My friend and former colleague, Eric Johnson, recently wrote an article for BenefitsPro which outlined five reasons to enroll in an HSA. I actually agree with him that the HSA is going to be the plan of the future and that they do offer a number of great benefits for employers as well as employees. In fact, my family and I have had an HSA for the last couple of years. However, there are reasons why an HSA may not be for everyone. Here are some.
1) HSAs are not instantly financed
Of course we know by now that one advantage the HSA has over the FSA is the fact that unused funds can stay in the account indefinitely—no use it or lose it rule. However, the disadvantage is that funds usually need to build up over time.
Most employees, and employers who contribute to their employees’ accounts, make a contribution each payday. At that rate, and depending on what is being spent from the account, it can take a while to build up enough dollars to fully cover the deductible. On the other hand, an employee with a FSA can access the full amount of their annual allocation on day one of the plan year if they encounter a big expense.
2) No prescription drug co-pays
This was a big change for my family to get used to. It’s really nice to be able to walk into the pharmacy and pick up a prescription for $20 or so. With the HSA, the members pays the full amount of the drug (minus the health plan discount) until the deductible has been reached. This can be a real eye opener (as it is supposed to be) when that $20 drug is suddenly $120. As was no doubt intended by the drafters of HSA legislation, this “skin in the game” encourages the use of generics and the $4 drugs available at some pharmacies rather than the pricey name brands.
3) High deductibles are high
I guess it needs to be mentioned that the HSA does come with a higher deductible than most traditional PPO plans. This year, the IRS requires that qualified HSA plans come with a minimum family deductible of $2,400, but could be as high as $6,500 with a maximum out of pocket of $12,100. That can be a lot of cash needed at once if you crash your bike and are taken by ambulance to the ER as was my wife a couple of years ago. (See reason #1.) Likewise, I have found myself putting off some minor, but recommended care because I don’t want to spend my own money. Fortunately, accident and critical illness policies can be purchased to help mitigate some of this risk.
4) 213(d) confusion
A fourth reason that HSAs may not be for everyone has to do with understanding what they can be used for. I received a phone call recently from a former colleague who is an executive with an east coast insurance brokerage—a guy who has been around insurance his whole career.
He had noticed that I had written a few articles about HSAs and wanted to pick my brain about how to use one. I told him that generally speaking he could use his HSA to pay for any 213(d) expense, referring to the IRS Code Section 213(d) Eligible Medical Expenses. He laughed and said jokingly, “Sure, I carry that list around in my wallet.” Unlike FSAs and HRAs most debit cards tied to an HSA will work just about anywhere for just about anything. So while you think that something should be covered and the card works, you may find yourself paying taxes on the money you used in error, plus a 20 percent penalty.
5) Education gap
This brings me to reason No. 5 for why HSAs may not be for everyone—the education gap. (I figured I’d better match the number of good reasons that Eric came up with.)
HSAs do require a fair amount of education and training when they are introduced to a workforce. Unfortunately, many employers and their brokers miss this step in their haste to implement a new plan. The employees never get to see Eric’s list of reasons to enroll in an HSA, but they do far too often experience some of the negatives that I have described here and this leads to workers who are unhappy with their benefits plan. HSA communications materials get better every year and there is no excuse not to do a thorough job of educating and reeducating workers on how to benefit from the program.
To steal a quote from Eric's article, “…perception is reality: if employees don’t think they have a good benefits plan, they don’t regardless what the employer is paying.”