Consumer-Directed and Supplemental Coverage: HSAs, HRAs, and Ancillary Products
Consumer-directed accounts
Health Savings Accounts (HSAs) require enrollment in a qualifying high-deductible health plan (HDHP), have annual contribution limits with catch-up contributions for those 55+, are portable, and are triple tax-advantaged (contributions, growth, qualified withdrawals). Funds roll over indefinitely. Health Reimbursement Arrangements (HRAs) are employer-funded only, not portable, and the employer sets the terms; flexible spending accounts (FSAs) are generally use-it-or-lose-it with limited carryover or grace-period options and are employee-funded (with optional employer contributions). Know the difference between qualified medical expenses and nonqualified withdrawals (taxable plus penalty for HSAs before 65, with exceptions).
Supplemental products
Medigap plans are standardized by letter (Plan A, B, C, D, F, G, K, L, M, N), with Plan F and high-deductible F closed to newly eligible beneficiaries; Plans K and L use out-of-pocket limits. Dental, vision, critical illness, accident, hospital indemnity, and cancer policies pay fixed benefits, not fee-for-service reimbursement, and are not coordination-of-benefits substitutes for major medical. Short-term medical is not minimum essential coverage. Disability income and long-term care products are distinct from health insurance and have their own underwriting and benefit triggers.
Traps to expect
- Treating an HRA as portable or employee-funded; it is neither.
- Assuming an FSA balance always rolls over - only if the plan offers carryover or a grace period.
- Assuming any HDHP is HSA-qualified - it must meet the statutory minimum deductible and maximum out-of-pocket limits.
- Describing indemnity or critical illness benefits as covering the full cost of care.
Worked example
An employee with an HSA-qualified HDHP contributes $3,000, the employer adds $1,000, and the employee withdraws $500 for a nonqualified expense at age 40. The $500 is taxable and subject to the additional tax, and the employee must report it. A same-age employee with an HRA cannot take the balance to a new employer.