By John D. Head, Employee Benefits Advisor
Since the passage of the Affordable Care Act in 2010, employers increasingly are looking to high-deductible health plans (HDHPs) with Health Savings Accounts (HSAs) for their employee benefits programs. Although the House of Representatives voted in early May to repeal the legislation, odds are that HDHPs and HSAs will remain a popular benefit offering, regardless of the outcome of the pending Senate vote. In fact, 59 percent of companies offered a high-deductible health plan in 2015, according to an industry survey, up from 48 percent the year before. The Kaiser Family Foundation also reports that 29 percent of covered workers were enrolled in a high-deductible plan with a savings option in 2016, compared to only 4 percent in 2006.
The challenge to employers comes when they announce the addition of a high-deductible plan without educating workers about the advantages of the accompanying Health Savings Account. As a result, employees often not only fail to recognize the value of the new offering, but instead perceive the package as a reduction in benefits or simply a cost-saving measure on the part of the company. This mindset can have a negative impact on both productivity and retention, and create added stress for benefits department personnel, who are left trying to persuade employees that the addition was a positive move. By proactively communicating the value that HSAs offer, employers can improve program engagement and reduce turnover, while also promoting employees’ physical and financial wellbeing.
Triple Tax Win
The obvious benefit of a high-deductible health plan is lower premiums, which can help both the company and its workers save money. On the flip side, however, employees are paying substantially more out of pocket for medical expenditures. The Health Savings Account helps offset these costs by providing three major tax advantages:
In essence, employees don’t pay any taxes on the money they save and earn in their HSA account, as long as the funds are used for qualified healthcare costs. Helping them understand that they are literally reducing the cost of their medical expenditures, in terms of real dollars, can get people excited about the prospect of contributing to an HSA.
What’s more, the HSA is a lifetime account, which means employees can build long-term balances that they can use for medical expenses, or safeguard until retirement. Because they are paying lower premiums for the high-deductible health plan, they ideally can take a portion of the savings and move it into the HSA to use for immediate needs or to grow their nest egg tax-deferred for the future. If the employer offers matching contributions into the Health Savings Account, those funds belong to the employee for the life of the account, as well, even if they leave the company. This makes HSAs a valuable tool for retirement planning, adding a third leg of financial security, in addition to social security and their 401(k) or other retirement account.
When introducing the new benefits package, employers should communicate clearly the criteria to have an HSA, and the details of how the accounts work. First, employees must be enrolled in a high-deductible health plan to qualify for a Health Savings Account, and they cannot have secondary insurance or Medicare. The annual contribution limits are based on the type of coverage, not on marital status, and for the current calendar year are $3,400 for individuals and $6,750 for families. In 2018, the annual contribution limits will increase to $3,450 for individuals and $6,900 for families. Also, a catch-up contribution of $1,000 for those 55+ years old has been previously allowed.
Employees can determine how much to set aside into an HSA in much the same way as they would for a Flexible Savings Account (FSA) by calculating their estimated annual expenses for check-ups, doctor’s visits, dental and eye care exams, and other medical costs. Unlike the use-it-or-lose-it structure of an FSA, however, employees can roll over the funds in their Health Savings Account year after year. The money is theirs to keep. In addition, anyone can contribute to the account, including the employer, employee, and their family members. This feature is especially beneficial to help employees sock away money toward retirement, with the interest earnings growing tax-deferred.
Another key perk of HSAs is that the employee’s spouse (if filing jointly) and dependents can use the account for their medical expenses. That means that an employee can use pre-tax dollars to pay for their daughter’s eye exam, their son’s orthodontist, or the x-rays for their spouse’s sprained ankle. Most HSA debit cards will recognize unqualified purchases and won’t allow the transaction to go through. However, any funds that are used for non-qualified expenses are taxed at the employee’s normal income tax rate, plus a 20% penalty, if the account holder is under 65.
Health savings accounts also help employees gain leverage when managing their healthcare costs. For example, let’s say a worker has a prolonged illness and racks up $11,000 in hospital bills. The employee has a $6,500 deductible through their HDHP, but they don’t yet have that much saved up in their HSA. The employee can negotiate with the hospital to pay $200/month until the balance is paid off, and in the meantime set aside that amount into their Health Savings Account each month. Instead of the money coming out of their payroll with post-tax dollars, they are paying with pre-tax dollars through their HSA, in essence using it as tax-free funding for a major medical expense.
In a similar scenario, let’s say the employee already has $10,000 set aside in their HSA and has the same $6,500 out-of-pocket expenditure. Now, they’re in a position of bargaining. They may offer to pay the hospital $3,000 to consider the account paid in full, in lieu of a long-term payment plan. The hospital is a business, and frequently would rather have a guaranteed lump sum than have to chase down money over a period of several years. The current healthcare delivery model in America is not transparent, in terms of pricing, and educating employees about the buying power they hold with an HSA can make high-deductible health plans more appealing, while also helping workers become better consumers of healthcare.
HDHPs offer a unique set of advantages and pitfalls, and they may not be a suitable option for all employees. Even so, high-deductible plans likely will continue to grow in popularity among employers looking to curb medical costs, and they provide informed employees the opportunity to play an active role in managing medical expenses and saving for retirement. By focusing on the advantages of the HSA first, and explaining that it is only available with the high-deductible plan, companies can drive employee engagement, help them achieve their financial goals, and ensure that they make informed benefits decisions at the next open enrollment.