Group health insurance costs are painfully high!
You’re nodding your head, right!
Every business owner today feels the sting of just how expensive group health insurance is today! For most businesses, group health is their second or third largest operating expense.
And as a business owner, you have probably come to expect increases in your group health premiums every renewal. This is just the norm!
What you may not know is that more businesses than ever before are turning to alternative solutions to their growing group health care costs. In fact, 50% of my clients are utilizing options such as HRAs, HSAs, and even self-funding their group health.
Have you considered alternatives to help cut your group health insurance costs?
As an Employee Benefits Specialist, I meet with businesses every week that are open to considering creative solutions for their group health insurance needs. I sit down with these business owners or CFOs and outline many options available to them.
One of the options I cover with my clients is the combination of Health Savings Accounts used in conjunction with a High Deductible Health Plan. For many businesses, this is a great solution for lowering their group health insurance costs while still providing their employees with excellent health care coverage.
This article will explain to you the ins and outs of Health Savings Accounts (HSAs). We will discuss:
- What exactly is an HSA?
- How an HSA works in tandem with and High Deductible Health Plan
- The advantages and disadvantages of HSAs
- If HSAs impact your employee’s wellness choices
- A few important but little known facts about HSAs
- And 3 keys to successfully implementing this solution
What is an HSA?
Since 2004, the IRS has approved the use of Health Savings Accounts (HSA). An HSA is a tax-favored, interest-bearing account that employees can use to pay for qualified medical expenses.
And what is great about an HSA is that the funds in an HSA can be used now or can be used for expenses in the future such as after retirement. You can think of an HSA like a 401(k) for health care.
The most significant benefit of an HSA is that any contributions made to the HSA are made pre-tax dollars, and those same dollars are not taxed when used for qualified medical expenses. The money invested in an HSA is not taxed!
HSAs and Qualified High Deductible Health Plans
To use HSAs as a part of your group health insurance program, your business has to offer a qualified High Deductible Health Plan (HDHP). What is a qualified High Deductible Health Plan?
According to government regulations, in 2020 a qualified High Deductible Health Plan is a health insurance plan that has a deductible of at least $1,400 for an individual or $2,800 for a family. Also, an HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can not exceed $6,900 for an individual or $13,800 for a family.
The overall idea of this type of plan is that your employees would use their HSA to pay their deductibles, copays, prescription drug costs, and other medical expenses. The money in the HSA is designated to cover the high deductible outlined by the employee’s health insurance.
Advantages of HSAs
Employers can benefit from setting up a High Deductible Health Plan because their deductibles will be higher and their premiums lower. But, it isn’t employers alone who can benefit from this plan. Group health plans that use both an HDHP and an HSA can have numerous advantages for both employer and employee.
#1 HSAs give employees more choices about their health care and their money
With an HSA, your employees are given more choice in how they use their income. Because HSAs are set up through a banking institution, your employees will have options in how they will manage those funds.
In the bank, your employee can choose if they would like that money to remain in an interest-bearing account or if they would like to invest that money in mutual funds that the banking institution offers. If they opt to invest their funds, your employee can liquidate the fund quickly if they need to use the funds for their medical expenses.
HSAs also empower employees to make educated choices about the health care they receive. Employees with HSAs are encouraged to shop around and make the best choice for where they will have medical procedures done or where they will have drug prescriptions filled. Your employee chooses where and when to spend the money in their HSA.
#2 HSAs offer a “triple” tax savings
When an employee uses an HSA, they receive a “tax-break” not just once, but three times. And because there are no income limits on HSAs, these tax-savings are significant!
How do these funds qualify for triple tax savings?
- Contributions to an HSA are taken out of an employee’s income before it is taxed. This deduction is subtracted directly from an employee’s gross income.
- The funds in an HSA earn tax-free interest. You can consider these as investment earnings!
- Lastly, any funds used for qualified medical expenses are also tax-free. Qualified medical expenses even include future expenses like Medicare and long-term care premiums.
#3 HSAs are employee-owned
Unlike HRAs (Health Reimbursement Arrangements) which are employer-owned, HSAs are employee-owned. Because of this, even when an employee changes employment or retires, their HSA is still theirs to use for qualified medical expenses.
Also, HSAs differ from Flexible Spending Accounts (FSAs). Like HSAs, FSAs allow employees to set aside money in an account to be used for qualified medical expenses. The biggest difference is if an employee does not use the funds in their FSA, they lose those funds at the end of their insurance year or if they change employment.
With an HSA, the employee never loses their funds! The employee can roll their funds over to the next insurance year and take their funds with them when they change their employment.
#4 HSAs can be funded in multiple ways
Unlike HRAs which can only be employer-funded, HSAs can be funded three different ways – by the employee, the employer, or by a third-party.
- Employee-funded – With this option, the employee makes contributions to their HSA. Using this arrangement, the employee can set up funds to be directly withdrawn from their paycheck and deposited into their HSA. An employee can opt to have funds added to their HSA on a monthly, quarterly, or annual basis.
- Employer-funded – Sometimes to help their employees cover their high deductible, employers will contribute a portion of funds to the employee’s HSA. If an employer is making contributions to their employee’s HSA, most often they will make these contributions monthly. About 50% of employers who offer HSAs to their employees make contributions to the HSA as well.
- Third-party funded – If an individual has an HSA, other people can make contributions to the HSA as well. For example, a spouse or a parent can gift money to an individual’s HSA.
#5 Employees can use their HSA funds for a wide variety of medical costs
With an HSA, employees can use their funds to cover qualified medical expenses like prescription drugs, doctor visits, emergency room care, etc.
In addition to these more common uses, an employee might be surprised at other expenses that are considered qualified. Qualified expenses even include orthodontic care, glasses and contacts, acupuncture, and even guide dogs and service animals.
#6 HSAs are great plans for high-earning and/or healthy employees
Usually, high-earning employees have the income to save. Because HSAs offer triple tax-savings, HSAs can be particularly appealing to high-earning employees.
Also, healthy employees don’t often use their health insurance. These employees can see health insurance as an expense that they don’t often get a “return” on.
With an HSA, healthy employees often prefer a higher deductible health plan knowing that they most likely won’t need to spend the entirety of their funds on their deductible. They probably won’t have enough medical expenses to even meet their deductible.
With the higher deductible, their health insurance premium is lower allowing them to save the difference of what they would typically spend on health insurance.
For higher-earning employees or healthy employees, HSAs offer more choice to these employees.
Disadvantages of HSAs
While HSAs are an incredible savings vehicle and a way to meet deductibles, they are not a good fit for every business.
#1 Low-income employees may not be able to make contributions to their HSA.
Because low-income employees are not earning a lot of money, they may be hesitant or unable to save some of their income in their HSA. This can be problematic when low-income employees are part of a High Deductible Health Plan.
When the employee does not make contributions to their HSA, they can not afford the costs of their deductible. This is a lose-lose situation for the employee! They have an unaffordable deductible and no means to save for it!
#2 Many employees don’t take advantage of their HSA.
Over 40% of employees offered an HSA by their employer never open one!
Why is this?
- Lack of understanding – Employees often don’t understand how their group health insurance plan and their HSA are designed to work together. These employees don’t understand why they need to make contributions to their HSA. Without making contributions, many employees will not have sufficient funds to cover a large claim before their deductible has been met for the year.
- Lack of will – Setting up an HSA takes effort and time. Many employees will simply not have the momentum to set up their HSA and engage in this health care option.
- Inability to contribute – If an employee has limited income, they may not be able to afford to contribute to their HSA. This is especially true for low-wage earners. When an employee is a low-wage earner, they often need their income for their general living expenses and do not have enough left over to make contributions.
- Difficult to use – Depending on how the HSA is set up, the account may be difficult for the employee to manage. They may not have the use of electronic tools to help them establish and monitor their account. These difficulties often prevent employees from taking advantage of their HSA.
#3 Employers must educate their employees to successfully use the HSA.
It is critical that the employer invest time and resources into ensuring their employees understand the group health plan that they are offering their employees. This is especially true when an employer is using both an HSA and a High Deductible Health Plan.
Educating their employees will require that an employee invest resources in their education program. They will most likely need added personnel to help their employees navigate using their HSA.
Employers will also need to regularly communicate with their employees regarding their HSA. The employees need regular reminders and information on how to use their HSA in conjunction with their High Deductible Health Plan.
Lastly, employers will need to invest time reaching out to their insurance broker. The insurance broker will play a vital role in the success of this type of insurance program. Regular interaction with the insurance program is required for it to be a success.
#4 The IRS sets annual limits on HSAs.
Annually, the IRS sets the maximum contribution limits on Health Savings Accounts. In 2020, the individual maximum is $3,550 and the family maximum is $7,100.
There is an exception for individuals over 55 years old. These individuals can contribute $1,000 more annually as a “catch up” feature.
#5 HSAs can not be used with Flexible Savings Accounts (FSAs) or Health Reimbursement Arrangements (HRAs).
Annually, the IRS will only allow a certain amount of an individual’s income to go untaxed through their health care plan. If you are contributing funds to an HSA, the government will not allow that individual to contribute funds to an FSA. The IRS only gives a tax break on an HSA for an individual up to $3,550 and an HSA for a family up to $7,100.
The IRS will also not allow a business to utilize both HSAs (which are employee-owned accounts) and HRAs (which are employer-owned accounts). There are very few exceptions where both of these options can be used at the same time.
#6 Not everyone is eligible for an HSA.
If you are covered by your spouse’s health plan, you are only able to take advantage of an HSA if your spouse’s plan is compatible with HSAs. If not, you cannot make contributions to an HSA.
Other individuals who do not qualify to set up an HSA are those enrolled in Medicare or those individuals who are claimed as a dependent on another person’s tax return.
Will having an HSA influence Employee Behavior?
An argument that some like to make for using HSAs and High Deductible Health Plans is that employees will be more responsible for their health. But the evidence for this is inconclusive.
To measure the effectiveness of this type of insurance program, your business would need to review your premium rates over several years.
Let’s say that for the last ten years your company has had a 7% increase every year. You would be able to see improvements when your company reaches a several year period where your increases were only 5% or less annually. You would need to compare your premiums over 5 to 7 years.
Below are some of the arguments for how using HSAs in your group health insurance program will change employee behavior and help lower group health care costs.
A High Deductible Health Plan and HSA forces employees to have “more skin in the game” and it will lower group health care costs.
This argument assumes that because the employee has to spend more of their financial resources on their medical costs, they will be more cautious about spending healthcare dollars.
This is true in some cases. Studies have shown that health spending is curbed, but only by 5% to 10% of total spending.
What is also true is that some employees will put off necessary medical procedures or prescriptions because they are too expensive. This happens often with low wage employees who lack enough income to contribute to their HSA.
Overall, the impacts of neglecting these medical procedures or prescriptions can be very harmful. For instance, if a diabetic employee decides to stop taking insulin because of the cost, the long-term effect of that decision can be catastrophic!
Employers can use HSA contributions to incent healthy behavior.
This is absolutely true! Employers can contribute HSA dollars to an employee’s account based on behavior. For example, an employer can tie HSA contributions to an employee’s participation in a wellness program.
An example of this would be an employer contributing to their employee’s HSA once the employee has achieved certain tasks like a yearly physical, regular monitoring of blood pressure and cholesterol, stopping smoking, or obtaining a flu shot.
Employers have plenty of options and flexibility in how they can link HSA contributions with wellness activities.
But will this impact the employer’s group health care costs?
It may affect their costs. However, the results would need to be calculated over a long-term period of at least three to five years.
High Deductible Health Plans do not stop employees from filing high-cost claims or “shock claims.”
HDHPs and HSAs only deal with the deductibles for employees. They do not affect the amount or size of the claims your employees will submit over the policy year.
In large part, most high-cost claims are not due to wellness or employee behavior. A high-cost claim can be the result of a devastating car accident. This type of large claim will have an impact on your next year’s premium.
Other high-cost claims can be a result of employees not managing pre-existing conditions because they do not have the funds in their HSA to pay for ongoing treatment or expensive regular medications. For example, if an employee can not afford their insulin prescription and ends up needing an amputation due to their diabetes, that employee will be submitting a large claim.
Having an HDHP and HSA insurance program will not stop large claims. In fact, with low-wage earners, an HDHP and HSA might inadvertently cause your employer to neglect important care and need greater care.
Using HSAs and HDHPs will prevent employers from receiving high annual premium increases from the insurance company.
This is not true. These products will not prevent large claims. If your employees have a high use of their health insurance, the HSA and HDHP will affect the low-cost items. They will not cover anything above the deductible.
For instance, if your employees use the emergency room often, have high-cost prescriptions, or have high-cost procedures, these larger expenses could affect your insurance renewal negatively.
Little known facts about HSAs
As I said earlier, HSAs have been in use since 2004. HSAs are the best savings vehicle available under the U.S. tax code.
HSAs top 401ks, IRAs and Roth IRAs in terms of tax savings
HSAs are not subject to income taxes. They are also not subject to payroll taxes. Most Americans pay more in payroll taxes than in income taxes.
In retirement, if you use your HSA funds for non-medical purposes, those funds would face income taxes. But because health expenses tend to be large in the retirement years, most individuals only use their HSA funds for medical expenses. Those funds never end up being taxed.
You can roll your IRA over into an HSA.
If you already have an IRA set up, the law allows you to roll money from your IRA into your HSA. This is significant when you remember that money used from an HSA is not taxed. Earnings added to an IRA, while they are not taxed when deposited, will be taxed when you withdraw them. However, moving those earnings to an HSA means they will not be taxed when used for qualified medical expenses.
Individuals can use their HSA as a retirement savings strategy.
Because you can make contributions to your HSA yearly, you can use this vehicle as a way to save toward your retirement costs. HSAs can be used by individuals to pay for medical expenses incurred after they retire.
Saving money in an HSA can be a great strategy for retirement savings because post-retirement is often a time when medical expenses increase.
You can invest HSA funds, just like you invest IRA funds.
Because your HSA is set up through a bank, you will have various options as to how you want those funds to be invested. You may opt to place the funds in an interest-bearing account, or you may choose to invest in mutual funds or other investment opportunities provided by the bank that houses your HSA account.
3 Keys To a Successful HSA Program
If you take advantage of HSAs with your employees, these three keys are vital to creating a successful program.
#1 Employee Education
As mentioned before, employee education is a must if you want your HSA program to be successful. The biggest reason for failure is a lack of understanding from your employees.
What does failure look like?
- Less than 40% of your employees set up their HSA.
- Your employees don’t use their HSA to cover their deductible.
- Your employees don’t fund their HSA through payroll deductions.
To encourage employee participation, you must convey the importance of using their HSA. You will need to educate them on how to set up their account and how to make contributions to it.
Also, your employees must understand how the HSA works in tandem with their group health insurance. Otherwise, employees will not understand why it is essential that they contribute money to their HSA.
#2 A Knowledgeable Insurance Agent
Your insurance agent will be your advisor. Your agent must be very knowledgeable so that they can walk you through the various HSA possibilities and scenarios. Your advisor should help you with the following:
- Your employee’s perception of your company’s benefits – Your agent will help you explain to your employees exactly how their coverage will work and how their HSA will supplement their health care expenses.
- Educating your employees – Your advisor should provide education to your employees about how their HSA will work. They will educate your employees on qualified medical expenses, setting up their HSA, and accessing their funds.
- Monitoring your HSA – Your advisor will help you determine how to monitor your HSA. They will also help you establish how to report your medical expenses. Your advisor will direct you to a third-party administrator to help you with these items.
- Compliance with the law – Making sure your HSA program complies with the law is essential. Your advisor will make sure you are complying with ERISA, IRS, and Labor Department laws.
- Hiring a Third-Party Administrator (TPA) – Your insurance agent must be able to recommend reputable Third-Party Administrators to manage your program. Most business owners or CFOs will not be able to manage this program on their own. Your agent will be able to present the pros and cons of working with various TPA’s.
#3 A Third-Party Administrator
For an HSA to work effectively, it must be run by a third-party administrator (TPA). Sometimes the TPA can be the insurance company itself. Other times, you will want to hire a separate TPA for your HSA management.
What will your TPA do?
- Monitor your compliance with the law – TPAs are experts in this area. They will make sure you stay in compliance and don’t suffer any penalties.
- Provide electronic resources – TPAs often have websites available to you and your employees to monitor your HSAs. Some even offer phone apps.
- Government reporting – Your TPA will assist you with reporting your HSA activity on your taxes and other required reporting.
- Employee education – Your TPA will educate your employees about their benefits and the use of their HSA.
- Coordinating with a bank – Ultimately, your HSA is established with a banking institution. Your TPA will coordinate your HSA program between providers, employees, and the bank.
- Investments – If you wish to transfer some of your HSA funds into investments, your TPA will be able to assist with that. Also, they will help you with any investment reporting you will need to do.
Is My Business a Good Fit for an HSA Program?
The best way to determine if an HSA program is the right fit for your group health insurance program is to consult with a knowledgeable Employee Benefits advisor. Your advisor will gather information about your business and your employees. Together you will settle on a group health solution that will best meet your needs.
Your Employee Benefits advisor must be well-versed in the many options available to companies today-HSAs, HRAs, FSAs, self-funding, etc. As you can see, group health insurance has numerous options beyond simply choosing a traditional insurance company to provide group health coverage for your employees.
At Baily Insurance Agency, we take a complete look at your business and your needs. Our clients are often surprised by the variety of options available to them. With creativity and know-how, we help our clients create a group health program unique to their company.
We know that every company is unique. Their employees’ needs are unique. And we believe their insurance solutions should reflect the uniqueness of their business.
We understand that insurance is not a one-size-fits-all industry.
If you’d like to learn more about another non-traditional group health option, I’d suggest diving into How Can I Control My Group Health Insurance Costs? The Benefits of HRAs. This article will give you a better understanding of another creative solution that might be a good fit for your company.
If you want to get started creating the perfect group health package for your business, please let me know! I’d love to start that journey with you today.