEHA) to ensure your doctor accepts the new plan provider. 

 

How a High Deductible Impacts Your Health Care Spending

Since HDHPs require you to meet a higher deductible, they can significantly impact your healthcare spending. Here’s how:

  • Lower Monthly Premiums: You’ll likely save money each month on premiums compared to a traditional plan.
  • Increased Out-of-Pocket Costs: You’ll pay more for covered services until you meet the deductible. This can encourage you to be more mindful of seeking unnecessary medical care.
  • Tax-Advantaged Savings: With an HSA, you can contribute pre-tax dollars to cover qualified medical expenses, potentially reducing your taxable income.

 

How does HDHP Compare to the Traditional FEHB Plan?

There are certainly many differences between a high deductible plan and a traditional plan within the federal employees health benefits program. Here’s a comparison between the two most popular plans in each category. The premium listed are based on a 50-year-old employee in the DC Metro area. Your actual cost may vary.

Individual Family
BCBS
(Standard)
GEHA
(HDHP)
BCBS
(Standard)
GEHA
(HDHP)
Biweekly
Premium
$151 $72 $371 $189
Annual
Premium
$3,920 $1,860 $9,640 $4,910
In-Network
Deductible
$350 $1,600 $700 $3,200
In-Network
Out-of-Pocket
Limit
$6,000 $6,000 $12,000 $12,000
Each person is
limited to $6,000

Most federal employees are concerned with the deductible. Comparing the two family options, $3,200 vs $700 feels like a no-brainer. A lower deductible means lower prices and less from us, right? Not so fast. When you account for the premium paid, the annual cost difference for a family plan is $4,730 (BCBS $9,640 – GEHA $4,910). That means even if you had to pay the extra deductible of $2,500 ($3,200 – $700), you actually save money overall with an HDHP.  Also, most feds don’t realize that the out-of-pocket maximum will limit your exposure to catastrophic events.  So, if you were in an accident or major health situation, the most you will pay out of pocket is $6,000 per person. That is the same amount as the traditional health plan.  Lastly, the most powerful tool that only HDHP has: the Health Savings Account.  

Annual Premium Comparison
Individual Family
BCBS
(Standard)
$3,920 $9,640
GEHA
(HDHP)
$1,860 $4,910
Annual Premium Savings $2,060 $4,730
Higher Deductible Cost with GEHA HDHP
$1,250 $2,500
Total Savings After High Deductible $810 $2,230

 

Exploring the Benefits of Health Savings Account (HSA) for Federal Employees

HSAs are tax-advantaged accounts that allow you to save money specifically for qualified medical expenses. They work similarly to FSAs in that your contributions are tax-deductible and lower your current year’s income tax.  Also, as long as you use the account for healthcare expenses, any withdrawals or reimbursements are tax-free. That’s where the similarity ends.  Contributions to the HSA are much higher, and they do not expire. In 2024, an individual can contribute $4,150, and a family (including self + one) can contribute $8,300.  So, you can easily set aside the premium saved from a traditional health plan and still get the tax deduction.  Moreover, since the amount never expires, you can keep rolling and contribute the savings annually, building up a sizable account for your healthcare needs. 

 

Investment Opportunities with HSAs

Now that you have set aside thousands of dollars in your HSA, can you do more than just pay for health care expenses? Yes, you can! You can invest in your HSA account and buy mutual funds. However, just like the TSP or an IRA, any gains you make within the HSA are not tax reportable. Compound interest + thousands of savings per year = a sizeable account at retirement. You can learn more about investing in the HSA from our article Investing for Retirement with Your HSA: Maximizing the Health Savings Account as an Investment Vehicle

 

The Triple Tax Advantage of HSAs

That’s not a typo. Yes, it is triple tax-advantaged! Let’s count it. 

  1. Voluntary contribution to your HSA is pre-taxed and lowers your current year’s taxable income. 
  2. Growth in the account accumulates tax-free; you do not need to pay taxes on annual gains and dividends.
  3. Withdrawals from the HSA for qualified health expenses are tax-free. So you never pay taxes on this money!

Furthermore, once you turn 65, you can use your HSA to pay for Medicare Part B or D premiums or long-term care insurance, tax-free!  You can also use the account for any other purpose. However, if you withdraw for non-medical expenses, you will pay income taxes based on the withdrawal, just like any pre-tax IRA or the Traditional TSP. 

 

Navigating Deductibles and Out-of-Pocket Costs

Managing the deductibles and Out-of-Pocket expenses requires planning and discipline.  You need to plan ahead and make sure you set yourself up for success.

 

Strategies to Manage Your Deductible

You have to set aside money in your HSA. At a minimum, you should contribute the premium you are saving from the traditional health plan for a few years. This will ensure you have ample funds in the savings account to pay those deductibles. 

 

Understanding the Out-of-Pocket Maximum

The out-of-pocket maximum is the yearly limit on what you’ll pay for covered services. Once you reach this limit, your insurance typically covers 100% of covered costs. Again, if you keep contributing to your HSA, you will have enough saved in a few years. However, keep in mind that the out-of-pocket maximum is the same for traditional health care plans and high deductible health care plans. 

 

How HDHPs Work with Other Forms of Health Coverage

Coordinating HDHPs with Medicare

It may not be a good idea to use HDHP with Medicare.  The reason is that you are not eligible to contribute to an HSA once you enroll in Medicare.  And since the HSA is one of the main benefits of an HDHP, it doesn’t make as much sense.  If you are still working for the federal government at or beyond 65, you can keep using HDHP and HSA as long as you don’t enroll in Medicare.  If you are retired, you can consider an advantage plan within FEHB to lower your premiums.

 

Using a Flexible Spending Account (FSA) with an HDHP

Since you have the HSA, HDHP plans are not eligible for the FSA.  However, you may be able to set up a limited-expense health care flexible spending account (LEX HCFSA) for dental and vision expenses. You need to verify the specific plan to ensure you qualify. 

 

Common Misnomers about HDHP

 

“I would be paying for preventive care and annual check-ups”

Not true. Preventive care is 100% covered and typically requires no out-of-pocket expense or deductible. Please see the plan brochure for details. 

 

 “I would pay more for out-of-pocket medical expenses compared to a traditional health plan”

It would depend on the plan. However, traditional health care also has out-of-pocket expenses. If nothing else, your HDHP plan’s deductible means that you will have less to pay before hitting your max out-of-pocket. 

 

“I would be stuck paying the doctors “full price” (before negotiated prices)”

This is also not true. You still have health insurance, and the insurance company will negotiate prices on your behalf. Once they negotiate or limit doctors’ charges, they will show you your cost on benefit statements. 

 

“I will not have access to FSAs”

Yes, this one is true. You will no longer have access to health care flexible spending accounts (HCFSA). However, you may have access to a limited FSA (LEX HCFSA) for vision and dental expenses.  You would still have access to dependent care and travel FSAs since they are not part medical insurance. Remeber that you can put more money in a HSA than a FSA and the HSA does not expire.

 

“Do I have to contribute to an HSA?”

While you don’t “have” to do anything, I would say that if you do not contribute to an HSA, you should not use HDHP only to save money on healthcare premiums. You are better off exploring other traditional healthcare coverage that is lower-cost.

 

Summary

We covered many aspects of the High Deductible Health Plans (HDHPs) as an option for federal employees. We unpacked the concept of HDHPs, explaining their lower premiums and higher deductibles compared to traditional plans. For those who choose HDHPs, Health Savings Accounts (HSAs) offer a powerful “triple tax advantage” – contributions are made with pre-tax dollars, earnings grow tax-free, and qualified withdrawals are tax-free. We then explored strategies to manage deductibles and out-of-pocket costs.  Moreover, we emphasize the importance of understanding out-of-pocket maximums and planning for informed healthcare spending. Finally, we addressed the complexities of coordinating HDHPs with Medicare since enrolling in Medicare disqualifies you from HSA contributions. 

I hope this article helps you better understand HDHPs. They are not for everyone, and you should consult with your doctor and review your medical expenses before switching health plans. However, if you and your family are healthy, HDHPs could provide you with additional savings and an additional tool in your retirement and financial plan.

Reach Out to Us!

If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we focus on retirement planning for federal employees. Learn more about our process designed for the career federal employee.

Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.

Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.