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]
But, while employees may see the benefits to the company for moving to an HSA-qualified plan – a lower price point, the flexibility to adjust HSA contributions in future years, and the potential for better utilization and reduced claims – many business owners worry workers won’t see the value in a plan where they’re responsible for most of their up-front expenses. And, as we all know, perception is reality: if employees don’t think they have a good benefits plan, they don’t, regardless of what the employer is paying.
So how can employers ensure that their employees will appreciate their benefits even after they drop the copays from the plan? The answer, of course, is education and communication – but what should we be communicating? Sure, it’s important that employees know how to access their benefits and utilize the price and quality transparency tools that are available to them, but that alone won’t sell them on the plan. [See also: Helping employees understand HSAs]
To really convince employees that this is a good solution for them and their families, we need to show them how an HSA is actually better than some other health plans and tax-advantaged accounts they might already be familiar with. Here are a few >>
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.
In many ways, an HSA is actually more flexible than a flexible spending account. Here are some of the distinctive features:
- HSA contributions are not subject to the irrevocable election rule, so employees are not locked in at their original contribution amount. In fact, employers must allow employees to adjust their contributions on a monthly basis at a minimum.
- HSAs do not have a use-it-or-lose-it rule; instead, it’s a use-it-or-keep-it account. Unused funds roll over from year to year, so employees can stash away money during the good years and use it when they do have a big medical expense.
- HSAs are also individually owned accounts, so employees take the money with them when they leave. And, as a bonus for employers, because HSAs are individually owned, the employer is not responsible for keeping up with expenses – it’s up to the employee to make sure they’re using their accounts for their intended purpose and keeping copies of the receipts.
(photo credit: renjith krishnan/freedigitalphotos.net)
[Next: Better than a 401(k)]
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.
An HSA is similar. Employees can deposit funds into their account and earn tax-free interest and investment income year after year. But with an HSA, as long as the funds are used for qualified medical expenses, account holders never pay taxes on the money – it’s not a tax-deferred account like an IRA or a 401(k), it’s actually a tax-free account.
At some point, most of us will have medical needs that we can pay for with our HSA, and even those who don’t will have plenty of things to spend their HSA money on as they grow older – like long term care insurance and Medicare Part B premiums. And, once someone reaches age 65, they can actually use their account like an IRA or a 401(k). If they withdraw funds for non-qualified expenses, they’ll pay taxes but no penalty, while qualified expenses are always tax-free.
(photo credit: renjith krishnan/freedigitalphotos.net)
[Next: Better than a raise]
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.
The first is perception. As Steve Neeleman, founder and CEO of HealthEquity, explains, “a $50 per month – or $600 per year – HSA contribution is going to show up every pay period in the employees’ accounts and accumulate. All an employee has to do to appreciate the employer’s ‘gift’ is to log on to their member site and see the monthly contributions. On the other hand, a $50 premium discount – or, in other words, $50 more cash from their employer every month – will soon be forgotten by the employees because their pay has been adjusted and it is buried in their EFT to their bank account…out of sight, out of mind.”
The other reason an HSA contribution makes sense for both the employer and the employee is because $50 really means $50. Neeleman continues, “When an employer puts $50 in an employee’s account, the entire amount is passed on to the employee. The employer does not pay FICA taxes, and the employee receives the $50 completely tax-free. But when an employer gives the employee $50 more income per month, both the employer and the employee have to pay 7.65 percent FICA taxes on that $50 [reduced to 5.65% for employees in 2012]. So it actually costs the employer $53.83 to give the employee $50, and the employee’s fifty bucks quickly becomes $46.17. Of course, that’s not all the employee has to pay – she also owes federal and state income tax. Using a cumulative figure of 20 percent (a pretty low tax rate), another $10 disappears, leaving the employee with only $36.17 extra per month, probably divided over a couple paychecks.” No wonder she forgets about it so quickly.
(photo credit: worradmu/freedigitalphotos.net)
[Next: Better than a copay plan]
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.
With an HSA-qualified plan, the member pays more up front for routine expenses like doctor visits and prescriptions, but she still gets the insurance company discount, and this amount is applied toward the plan’s deductible and out of pocket maximum. Out-of-pocket max really means out of pocket max on an HSA-qualified plan – the member knows up front what her worst-case scenario is and can plan accordingly.
(photo credit: Arvind Balaraman/freedigitalphotos.net)
[Next: Better not wait...]
Better not wait…
Many experts expect HSAs to be the plan of the future, especially after the majority of the health reform provisions kick in in 2014. They will likely be the bronze-level “minimum essential benefits” plan that individuals must have in order to avoid a penalty, so enrollment should increase even more rapidly than it already is.
But that doesn’t mean we should wait until 2014 to sign up; on the contrary, if we think we may have an HSA some day, then it makes a lot of sense to go ahead and get it today, while premiums are still somewhat manageable and we can afford to sink some money in our accounts. If we wait until 2014, premiums will almost certainly be higher, leaving us less disposable income to set aside for medical expenses. As with any investment, starting early is always a good idea.
(photo credit: David Castillo Dominici/freedigitalphotos.net)