Don’t Let ‘High Deductible’ Cloud the Appeal of the HDHP/HSA Combination

3533
doctor talking to her male senior patient at office

Photo credit: Depositphotos

By Kendra Smith

The annual benefits enrollment period is over at most companies, but that doesn’t mean benefits education stops, especially when it comes to high-deductible health plans and their accompanying health savings accounts. Capturing employee attention requires shining a year-round light on a health plan that can be misunderstood and underused.

*   *   *

“High deductible” isn’t generally considered a selling point – and that likely applies to high-deductible health plans (HDHPs), too.  But in fact, for many workers, an HDHP can make a lot of sense – particularly when paired with a health savings account (HSA) option that covers many otherwise uncovered medical expenses.

HDHPs aren’t for everyone. But benefits administrators should make sure the right potential employees understand how the HDHP/HSA combination can support their cost-effective access to needed medical care, and even help enhance their future financial security. It’s a helpful communications exercise to conduct throughout the plan year, so that employees are well familiar with the option – and perhaps even have decided whether to participate – by the time open enrollment season arrives.  

Understanding the value of covered preventive care 

An HDHP is simply a healthcare plan with a higher deductible – but typically a lower monthly premium – than a first-dollar coverage health insurance plan, with participants covering relatively more healthcare costs themselves before the insurance coverage takes over. For 2022, the IRS defines an HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family; and an HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family (the limit doesn’t apply to out-of-network services).

It’s also important to educate employees about the healthcare expenses covered. An HDHP covers preventive healthcare at 100%, including an annual physical, well-child visits, vaccinations, tests for diabetes, cholesterol and blood pressure, and cancer screenings such as a colonoscopy or mammography. Providing this education can empower employees to have better control over managing their healthcare as opposed to needlessly overpaying for their health insurance.  

Naturally, a lower monthly premium can make an HDHP particularly appealing to relatively healthy employees, who might reasonably expect that their healthcare needs will be modest during the benefit period. But such employees, of course, are on the hook for more of their own healthcare expenses if the unexpected happens, such as a visit to the emergency room.

Easing Uncertainty

Enter the health saving account (HSA). A feature that can be offered only in combination with an HDHP, HSAs are designed precisely to ease some of the uncertainty that might accompany participation in a high-deductible health plan.

A tax-advantaged HSA provides for coverage of out-of-pocket costs for qualified medical expenses (QMEs), regardless of the account holder’s income. HSAs are owned by the individual and are portable, and contributions can be made by anyone on behalf of an eligible individual – including the HSA member, employers, or relatives.  When made through a Section 125 “cafeteria” plan, those contributions are pre-tax (including pre-FICA); earnings on the HSA balance grow tax-free, and, assuming the HSA balance is withdrawn to cover IRS-qualified medical expenses, the withdrawals also are tax-free.

Because of the triple tax advantages, there are contribution limits that apply to an HSA. For 2022, employees under individual health coverage, the limit is $3,650 and employees under family coverage, the limit is $7,300. If the employee is age 55 or over, they are eligible to make an additional $1,000 catch-up contribution.  

As part of the communications throughout the year, make sure your employees understand there is no “use it or lose it” provision associated with an HSA. Unlike flexible spending accounts (FSAs), the full HSA balance can be carried over from year to year, enabling employees to grow their balance over time, even into retirement – making those funds available to pay for healthcare costs in retirement. (It should be noted that, due to special pandemic provisions, employees may be able to carry over all their FSA unused funds from 2021 into 2022, if their workplace opted into the changes.) 

To help boost that longer-term growth potential, most HSA administrators will allow HSA members to allocate contributions to mutual funds or a brokerage account once their balance hits a certain threshold (e.g., $1,000). 

Getting Over the Hurdles

HDHPs combined with an HSA have a lot going for them.  But it’s common to hear concerns and questions, among them:    

  • “A high deductible is scary”:  It’s true that a high deductible means a larger cash outlay for employees with unanticipated expenses, but that’s exactly the kind of contingency that HSAs are meant to address. Dollars saved on the lower premium can be allocated instead to the HSA, and a participant who tries to faithfully fund their account will have critical help in meeting those expenses, if they occur. And what’s more, the dollars are not “lost” if not used.  
  • “There is no employer match”:  Not every employer will offer a match for employee HSA contributions. But the lack of one needn’t be a deterrent, particularly if a sponsor takes pains to point out the advantage that accrues from every dollar the participant is able to contribute on their own. Of course, it simultaneously makes sense to encourage participants to appropriately fund savings vehicles that do offer a match, such as the retirement plan.
  • “Aren’t HSAs only for the wealthy?”:  In 2022, the IRS has announced, the annual inflation-adjusted limit on HSA contributions will be $3,650 for self-only and $7,300 for family coverage.  It’s true that not every individual worker or worker with family responsibilities will be in a position to max out their contribution. But again, advantage does accrue from every contributed dollar, and a participant will certainly stand to benefit from funding the HSA at whatever level is sensible given their circumstances as well as other necessary uses of their discretionary dollars.      
  • “What if I have a lot of recurring medical expenses?”:  For some participants, recurring and perhaps substantial medical expenses are a fact of life; such participants in an HDHP will have relatively higher out-of-pocket expenses. They are best served by a more traditional insurance plan, if one is available, or by taking advantage of an HSA to the greatest degree possible. These workers will, of course, consider an employer match of their contributions an extraordinarily valuable benefit. 

Give the HSA a Good Showcase

As with any benefits offering, information and education go a long way in giving an employee the knowledge they need to do what’s best for them. Yet, many employers bury the HSA information deep within their overall medical plan benefit.

If that’s the case with your plan, give the HSA more visibility within your plan communications.  Encourage your employees to consider an HSA and make sure the associated explanatory information is robust enough to address their initial questions. Make clear the HSA’s immediate benefit: a tax-advantaged way to cover today’s uncovered medical expenses.  But also, be sure to point out that the HSA also is a tax-advantaged “savings” tool for extending retirement plan benefits – and even covering retirement medical expenses. And, again, employees will find it helpful if the necessary information is readily accessible and visible all year long, so that they’re ready to make a good decision come enrollment time. 

An HSA can be a vital element of the healthcare equation for HDHP participants, supporting confidence that they’ll successfully meet unanticipated healthcare expenses while they also enjoy the cost advantages of a lower premium. Help your employees get familiar with this valuable approach – so that “high cost” doesn’t cloud its considerable appeal.

*   *   *

The TIAA group of companies does not provide legal or tax advice. Please consult your legal or tax advisor. 

TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, distributes securities products.  

©2021 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017

Kendra Smith is on the TIAA Health Solutions team and is responsible for the sales, distribution and development of the TIAA HSA. She is a seasoned financial services professional with expertise in retirement plan and HSA design to improve employee outcomes.  Kendra’s passion is to educate plan sponsors and their employees about HSA benefits to cover health care costs to and through retirement.