As the cost of health care increases, many employers are shifting to health plans that include a lower monthly premium and a higher deductible.
In 2016, 29% of all insured employees were enrolled in high deductible health plans (HDHPs)—an increase of 9% since 2014, according to the Kaiser Family Foundation. HDHPs now appear in three out of every five large employer benefit offerings, but PPO plans remain the most popular choice for employees, with 43% enrollment in the last year according to the second annual State of Employee Benefits report from Benefitfocus.
Often, employers offer health savings accounts (HSAs) along with HDHPs to enable employees to save money tax-free for medical expenses that roll over year-to-year and can help fund the employee in retirement. Balances in health savings accounts (HSAs) grew by more than one-third in 2015, according to the most recent results from the Employee Benefit Research (EBRI) HSA database.
According to the U.S. Treasury, HSAs were created in 2003 so that individuals covered by HDHPs can receive tax-preferred treatment of money saved for medical expenses. Fourteen years later, according to Alex Tolbert, founder and team member of Bernard Health, a health care advisory group in Nashville, Tennessee, there are still misunderstandings about these plans due to employers presenting them in a less than optimal manner during open enrollment. He says this leads to savings account underutilization by employees who may not understand the full benefit of an HSA.
A first tier issue, according to Tolbert, is that when employers compare the various health plan options that employees can elect, instead of describing the health plan piece of an HSA-eligible plan, they discuss the tax incentives related to the savings account.
“The biggest mistake I see is that when employers are explaining eligible health plans, they are comparing apples to oranges,” Tolbert says. “They’ll talk about the health merits of non-HSA eligible health plans and emphasize the savings account for the HSA eligible plan while the bank account really ought to be treated like the cherry on top, rather than how the health plan is discussed.”
Similarly, Bernard Health does not recommend calling these plans “high-deductible health plans.” “Mention high deductibles, and many of those same employees are tuning you out right away,” Tolbert says.NEXT: Problems with administration and cost concerns
The HDHP and the HSA are two separate components with separate laws, according to Steven Mindy, senior associate (Employee Benefits/ERISA/ACA) at Alston & Bird LLP. “In order to have an HSA, the employer must have a plan that meets certain requirements, including deductibles at or higher than $1,300 for an individual or $2,600 for families.”
Mindy has not seen HSA plans presented negatively. He says, “It could be the clients I work with or it could be that some employees tend to focus on health plans in the short term only. Therefore when comparing an HSA to a Preferred Provider Organization (PPO) plan which offers for instance, just a $20 co-pay and no deductible, they enroll with the PPO.
According to Mindy, an HSA is a consumer-directed account that is individually owned, similar to an individual retirement account (IRA). In terms of an HSA account, employees can sign up for such an account, and the account owner and/or employer can contribute to it. Either way the employee keeps it and takes it with them; it cannot revert back to the employer. “It accrues earnings that can be in the form of interest or can be invested in mutual funds,” Mindy says. “If employees use the funds for qualified medical expense purposes, the employee does not pay any tax on the funds or the distributions. Any unused funds roll over at the end of the year.”NEXT: Problems with administrative processes
From Tolbert’s perspective, a second error that employers can make interrupting the full implementation of an HSA health plan, is not to integrate the savings account piece into the enrollment process. “Employers often wait to see who signs up for the HSA eligible health plan before providing information to those employees on how to open the savings account. When employees elect the plan, they think they have completed the full enrollment process and are done, yet they are not,” Tolbert says.
The best practice is for an HSA administrator, which could be a bank, insurance company or an IRS-approved bank trustee, to enter into an agreement on the back end with the plan sponsor before open enrollment, says Mindy. From his experience, “The provider contacts the employees who choose the plan eligible HSA to open an account. For employees who do not move forward with the account, the provider opens it for the employee.” This occurs most often when the employer makes contributions to incentivize employees to choose a HDHP.
Worst case, according to Tolbert, is that the employee elects their monthly contribution to fund their plan, the payroll department deducts the monthly contributions, and the HSA savings account is not open. Some employee’s bow out of the HSA account due to the inconvenience of setting it up, and they just stay in the HDHP.
Tolbert says another issue is that employees may not be maximizing the value of these accounts and are, therefore, not funding it as they might. Individuals can currently contribute up to $3,400 per year and families can contribute up to $6,750 per year to their HSA account. “An employer should compare an HSA account to something with which the employee is familiar with, such as a 401(k) or an IRA.”
Tolbert educates his clients by emphasizing that an HSA account is the only way for an employee (and an employer) to avoid Federal Insurance Contribution Act (FICA) taxes. If employers allow it, employees can fund their HSA with payroll deductions, allowing employees to avoid FICA taxes of 7.65% plus income taxes. He also tells his clients that maximizing their HSA account, before contributing to a 401(k) or an IRA, makes the most sense with one caveat—if the employer is offering a 401(k) match.In addition, before age 65, account holders can spend funds on health care with no taxes and no penalties. After age 65, employees can still spend funds tax-free. There are also no minimum required distributions at age 70 ½ like other retirement accounts.