In this post, we talk about a few unknown or underutilized gems when using a healthcare savings account (HSA) with a high deductible health plan. This unique combo is often the go-to plan for employers because of the cost — it typically has a lower premium. However, teaming an HSA with a high deductible plan can work as an effective one-two punch, benefiting employers and employees alike.
What Is a High Deductible Plan?
Before diving into the nitty-gritty, let’s cover the essentials first. What is a high deductible plan in the first place?
As the name indicates, this specific health plan has a higher deductible than a traditional health insurance plan. Although the monthly premium is typically lower than in other plans, you usually pay more out-of-pocket healthcare costs upfront before the plan kicks in. It’s highly attractive to relatively healthy individuals who rarely go to the doctor.
The most vital aspect to remember about high deductible plans is that they must meet specific criteria established by the Internal Revenue Service (IRS). A healthcare plan can’t be dubbed a high deductible plan merely because it has a higher-than-usual deductible.
According to Healthcare.gov for 2020, the stipulations for high deductible health plans include:
- Any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.
- The total yearly out-of-pocket expenses can’t exceed $6,900 for an individual or $13,800 for a family.
Additionally, all services must go through the deductible. In other words, it serves as a filter for coverage, allowing no services to be charged without running them by your deductible first. Also, there is no first-dollar coverage, except what is demanded by the Affordable Care Act (ACA). Everything must go toward the deductible.
As with most plans or programs monitored by the IRS, the criteria are very particular and highly regimented. Plus, the IRS re-defines these plans each year, so requirements change frequently. This IRS-hands-on approach might sound intimidating at first, but here’s the best part. If the plan meets the criteria, the IRS will allow you to set up a bank account called a health savings account (HSA) — and this is where the rubber meets the road.
What Is an HSA?
A health savings account is a personal bank account where employee payroll directly contributes to the funds. An employee decides how much to contribute to their HSA per pay period, and that amount is deducted right from their pre-taxed paycheck to the health savings account.
HSA Bank
Keep in mind that an HSA isn’t a traditional savings or checking account. Instead, it’s specifically a health savings account — because of the IRS criteria. However, an employer can’t start the account; only the employee can do that.
Plus, even for individuals who don’t have a bank, technology makes it effortless to find a bank. What’s more, niche banks, such as Lively, are popping up throughout the country. Lively, for instance, sores above the industry average of 79%, by reporting 98% accounts funded. These niche banks help to educate employees so that they can maximize the usage of their benefits.
Fund Usage
These funds are designated for eligible medical expenses, such as deductibles, copays, and coinsurance. Plus, many people use the money to pay for other qualified medical costs that the plan doesn’t cover. However, an HSA balance can’t be used toward the plan’s premium.
Although the government sets a maximum yearly cap that can change each year, the HSA growth is tax-free. A recent trend is for employees to treat their HSA like a 401(k), which encourages more employee engagement. Sometimes, an employer will participate in a defined contribution, where the employer contributes the same dollar amount toward the plan. And still, the HSA growth is tax-free.
Contribution Tool
Aside from qualified medical expenses and retirement plans, let’s break the contribution aspect down more. Two types of contributions occur when it comes to an HSA, which include:
- Contribution to the paycheck
- Contribution to the bank account
When we look at it from this angle, an HSA becomes more of a tool that employees can use to get the most out of their health insurance plan. Instead of only seeing the cost, individuals have the clarity to see how much an HSA with a high deductible plan can benefit them. Strangely enough, only a small percentage of people actually set up an HSA, let alone use it to their advantage.
How Does an HSA With a High Deductible Plan Help Employees?
Often, individuals take one look at a high deductible health plan and write it off from fear of the high deductible. Others assume that their employer is trying to get the edge on them. At second glance, however, this option is beneficial for many people (and families).
High Deductible Plan vs. Traditional Plans
The challenging part of choosing the best health insurance plan is in seeing beyond the initial deductible. After all, most individuals only use their health insurance when a significant medical event occurs, such as an extended stay in the hospital. And yet, the savings benefits are astounding.
Savings Benefits
For starters, the saving out an employee’s paycheck is so significant that they can typically fund their own HSA instead of paying the carrier. For example, according to the IRS for 2020, individual employees can contribute a maximum of $3,550 for themselves and $7,100 for families.
These numbers will update to $3,600 for self-only and $7,200 for families in 2021. The annual “catch-up” contribution amount for 55+ will stay at $1,000.
Tax Benefits
An HSA has three defined tax advantages for employees, which include:
- HSA contributions are pre-tax (if through an employer) or tax-deductible (if an employee opens their own).
- HSA growth is free of tax.
- HSA withdrawals for eligible expenses are tax-free.
Other Benefits
With their HSA card (much like a debit or credit card), employees can use HSA money for a slew of tax-benefit items. Most people are pleasantly surprised at how many things are HSA eligible. The following is a shortlist of the most popular uses for HSA money:
- Over-the-counter (OTC) medicine, such as aspirin, acne treatment, or sinus products
- Bandages
- Blood pressure monitor
- CBD oil and products
- Breast pumps and accessories
- Chiropractic care
- Dental treatment
- Vision care
- Birth control
- Mental health counseling
- Lasik
- Flu shots
As you might have imagined, this list isn’t extensive, and plenty more things qualify. To get an idea of how to use HSA money to its max, visit HSAstore.com.
How Does It Help Employers?
Healthcare costs have been on a steady rise for several decades. It’s no surprise that businesses all over the country feel the pinch from these costs. As a result, most companies now offer high deductible health plans as a budget-friendly option to their employees.
However, employers benefit from these plans, as well. For starters, a higher deductible typically means lower premiums for small businesses and mid-markets that are looking for ways to save money. Premiums for high deductible plans are usually on the lower end of the spectrum, making this option incredibly attractive (and beneficial!).
Additionally, high deductible health plans usually cover a broad group, from single employees to families to near-retirement folks. In a nutshell, the cost is spread across the entire group instead of only a particular subgroup taking on most of the financial burden.
Most high deductible plans offer preventative care, vaccines, and generic prescriptions at little to no cost. This approach serves the vast spread of employees very well — which turns out to be a bonus for employers, too. All (not most) HDHP cover preventative at 100% no cost share to the member.
Are There Other Uses and Applications for an HSA?
As mentioned, using an HSA like a 401(k) has become increasingly popular, mainly when an employer participates in defined contribution. Plus, we’ve heard it hundreds of times to max out our 401(k) or similar defined contribution plan. This strategy isn’t old advice; however, HSAs are frequently the preferred method to tackle retirement planning nowadays. And for many good reasons, too.
Unlike a flexible spending account (FSA), money from an HSA rolls over into the next year. There’s no time limit in which to use the funds, and the money stays put. That said, an employee can continue to contribute to an HSA until they become eligible for Medicare.
Plus, you can invest this money into the market, such as mutual funds, stocks, and other investment options. Although investing in this manner involves minimal risk, it’s no surprise that risk-tolerance plays a role nonetheless.
Lastly, the triple tax advantages of HSAs often make them more attractive than traditional retirement plans. It’s clear why using an HSA like a 401(k) is a growing trend.
What Are the Other Benefits in Choosing This Type of Plan?
Employees are typically asked to choose between four different healthcare plans: Bronze (HSA-compatible), Silver, Gold, and Platinum. With the help of an advisor and Human Resources (HR) representatives, employees can make a more educated decision.
However, it’s not always effortless. Sorting through the details of each healthcare plan can seem like a daunting task. The healthy population typically goes for Bronze plans, while others choose different plans based on their needs.
Still, the most substantial benefit is the culmination of advantages a high deductible plan can offer when teamed with an HSA. Aside from a low premium, there are multiple tax advantages, retirement and investment options, and plenty of available savings benefits. It all comes down to how the plan’s criteria fit the consumer’s lifestyle the best.
Here at LG Risk Management, we strive to serve our clients according to their specific needs. After all, choosing the best-suited employee benefits plan can seem like a complicated process — but it doesn’t have to be. With decades of experience, our specialists can help you become an educated and informed consumer of healthcare, empowering you to make decisions that will benefit your journey. Please visit our Group Benefits page, and reach out to us via the contact form; we’ll guide you through the task of finding the right plan for you.
Sources:
https://www.healthcare.gov/glossary/high-deductible-health-plan/
https://www.irs.gov/publications/p969#en_US_2019_publink1000204030