As HSAs continue to grow in popularity, more and more employers are considering this option for their employees.
[See also: IRS announces new HSA limits for 2012]
Better than an FSA
An FSA, which allows employees to set aside tax-free dollars to pay for current-year medical expenses, can be a great option if you know how much you’re going to spend on health care this year, but it does require you to be a bit of a fortune teller. If you guess too low on your medical expenses, you forfeit some of the tax savings you could have enjoyed. If you guess too high, you actually lose some of the money you put into your account. And even if you realize that you messed up, you’re not allowed to change your contribution mid-stream.
Better than a 401(k)
The beauty of a 401(k) is that employees can deposit funds in their account, get an immediate tax break, and watch their money grow on a tax-deferred basis, earning investment income along the way. They don’t pay taxes on the money until they actually withdraw it from the account.
Better than a raise
HSA-qualified plans tend to have a lower price point than a traditional PPO plan, giving an employer the opportunity to sink some money into their employees’ HSA accounts. There are two reasons that it makes more sense for an employer to deposit the premium savings into the employees’ HSAs than to pass on that savings in the form of a premium discount or a pay raise.
Better than a copay plan
The advantage of a traditional PPO plan is that up-front expenses like doctor visits and prescriptions are predictable because they’re covered by a fixed copayment. Unfortunately, this predictability is lost for someone with larger expenses that cause them to hit their deductible and “maximum out of pocket." That’s because, on most traditional PPO plans, copayments do not count toward the OOP max – they continue even after the member has reached her deductible and coinsurance stop-loss amounts, so the member’s total exposure is actually uncapped and unpredictable.