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HDHPs and HSAs: Pros and Cons

Premium increases for employer-sponsored family coverage are expected to remain modest in 2016, ranging from 6.8 percent for a health management organization (HMO) to 7.8 percent for a preferred provider organization (PPO), according to the 2016 Segal Health Plan Cost Trend Survey released in September 2015.

Still, these percentages are outpacing inflation, while prescription drug coverage is expected to hit double-digit rates.

One reason cited for the relatively modest increase is that employers are finding alternatives to traditional coverage. One example: employers who are looking for a way to lower health insurance premiums for their employees often look to high-deductible health plans (HDHPs). On the upside, these plans offer lower premiums; on the downside, higher deductibles than are found in traditional health insurance plans. However, an HDHP combined with a tax-advantaged Health Savings Account (HSA) can be an effective way to pay for medical expenses.

HDHP

An HDHP has a higher annual deductible and out-of-pocket maximum limit than other types of insurance plans. For instance, in 2016 the HDHP minimum deductible level for an individual is $1,300 and for a family it’s $2,600. Out-of-pocket limits go as high as $6,850 for an individual and $13,000 for a family. Out-of-pocket limits include co-payments and other expenses, but not premiums.

These higher deductible amounts can be difficult for some employees to cover. However, after the insured pays the deductible amount, the plan might pay covered benefits at 100 percent for the plan year. This serves as a great catastrophic plan when medical expenses soar.

These plans also cover preventive services at 100 percent, which include:

  • Annual physicals
  • Routine prenatal and well-child care
  • Immunizations for children and adults
  • Stop-smoking programs
  • Obesity weight-loss programs
  • Screening services for cancer, heart conditions, mental health, pediatrics, vision, etc.

HSA

An HSA allows employees to save for qualified medical expenses on a pre-tax basis and use those savings to pay for health expenses not covered by a deductible. The money deposited into an HSA is not taxed and it can grow over time. The balance in the HSA grows tax-free, and that amount is available tax-free when withdrawn to pay medical costs. The HSA is portable — meaning that employees can take the HSA with them to another job.

In addition, anyone 65 or older may withdraw money from their HSA for services other than qualified medical expenses, but these will be subject to income tax. Anyone under 65 years old who withdraws money for expenses other than for medical reasons will be charged an additional 20 percent penalty.

An employee must be eligible to participate in a HSA. Those qualifications include:

  • Being enrolled in an HDHP and not covered by another health plan (including a spouse’s health plan, although this does not include specific injury insurance and accident, disability, dental care, vision care, or long-term care coverage)
  • Not enrolled in Medicare
  • Not in receipt of VA or Indian Health Service (IHS) benefits within the last three months
  • Not covered by spouse’s flexible spending account (FSA), unless it is a special “limited” FSA that only pays for non-major medical benefits such as dental and vision expenses.
  • Not claimed as a dependent on someone else’s tax return.

Employees who are not eligible for an HSA may use a Health Reimbursement Arrangement (HRA). An HRA differs from an HSA in that an HRA does not earn interest and cannot be transferred to another job. The employee also cannot make contributions to an HRA: only the employer can contribute.

For more information on how non-traditional benefits can help your organization save money, please contact us.

Contributing the Right Way

Employers do not have to contribute to their employees’ Health Savings Accounts (HSAs), but many do so to help ease the transition from traditional health coverage to high-deductible health plans (HDHPs).

There are two main ways employers can contribute — with a Section 125 plan or without. A Section 125 plan is commonly known as a cafeteria plan. Depending on the level chosen, a Section 125 plan allows employees to deduct insurance premiums pretax and avoid tax on income used to pay for medical and child care expenses. Employers also benefit from these plans because of decreased company payroll and tax liabilities for Social Security, Medicare and unemployment.

There are three basic forms of Section 125 plans:

  • Premium Only Plans (POP) A POP is the most basic and most popular. It allows employees to pay their insurance premiums with pre-tax dollars.
  • Flexible Spending Account (FSA) With an FSA, employees may make pre-tax contributions to the account. They can then be reimbursed from that account for child care, deductibles and eligible medical expenses not covered under their health insurance plan.
  • Full Cafeteria Plan

An employee who contributes to this account can do so tax free. This account can be used to pay for insurance premiums, medical or dependent care expenses.

HSAs also can be set up without a Section 125 plan as long as the employer keeps the contributions “comparable” for all employees. This means that contributions should be the same dollar amount or the same percentage of the employee’s deductible within the self-only category or family category. However, in order for HSA contributions to be made on a pre-tax salary reduction basis, the employer would have to set up a Section 125 Plan.

Keep in mind that there are limits to how much an employer can contribute. If an HSA is funded by an employee or by contributions from both the employer and the employee, total contributions must remain within the annual IRS limits. For 2016, the limit for self-only HDHP coverage is $3,350 per employee and for family HDHP coverage the limit is $6,750.

Employers can contribute the money at the beginning of the plan year or periodically throughout the year.

Contents In This Update

A New Way to Offer Employer-Sponsored Healthcare

HDHPs and HSAs: Pros and Cons

Supreme Court Decision Makes Enforcing Liens More Difficult

Updated FMLA Forms Limit Collection of Genetic Information

This Just In: April 2016 Quarterly Benefits Report

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