As healthcare costs rapidly started to rise in the 2000s, insurance companies started to push high deductible health plans, which came with lower monthly premiums, but higher than average deductibles. That trend has continued to the present day, where HDHPs (high deductible health plans) are as popular as ever among employers.
According to the Kaiser Family Foundation, employers offering HDHPs with some kind of savings option has increased 25 percent over the past decade. In fact, 29 percent of workers covered by employer-sponsored health plans are now enrolled in a high deductible health plan.
One of the major perks of being enrolled in an HDHP is the ability for employees to open and contribute to an HSA (health savings account) — but what many employers (and employees) don’t realize is that not all health plans with high deductibles are eligible for this benefit. So how do you know if your high deductible health plan is HSA qualified?
What is an HSA?
An HSA is a tax-advantaged savings account designated for qualifying health expenditures. This means that funds which employees, employers (or both) contribute to an HSA are not subject to tax, thereby lowering the participant's taxable income for the year. While participants can contribute any amount they like, the government caps tax-advantaged funds at $3,450 for individuals and $6,900 for families.
For people who have experience with FSAs (flexible spending accounts), the concept is very similar. FSAs, designed to offset health and dependent care expenses, are sometimes made available through employer-sponsored benefit programs. The main difference is that funds contributed to an FSA “expire” at the end of year in what’s called the “use it or lose it” rule. Net, if FSA participants don’t use their entire contribution, they forfeit whatever is left over.
While FSAs can be made available, at an employer’s discretion, with or without participation in a healthcare plan, HSAs are only available when paired with a high deductible health plan. The best thing about HSAs are that they are real savings accounts. Contributed funds never “expire” and participants get to keep the account forever, even if they aren’t enrolled in an HDHP any longer and even if they leave their current employer. Eventually, unspent funds can be converted into a retirement account, though they lose some of their tax advantaged status if they aren’t used on qualified healthcare expenses. That said, regulations on qualifying expenditures loosen dramatically at age 65, allowing participants to use the money in their HSA for almost anything.
How are HSAs Established?
By far, the most popular option for employers is to integrate the HSA with the medical plan, making it completely turnkey. In this instance, the carrier and your employee benefits broker will handle all the details. Another option, albeit far less popular, is to push this responsibility onto your employees, whereby they must set up their own HSA through their bank. If your strategic benefits plan and/or budget is predicated on a certain percentage of your workforce adopting an HDHP, it behooves you to make an HSA set-up as frictionless as possible.
How Do You Know if Your High Deductible Health Plan(s) are HSA Qualified?
Many employers don’t realize that just having a plan with a high deductible isn’t, by itself, sufficient to make it an HDHP (which, by its very nature, is then HSA qualified/eligible). There are three important criteria the health plan must meet; the minimum deductible, the maximum out of pocket expense, and the exclusion of any benefit coverage (beyond preventative care) before meeting the annual deductible.
Out of Pocket Maximum: HDHPs in 2018 must have an out of pocket maximum of $6,650 for singles, and $13,300 for families. (This figure is adjusted for inflation every year by the IRS.)
Minimum Deductible: HDHPs in 2018 must have a deductible of no less than $1,350 for singles, and $2,700 for families. (This figure is adjusted for inflation every year by the IRS.)
Benefit Exclusions Before Meeting Annual Deductible: HDHPs must not offer any benefit beyond preventive care before meeting the annual deductible. Here are some examples of how this rule is frequently is violated:
- Prescription Drugs - If the participant can get non-preventive prescription drugs covered by paying only a co-pay, without having to meet the annual deductible first, the high deductible health plan is disqualified from being HSA-eligible.
- Office Visits - If the plan offers a limited number of office visits with only a co-pay before meeting the annual deductible, the plan doesn’t qualify as an HDHP. (Again, preventative care such as a physical check-ups or immunizations wouldn’t be a violation.)
- Emergency - If a plan covers emergency with a co-pay, before meeting the deductible, the plan is again not HSA-eligible.
How Do You Let Your Employees Know that Your HDHPs are HSA Eligible?
As an employer, you can make this clear to your employees through your benefits enrollment literature and enrollment process. Since HDHPs, on their own, sometimes look less attractive (e.g. more costly) than non-HDHP plans, you should make a concerted effort to communicate how an HSA is specifically designed to work in conjunction with an HDHP to bring down total costs. To be clear, there are pros and cons with HDHP with HSA health plans, so it’s important to spend some time educating your workforce on these options through presentations, case studies, educational videos and even 1:1 counseling. (Once again, this is especially important if your strategic plan and/or budget is predicated on a certain percentage of your workforce adopting an HDHP.)
What’s particularly tricky about an HDHP is that a participant must first “take the first hits” beyond non-preventive care. If the enrollee is healthy and doesn’t consume much health care, it almost feels to them like they have no insurance. Every time they go to the doctor or get a prescription, they wind-up paying 100% out of pocket. Sure, they get the benefit of in-network negotiated billing rates, but that’s about it. (On the flipside, they also enjoy less of a deduction out of their paycheck to pay the monthly premium, but that often gets overlooked.)
People considering an HDHP simply need to remember that insurance is really designed for unpredictable things that cost a lot but don’t happen often. As Harry Sit of The Finance Buff likes to say, “You don’t use auto insurance when you get an oil change or when you have your brakes replaced. You don’t use homeowner’s insurance when you replace a worn-out garage door. You just have to get used to your health insurance working the same way.”
Further HSA and High Deductible Health Plan Questions
If you have further questions regarding HSAs and HDHPs, be sure to contact your employee benefits consultant. There are certainly pros and cons to these types of plans and it’s important that you understand them before enrolling your company in one. Health insurance is confusing for many people, so remember that there’s no such thing as a stupid question. Your broker should be accustomed to answering all kinds of questions, so don’t be afraid to speak up.
Is your high deductible health plan HSA qualified? We’d love to hear what you think of it! Leave us a comment below or contact us.
Editor's Note: This post was originally published March 31, 2017, but was updated to reflect 2018 HDHP and HSA limits set by the IRS.
About the JP Griffin Group
The JP Griffin Group is a national employee benefit consulting firm specializing in the design, implementation and management of complex multi-site, multi-state employee benefit programs. We deliver tailored employee benefit solutions through fact-based strategic planning, insightful and actionable analytics and leading-edge technology applications. These solutions improve patient outcomes, drive efficiencies, and deliver both immediate and sustained profitability protection and maximization of shareholder value for our clients.
Our full range of turnkey services focuses on plan design, benefit cost management, benefit automation, wellness, and employee communication and education, all supported through a world-class account management organization.
We consult for discerning companies coast-to-coast, ranging in size from 10 to more than 30,000 employees. In addition to servicing the Phoenix area through our Scottsdale, Arizona headquarters, we have bicoastal offices in Seattle, WA and Washington, DC.