What is a Consumer Directed Health Plan (CDHP)? And how does a CDHP impact employers?
CDHPs are also known as consumer-driven health plans. The key is that the consumer has the ability to make decisions about his or her own health care. This typically comes in the format of an insurance plan that comes with a consumer-driven component, like a health savings account (HSA), to use for additional healthcare expenses as chosen by the individual.
A CDHP is the component of the healthcare plan that acts as a medical savings account for the consumer to use as needed. The CDHP typically accompanies a high-deductible healthcare insurance plan. This can be beneficial to some consumers because it may mean the premiums for the plan are lower since the deductible is higher. The CDHP component then allows the consumer to have some tax advantages for income used for medical expenses and to have some flexibility in paying for expenses not covered by the insurance plan itself.
There are three main types of CDHPs:
- As with other CDHPs, HSAs are available in conjunction with high-deductible healthcare insurance plans, and there are specific legal requirements that must be met for the health insurance plan to qualify to have an HSA. Once these are satisfied, and the plan is qualified as an HSA plan, the consumer can set up an HSA separate from the insurance plan itself. HSAs have regulations that govern how much money can be put into the plan tax-free in any given year. The money can then be used by the individual on qualified healthcare-related expenses, and it will rollover indefinitely if unused in a calendar year. The money is accessed by setting up an HSA with a bank or other financial establishment and then using the account’s debit card to pay for medical expenses. Money put into an HSA goes into it tax-free (that is, it is not subject to income tax) and does not incur any income taxes upon withdrawal as long as it is used for a qualified medical expense.
- Flexible Spending Accounts (FSAs). Like HSAs, an FSA is an account that is set up and funded with pretax income. Unlike HSAs, an FSA is typically set up by an employer rather than by the individual, and it is usually funded from deductions from the employee’s paycheck. Also unlike an HSA, funds in an FSA usually have a “use it or lose it” component, meaning they are lost if they are not spent on qualified healthcare-related expenses during the calendar year. To use the FSA funds, typically the consumer pays out of pocket for the healthcare expense and is then reimbursed by the employer out of the FSA account.
- Health Reimbursement Arrangements (HRAs). HRAs are similar to FSAs in the fact that they are generally managed by the employer and are paid out as reimbursements to employees after the employee has paid for a qualified medical expense. Unlike the other two options, however, HRAs are funded by the employer, rather than the employee. It is a form of employee benefit. They are also quite different because there are not annual contribution limits imposed on the employer with this type of plan. The benefits (reimbursements) are also not taxed, which helps both the employer and the employee. This type of plan is very flexible for employees and employers; there is a lot of leeway for employers to create plan specifics within the legal guidelines.
Each of these types of accounts has specific regulations dictating how they must be used to remain tax advantaged. It’s important to understand the rules and administer the programs correctly.
Each of these options has the potential to save employees and employers alike through reduced premiums and tax advantages, but they’re not the right choice for everyone. Employers that choose to offer a CDHP as part of its insurance benefit options would be well served to give employees ample information and allow them to review health insurance choices to determine what is right for them.