This is page ten of a Health Savings Account Handbook guide. Start with page one to understand all of the ins and outs of Health Savings Accounts (HSAs).
This final page is really for employers, but feel free to read of if you are curious.
Contents
- Benefits of offering HSA-qualified health plans
- Approaches to putting plans into action
- HSA rules and regulations
- Summary
Overview
HSA-qualified health plans usually cost less for employers because the overall coverage cost is lower. This means they spend less on premiums, and over time, this saving can increase because these plans often have smaller hikes in insurance rates each year.
The growing number of Health Savings Accounts (HSAs) and the increasing amount of money being put into them show that more employers are choosing HSA-qualified plans.
This move helps them save money and meet the requirements of the Patient Protection and Affordable Care Act (PPACA). As reported by Devenir Research, by January 2022, the total amount of money in HSAs reached over $100 billion across 33.4 million accounts.
By carefully planning how they introduce these plans, employers can build up savings. However, while saving money, employers also have to handle some extra work, like setting up the plan and keeping it running in a way that maintains its tax-advantaged status.
Benefits of offering HSA-qualified health plans
Fighting against increasing expenses
The massive spike in health spending, from $74.1 billion in 1970 to $4.1 trillion in 2020 as reported by the Centers for Medicare and Medicaid Services (CMS), is due to several factors:
- New medical technologies and treatments have improved, extending life expectancy.
- There’s an increase in the number of people living with long-term health conditions.
- Often, patients don’t look for more affordable options, like choosing generic drugs over brand names.
- There’s a tendency to overuse healthcare services, like going to emergency rooms for minor health issues.
- Healthcare companies include their administrative costs in the prices that consumers pay.
- Government policies have expanded the range of healthcare services that need to be covered.
Employers can’t change all these factors, but they can make a difference in some areas. They can influence how employees use healthcare services, offer programs to help prevent chronic illnesses, and work to reduce the average cost of healthcare claims.
Encouraging the use of Health Savings Accounts (HSAs) is one way employers might help slow down the growth of insurance costs by promoting healthier choices among employees.
Increasing awareness
In our healthcare system, there’s often a disconnect between getting medical services and paying for them. Usually, a third party like an insurance company, employer, or plan manager handles and pays the bills.
This setup means that patients might not know the real cost of medical services and products. They usually just see their copay amount, not the total bill for things like doctor visits or lab tests, and might think the copay is all there is to it.
Similarly, employees often only see what they contribute to their health insurance, not the full premium. The true value of their employer’s health plan might not hit them until they have to consider continuing coverage after leaving their job, often through a COBRA notice that shows how much it really costs.
As healthcare gets more expensive, these costs sneakily get passed back to consumers through higher insurance premiums. But since this process is indirect, it’s hard for people to see the link between rising healthcare costs and their insurance bills.
Understanding the true cost of healthcare is key for consumers to shop around and make informed choices.
Increasing consumer choice
An HSA-qualified health plan can motivate people to be more mindful about healthcare costs by offering incentives for comparing prices and seeking better value. When you have an HSA, you save money on taxes and can keep the savings you get by making smart choices about your healthcare.
This gives you a stronger reason to be proactive about managing healthcare expenses.
In theory, if HSA owners are more careful about how they use healthcare services, it could lead to lower average costs for insurance claims. This, in turn, could reduce the cost of health insurance premiums for everyone.
Employers can take the money they save from using HSA strategies and put it towards extra benefits for their workers, like programs that promote good health and wellness.
Approaches to putting plans into action
When more employees go for an HSA-qualified health plan, employers start seeing advantages. This shift can even give employers more clout to negotiate lower rates with their insurance providers.
Plus, when employers put money into their employees’ HSAs or encourage their employees to contribute, they end up paying less in payroll taxes. This can lead to savings for the company, which is another perk of offering HSA-qualified plans.
Migrating gradually vs. full replacement
Some employers decide to go all-in with HSA-qualified health plans, making it the only healthcare option for their employees. This “full-replacement” strategy leads to a big jump in HSA ownership and the savings that come with it.
However, some employers worry about negative reactions from employees or losing their edge in attracting top talent. These employers might take a slower approach, offering a variety of health plans that include HSA options. They might aim to gradually phase out traditional plans in favor of HSA-qualified plans over three to five years.
Employers leaning towards the full-replacement strategy are usually motivated by a few key factors:
- Rising Premiums: Escalating costs force employers to cut back on benefits. Traditional plans with low premiums and low out-of-pocket costs become too expensive.
- Boosting Adoption Rates: Tools that project costs can support the case for quickly moving to HSA plans.
- Enhancing Additional Benefits: With everyone on an HSA plan, more employees might use cost-effective services like wellness programs, telemedicine, and tools that make healthcare costs clearer.
- Cutting Costs: A higher number of employees using HSAs can help reduce the overall healthcare expenses for employers.
Projecting savings
Imagine a made-up company thinking about a new kind of health plan that encourages people to manage their own healthcare spending, aiming to get as many workers as possible to use Health Savings Accounts (HSAs).
The company really wants to help its employees save money for medical costs they might have when they retire. They think this plan will help both the company and the employees save money.
To figure out how much money this could save, the company needs to look at a few things: how much the health plan costs, how much people actually use their health benefits, the money saved from taxes, and how many employees decide to join the plan.
Cost of coverage
Health plans that work with Health Savings Accounts (HSAs) were the cheapest option in 2021, costing about $11,991 for each employee on average. Plus, the prices for these plans don’t go up as much each year compared to regular health plans.
Utilization
When people are part of a health plan that lets them use Health Savings Accounts (HSAs), they often act more like shoppers when it comes to their healthcare. They look around and compare prices for medical stuff and services, go to the doctor less, and spend less money each time they go compared to similar healthcare. This careful way of using healthcare can end up lowering the total amount of money spent on healthcare.
Tax savings
When companies and their workers put money into Health Savings Accounts (HSAs), they can save on taxes, which helps everyone save money overall.
- Companies save on the taxes they have to pay on salaries (payroll taxes) when they put money into their workers’ HSAs and also when they encourage their workers to put their own money in.
- Workers save on their income taxes and also on the taxes that go towards Social Security and Medicare (FICA taxes) when they contribute to their HSAs.
Rate of adoption
The amount of money a company saves can also depend on how fast its employees start using the Health Savings Account (HSA)-qualified health plan option.
When more employees switch to this plan quickly, it helps keep costs more predictable and can lead to bigger overall savings. This happens because it cuts down on spending and helps keep the yearly increases in costs lower.
If you want more people at your workplace to start using Health Savings Accounts (HSAs), think about these points:
- If you offer lots of different health plans and introduce HSAs slowly, many employees might stick with the usual plans unless you give them a good reason to switch to an HSA-qualified plan.
- Employees who expect to have a lot of medical costs often pick the plan with the most coverage, not realizing that all plans have a maximum limit on how much you have to pay out of your own pocket. This means they might end up paying more for their plan (and the company pays more too) even though they get the same protection from big bills. Show your employees the full picture to help them make smarter choices.
Basically, employees can either:
- Pay more every month for their health plan.
- Choose a plan with lower monthly payments, save the extra money for future medical bills, and get the perks of tax benefits and earning interest on their savings.
The quicker everyone at the company moves to HSAs, the faster the company and its employees will start seeing the financial benefits.
Decreasing the feeling of uncertainty or danger
HealthEquity, a big player in managing Health Savings Accounts (HSAs), found out from their clients that when employees are deciding whether to go for an HSA-qualified health plan, three big concerns come up:
- Worry About Not Having Enough Money: Some folks are nervous they might face big healthcare bills before they’ve saved enough in their HSA to cover their plan’s deductible.
- Age Matters: There’s a common belief that HSA-qualified health plans are best suited for younger people who are generally healthier.
- Doubts About the Financial Benefit: People often doubt whether they can save up enough in their HSA to make a real difference financially.
A lot of employees are worried about having to pay a lot out-of-pocket for their healthcare. This fear, along with the comfort of sticking to traditional health plans with low deductibles, might make people hesitant to switch to HSA-qualified plans, which could slow down the savings potential for everyone involved.
Increasing HSA adoption
In earlier sections, we talked about how HSA-qualified health plans can be good for both employees and employers, but we also mentioned some reasons why people might hesitate to sign up.
If a company decides to go all-in with an HSA-qualified health plan and offers it as the only option, it can help boost adoption.
But just offering the plan isn’t enough. Companies need to communicate well with their employees and maybe even offer some financial perks to build trust and make the plan more appealing.
This part will give you some tips on how to get more people to sign up for HSAs. At the end, there’s a chart that sums up how different strategies can impact the adoption rates.
Reduce the number of plan options
Clients of HealthEquity who provide three or more plan choices notice that their employees tend to stick with the same plans they initially choose. However, the adoption of HSAs in these cases usually stays low, at 5% or less.
Conversely, employers who opt for the full-replacement approach by offering only HSA-qualified health plans tend to see higher adoption rates.
This strategy also fosters more communication among employees, as they discuss their healthcare options and share knowledge, ultimately making them more informed healthcare consumers.
Raise the differences in premiums paid by employees
When the premium for the HSA-qualified health plan is at least 40% lower than other plan options, there is a notable increase in HSA adoption rates.
Reduce deductible levels
Maintaining a lower deductible helps to alleviate concerns about the perceived risks of HSA-qualified health plans
HealthEquity has found that many clients with high adoption rates (greater than 30%) set the deductible for HSA-qualified health plans at less than $2,000 for individual coverage and less than $4,000 for family coverage.
Reduce out-of-pocket maximums
Employers should aim to provide the lowest feasible out-of-pocket maximum. When the out-of-pocket maximum for the HSA-qualified health plan is aligned with that of other plans, employees perceive less risk.
This alignment, coupled with increased employer contributions, enhances adoption rates, even in scenarios where companies offer multiple plans during open enrollment.
Increase HSA employer contributions
Providing a substantial employer contribution to employees’ HSAs serves as a powerful incentive for them to opt for an HSA-qualified plan. This gesture enhances the wealth-building potential associated with such plans, thereby diminishing the perceived risk among employees.
Make an HSA-qualified health plan the default option
Simplify the process for employees to select the HSA-qualified health plan by offering user-friendly enrollment tools.
During open enrollment, consider making the HSA-qualified health plan the default choice if there are multiple options available. This streamlines the decision-making process for employees and encourages higher adoption rates.
Consider multiple HSA-qualified health plans
Offer multiple HSA-qualified health plans with varying deductibles and out-of-pocket limits. For instance, one plan could have deductibles of $3,000 for self-only coverage and $6,000 for family coverage, with out-of-pocket limits set at $4,000 and $8,000 respectively.
Another plan might feature deductibles of $2,000 for self-only and $4,000 for family, along with out-of-pocket limits of $3,500 and $7,000 respectively.
Providing these options allows employees to choose the plan that best fits their individual healthcare needs and financial situation.
Get executive management involved
HealthEquity has observed that successful client groups actively involve company executives in their communication campaigns.
These campaigns should start early, several months before open enrollment, and should include messages from executives about their own enrollment in HSA-qualified health plans. Executives have a unique ability to enhance trust and build enthusiasm for HSA programs.
Furthermore, it’s beneficial to involve a wide range of employees to discuss their own experiences with HSA-qualified plans and the benefits of HSAs.
Hearing from fellow employees who have firsthand experience can be very convincing for others who may be considering enrollment.
Educate and communicate
A successful transition to HSA-qualified health plans requires a well-organized effort to educate employees, ensuring they understand the benefits and financial implications of HSAs.
Some employees may view HSA-qualified plans as a reduction in benefits if they don’t fully grasp the tax savings and premium decreases compared to higher deductible plans.
To convey the true value of HSAs, employers must help employees understand how these plans work, assist them in making financial decisions, and teach them how to manage contributions and payments.
Moreover, employees need guidance on various aspects, such as determining appropriate contribution levels, maintaining records, accessing support channels for questions, checking HSA balances, navigating healthcare networks, and finding reliable healthcare information.
Employers can leverage tools provided by HSA administrators and health plans to facilitate this education process.
Employers who empower their employees with information and resources to make informed healthcare decisions, particularly regarding effective use of the healthcare system, will ultimately benefit their workforce.
It’s essential for employers and HSA providers to engage in ongoing employee education and communication efforts throughout the year, not just before open enrollment.
| Low adoption rate | Medium | High | |
|---|---|---|---|
| Number of healthcare plan options available | ≥3 | 2 | 1 (only HSA-qualified health plan) |
| Employee premium differential vs. traditional plan | ≤15% | 16%–39% | ≥40% |
| Deductible level | >$2K/$4K single/ family | Up to $2K/$4K | Federally mandated minimum |
| Out-of-pocket max, compared to traditional plans | >51% higher | 0–50% higher | Equal to |
| HSA employer contribution (as percentage of deductible) | ≤25% | 26%–59% | ≥60% |
| Active vs. passive enrollment | Passive Non-HSA-qualified health plan default | N/A | Active, HSA-qualified health plan offered as default option |
| Executive involvement | None | Endorse HSA-qualified health plans | Executives choose HSA-qualified health plans |
| Communication strategy | Limited or none | Moderate 0–2 months |
Active ≥6 months |
HSA rules and regulations
To ensure employees retain tax benefits and employers avoid penalties, it’s crucial for companies to follow IRS guidelines regarding HSAs.
One important requirement is that employer contributions to employees’ HSAs must pass a nondiscrimination test.
Additionally, in certain cases, contributions must adhere to a comparability test. These tests help ensure fairness and compliance with tax regulations governing HSAs.
Nondiscrimination
Nondiscrimination rules prevent companies from favoring highly compensated employees (HCEs) and key employees over lower-paid employees when providing benefits like health benefits, 401(k)s, and FSAs. These rules ensure fairness and equality among all employees.
Nondiscrimination testing involves three main areas:
- Eligibility: The plan must cover a sufficient percentage of non-HCEs.
- Contributions: HCEs cannot receive significantly more contributions than non-HCEs.
- Benefits: HCEs should not have access to more plan features than non-HCEs.
Comparability
Employers have different options for contributing to employees’ HSAs, each with its own set of rules. One effective way is through a Section 125 cafeteria plan, which doesn’t require comparability testing. However, if employers opt to directly contribute to employees’ HSAs, they must adhere to comparability rules.
Comparability rules mandate that employers provide the same dollar amount or percentage of the annual deductible to all HSA owners with the same employment status and coverage category. Failure to comply could lead to a hefty excise tax on contributions (35%).
Employers must ensure comparable contributions within each category, which typically include part-time and full-time employees with self-only or family coverage.
For instance, one company may contribute $500 to each full-time self-only employee’s HSA and $750 to those with family coverage. Another company might provide contributions equal to 75% of the deductible for all part-time employees.
It’s crucial to maintain separate HSAs and contributions for married couples working for the same employer to avoid violating comparability rules.
If one spouse receives contributions for both themselves and their partner, it could result in unequal treatment compared to other employees.
Non-HCE exception
An exception to the comparability rule allows employers to contribute more to the HSAs of non-highly compensated employees (non-HCEs).
The IRS defines HCEs using the same criteria as for other retirement accounts, where individuals earning less than $135,000 in 2022 fall under the category of non-HCEs.
Exception for cafeteria plan HSAs
Cafeteria plan HSAs offer more flexibility as they are not subject to comparability rules. Employers can match employee contributions or mandate an employee contribution to their HSA before making their own contributions.
However, if employer contributions do not meet comparability requirements, they are subject to a 35% excise tax.
Notice to employees
The notice requirement specifically applies to cafeteria-plan HSAs. Through this plan, employers can require employees to contribute to their HSA before the employer contributes. For instance, an employer might offer a $500 contribution to employees’ accounts on the condition that they also contribute.
Under the notice requirement, employers must inform employees that each eligible employee who sets up an HSA by the end of February and notifies their employer will receive a comparable contribution for the previous year.
Employers fulfill this requirement by providing written notice to all affected employees by January 15. Additionally, they must contribute comparable amounts, plus reasonable interest, to employees’ HSAs for the previous year by April 15 or an IRS-specified deadline.
Below is a summary of these guidelines:
| HSA as part of a cafeteria plan | HSA outside of a cafeteria plan | |
|---|---|---|
|
Employee contributions |
Pre-tax contributions (saves money on payroll taxes). May be required to contribute to receive employer funds. | Post-tax contributions are deducted (above-the-line) from income on federal tax return. May receive employer funds without contributing. |
| Employer contributions | Pre-tax contributions through employer-sponsored plan | Contributions allowed as tax-free employer-provided benefit |
| Rules | Nondiscrimination rule applies | Both nondiscrimination and comparability rules apply |
| Matching contributions | Permitted. Notice to employees required | Not permitted, hence no “notice to employee” requirement |
Required reporting
HSA owners are required to receive regular statements detailing various aspects of their accounts.
These statements should include information such as the current HSA balance, any interest earned, returns on investments, applicable fees (like maintenance fees or check replacement fees), and a breakdown of expenses paid from the HSA.
Federal oversight
Two main government agencies oversee federal regulation of private employer benefit plans: the US Department of Labor (DOL) and the Internal Revenue Service (IRS).
The Employee Retirement Income Security Act (ERISA), enforced by both the IRS and the DOL, established legal guidelines for the administration and investment practices of private employer benefit plans.
ERISA generally takes precedence over state laws that apply to private-sector employee benefit plans. This means that state laws do not typically apply to employee benefit plans, even if those state laws set higher standards of benefits than what the plan offers.
The Department of Labor (DOL) oversees participants’ benefit rights under ERISA, while the IRS ensures that employers comply with tax codes related to sponsoring benefit plans and deducting associated costs.
However, the DOL does not consider Health Savings Accounts (HSAs) to be an employee benefit plan subject to ERISA regulations. Instead, HSAs are viewed as personal healthcare savings vehicles, meaning that state laws (rather than group insurance regulations) apply to them.
This exemption from ERISA for HSAs is maintained as long as the employer adheres to certain requirements:
- Employees must be allowed to transfer their funds to another HSA, following IRS restrictions.
- Employers cannot impose additional conditions on how HSA funds are used beyond IRS regulations.
- Employers cannot make or influence investment decisions regarding HSA funds.
- Employers cannot represent the HSA as an employee welfare benefit plan established or maintained by the employer.
- Employers cannot receive any payment or compensation related to the HSA.
Failure to meet any of these requirements could subject the HSA to ERISA oversight; otherwise, state law governs its regulation.
Implications
Because Health Savings Accounts (HSAs) are generally not subject to the rules of the Employee Retirement Income Security Act (ERISA), they lack certain protections in the event of personal bankruptcy. Unlike most retirement savings plans, which are shielded from creditors, HSAs do not have the same level of protection.
For example, funds accumulated in an employer-sponsored pension plan or 401(k) are typically protected from seizure by creditors if the account holder declares personal bankruptcy. However, HSAs do not enjoy the same level of protection.
Additionally, state laws regarding unclaimed property, also known as escheat laws, apply to non-ERISA HSAs. If an HSA account remains inactive for a certain period of time, the trustee or custodian of the account must transfer the funds to the state’s treasury. The state will then hold these funds until the account owner claims them back.
To avoid this, it’s important to keep your HSA account active by checking the balance periodically and making transactions when necessary. It’s advisable to consult with your HSA custodian or trustee for information on state-specific regulations regarding dormant accounts.
Summary
Here’s a summarized version for easier understanding:
- Employers save on taxes and overall healthcare costs when employees have HSA-qualified health plans and Health Savings Accounts (HSAs).
- Efficiency increases when only HSA-qualified health plans are offered, leading to more savings for both employees and employers.
- Nondiscrimination testing ensures fairness in benefit distribution among employees, preventing highly compensated employees from receiving disproportionate benefits.
- Comparability rules mandate equivalent employer contributions for similar employees with non-cafeteria plan HSAs.
- The Employee Retirement Income Security Act (ERISA) and the Department of Labor (DOL) oversee employee health benefits, with state law governing HSAs as personal healthcare savings tools.
- ERISA protects employee benefit rights, while the DOL enforces these rights and the IRS ensures compliance with tax regulations.
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