Plan sponsors started tointroduce HSAs in 2005, and most providers and sponsors initiallyexplained HSAs as an FSA look-a-like or as a kind of “super” FSA,and not as a long-term savings account. (Photo:Shutterstock)

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Health Savings Accounts (HSAs) offer employers and their employeesaccess to a great savings vehicle. However, we find that theycontinue to be widely misunderstood.

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The Plan Sponsor Council of America's HSA committee offers thesesolutions to common HSA pain points. Here are eight pain points andhow to approach them, to use now or at your next openenrollment:

Headache #1: HSA and FSA confusion

An HSA is not the same as a Flexible Spending Account (FSA). TheFSA basics have mostly been unchanged since 1984, when thecafeteria plan regulations were first proposed – annual elections,use-or-lose, etc.

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So, not surprisingly, after more than 20 years of education,workers are well trained to understand an FSA.

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Plan sponsors started to introduce HSAs in 2005, and mostproviders and sponsors initially explained HSAs as an FSAlook-a-like or as a kind of “super” FSA, and not as a long-termsavings account. In our Spring 2018 Issue of Defined ContributionInsights we discussed 10 Common Myths and Misconceptions of HSAs,and you may find that a useful reference.

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How do we remedy the misunderstandings about HSAs? Unlike anFSA, the HSA does not have a use-it or-lose-it-provision. You alsocan change your payroll deduction throughout the year without achange in family status.

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So, workers don't have to estimate next year's health careexpenses during open enrollment. Instead of linking the amount ofHSA contributions to next year's out-of-pocket medical expenses,the worker can focus on the savings decision – at annual enrollmentand throughout the year.

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It also allows plan sponsors the flexibility of offering HSAeducation throughout the year to remind employees of the value theHSA offers.

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We would suggest education throughout the year that positionsthe HSA with the 401(k) and not against the FSA.

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When workers start to understand the HSA properly, they will seeit as a “super” 401(k). Both the HSA and the 401(k) offer pre-taxsavings, and investment options, but unlike the 401(k):

  • HSA contributions are pre-tax for FICA and FICA-Med employmenttaxes,
  • The HSA offers the added ability to pay for out of pocketmedical expenses with tax free dollars, and
  •  Minimum required distribution rules do notapply.

Here's one more big education opportunity — under current lawthere is no time limit on reimbursement from an HSA. In otherwords, reimbursement from an HSA does not need to be made in theyear medical expenses are incurred.

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This is a huge benefit to employees. If they can afford to payfor current out-of-pocket health care expenses from today'shousehold budget, they can save those incurred receipts and getreimbursed in a future year.

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This allows unused HSA dollars to grow tax free, and alsooptimizes potential for greater investment growth. We explain thisstrategy to workers as “Shoeboxing” receipts.

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Reimbursing yourself tax-free at a later date, perhaps afterretirement, can provide tax-free income in retirement.

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Think of it this way, if you don't have an HSA, you will have topay for out-of-pocket health care expenses from your 401(k), whichresults in a taxable distribution (if it is a traditional 401(k)).Don't forget, tax free income may also reduce the taxes a workermay have to pay in retirement (on Social Security benefits) and thepremiums a worker may have to pay in retirement (income-basedpremium surcharges for Medicare Part B and Part D coverage).

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Here's another way of looking at it: At retirement, if you have$500,000 in your 401(k) and $150,000 in your HSA, which one wouldyou rather use to pay for health care expenses in retirement?

Headache #2: Deductibles are “high”ly misleading

Whatever you do, don't call the HSA-capable health option a“high deductible health plan!” Why? It sounds too scary.

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Instead, call it something else. Try “Health Savings Option” orHSA-eligible Health Plan.”

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Simply, the minimum deductible for a HSA-capable health optionis not so high anymore – the average deductible nationwide in a PPOis over $1,500 which is higher than the HSA minimum requireddeductible . (The Kaiser Family Foundation 2018 study ofemployer-sponsored health coverage showed that 85 percent ofcovered workers were enrolled in a plan with a general annualdeductible and that the average annual deductible for singlecoverage was $1,573 – 17 percent higher than the $1,350 HSAminimum.)

Headache #3: Employees don't contribute to the HSA

Instead of the FSA and “use-or-lose,” you might say a major HSApain point is “you snooze you lose.”

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Few plan sponsors incorporate features designed to open the HSAaccount when the worker is first eligible. Only those expensesincurred after the employee is enrolled in a HSA qualify fortax-free reimbursement.

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So, you should consider automatically enrolling employees thatchoose an HSA-qualified health option. Similar to the 401(k), youcan use a default HSA contribution amount – where employees havethe option to opt-out or select a different amount.

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For example, if an employee chooses the HSA compatible healthplan during open enrollment, you would enroll them in the HSA for$50 per pay period (or whatever amount you want to suggest).

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Today, most plan sponsors offer health options through a Section125 cafeteria plan – so employee contributions are automaticallytaken on a pre-tax basis. Automatically enrolling employees to makepre-tax contributions to the HSA would use the same rules.

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In other words, much like automatic enrollment in the 401(k),you may want to assume that those who enroll in the HSA-capablehealth option should also be contributing to the HSA.

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Another concept you can use to facilitate HSA contributions isto encourage employees who are already contributing to the 401(k)to split their contributions between the two programs. In this way,an employee would continue to contribute to the 401(k) as necessaryto receive the maximum employer contribution, but shift any excessto the HSA.

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Example: An employee is currently contributing 10 percent of payto the 401(k). The employer matches the first six percent of pay.The employee could change their 401(k) deferral to six percent ofpay and enroll in the HSA at four percent of pay (thereforemaintaining the same take home pay).

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The best strategy is to maximize the deferrals available underboth a 401(k) and an HSA. You might worry that employees couldnegatively impact their retirement preparation, however, you shouldcontinue to educate employees about why the HSA can be moreeffective than the 401(k) in saving for retiree medicalexpenses.

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Finally, while most plan designs allocate employer HSAcontributions to meet the comparability requirements, some plansponsors deploy a matching structure – sometimes using the samepercentage match on HSAs contributions that they use on 401(k)contributions.

Headache #4: Lack of educational materials on HSAs

There is a lack of educational materials that engage employeesand explain an HSA as anything other than a FSA look-a-like. PSCA'sHSA committee has been developing non-vendor HSA materials thatwill highlight and explain a variety of HSA strategies thatemployees can use to fill this education gap.

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Because employees can change their HSA contribution election atany time, we suggest you educate employees about HSAs throughoutthe year, when possible. If employees have a better understandingof HSAs prior to open enrollment, it might help them make a moreinformed decision. Throughout the year, you can engage them withtips about best uses and strategies for an HSA.

Headache #5: Verifying employee identity for HSA set up

Because HSAs are individual accounts and not under theemployer's control they are subject to PATRIOT act requirements.Some HSA providers have been able to set up the accounts with themonies funded to a cash account – Wage Works is one of thoseproviders.

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Regardless, you will want to educate the employee that this istheir savings account and that after they enroll, they will need tocomplete the account setup with the vendor just as they would ifthey were setting up a personal investment account. PSCA supports,and is advocating for, regulatory reform to make account setupeasier.

Headache #6: A health plan vendor is not necessarily the bestchoice as the HSA vendor

We hear from many plan sponsors who assume they must use an HSAassociated with the Health Plan provider. This is not the case.

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The HSA is not a health plan, and there are excellentindependent HSA providers. Look for competitive low-cost investmentoptions and a user-friendly website. In addition, some vendors areable to mirror your 401(k) investment line up.

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That may be an added benefit to the extent your employeesparticipate in and understand the investment options in your 401(k)plan.

Headache #7: HSA vendor is not proactive in promoting HSAsavings or investments

Many plan sponsors are frustrated with a lack of engagementaround the HSA. Too many HSA vendors are more focused on claimsadministration than wealth accumulation.

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As a result, only a small percentage of HSA account owners arerealizing all of the value the HSA has to offer.

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Some health plan advisors are not licensed to sell investmentsand may not be able to fully educate participants about HSAs.

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A solution may be to ask your 401(k) service provider or advisorif they have developed and can offer HSA education and engagementas part of their employee education services. If not, anindependent HSA advisor or consultant can assist you with designinga campaign.

Headache #8: Difficulty verifying eligibility

A person cannot make contributions to an HSA if they do notparticipate in an HSA-eligible plan or if they are covered by aplan that is not HSA-eligible. This might include a spouse's healthplan, and general FSA, or Medicare.

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Many Medicare-eligible employees enroll in Medicare Part A(since it is free or a requirement of the employer health plan)when they turn age 65, not realizing that even though Medicare issecondary to the employer-sponsored plan, that it will invalidateeligibility to contribute to the HSA.

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The burden of proof of eligibility is on the owner of the HSAand not the employer. Regardless, many plan sponsors want to avoidan employee inadvertently enrolling in an HSA. Many HSA providersinclude a question regarding other health plan participation toprevent this.

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In addition, you can add a prompting question as a part of youron-line enrollment platform or enrollment process to try to educateemployees about this.

Conclusion

We have identified eight HSA headaches. The pain points includedfailure to see the HSA as a savings account, employees failing tomake contributions to the HSA, and a lack of educationalmaterials.

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We offered solutions that included positioning the HSA alongsidethe 401(k), highlighting the HSAs as a long-term savingsopportunity, and as a solution for funding retiree health costs.Educational materials are improving and PSCA's HSA committee isdedicated to providing in-depth educational material to assist.Some of the pain points explored administrative headaches.

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Many of the solutions we provided encouraged you to talk to avariety of HSA vendors to see what support they may be able toprovide to resolve these issues. Remember, an HSA offered inconjunction with the Health Plan is not necessarily the best option– getting RFPs on other HSA vendors is recommended.

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Karin Rettger is President of PrincipalResource Group.  Jack Towarnickyis the Executive Director of the Plan Sponsor Council ofAmerica. Starting in 2019, PSCA will provide HSAeducational webinars. In our Spring 2018 Issue of PSCA's DefinedContribution Insights we discussed 10 Common Myths andMisconceptions of HSAs, and in the Summer 2018 issue we discussedauto-enrollment in HSAs. The PSCA HSA committee welcomesyour thoughts on HSAs, headaches you've suffered, the pain pointsyou are experiencing, solutions you have crafted – send us ane-mail at [email protected].

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READ MORE:

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10 HSA questions employers and employeesask

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Leading the HSA revolution: How to help employerssee the value of HSAs

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Are HSAs worth the effort forTPAs?

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