Combining a High-Deductible Health Plan with an HSA

A high-deductible health plan (HDHP) offers another option in regard to healthcare plans. When using an HDHP, employees and employers often pay less in premiums. In return, plan participants are expected to pay more out of pocket. To help balance the added out-of-pocket costs, combining a health savings account (HSA) with an HDHP can generate tax savings for both employers and employees. An HSA allows HDHP plan participants to save pre-tax dollars to pay for qualified medical expenses.

How does an HDHP work?

Similar to traditional group health insurance plans, employers and employees each pay a portion of the premiums for HDHPs. In return for lower premiums, HDHPs have higher deductibles. According to the IRS, in 2019 an HDHP's deductible must not be less than $1,350 for individuals or $2,750 for families. A maximum is also set for the annual out-of-pocket costs associated with an HDHP. To help pay for out-of-pocket expenses, HDHP participants may divert pre-tax income into a health savings account. Employers may also contribute to an employee's HSA account to help cover healthcare costs.

The benefits of a high-deductible health plan

HDHPs allow you to offer a healthcare plan to employees at a lower cost. When offered alongside a traditional health plan, like group or individual health insurance, HDHPs give employees another option to meet their individual healthcare needs. High-deductible health plans can help you:

• Lower monthly premiums. The lower premiums associated with HDHPs allow you to offer health plan benefits to employees at a more manageable cost. Health care is often listed as one of the most desired benefits, and lower-cost options like HDHPs allow smaller companies to provide coverage to their employees.
• Offer more optimal coverage for younger staff. Younger employees who do not anticipate the need for frequent doctor's visits may appreciate a lower-cost healthcare option over a traditional plan with premiums that reflect higher usage. An HDHP lets companies control expenses but still offer a suitable healthcare benefit.
• Avoid the potential effects of the Cadillac tax. Currently scheduled to begin in 2022, this tax will be levied on employers with high-value healthcare plans that require employees to pay premiums over a stated threshold. The 40 percent tax will be charged on healthcare costs over set limits. As of now, these 2022 limits are $10,200 for individuals and $27,500 for families.
• Allow policy holders to open an HSA. Health savings accounts are a popular benefit that allows employees to save pre-tax dollars to pay for medical costs. This adds an incentive for employees to choose an HSA-eligible plan like an HDHP to help lower their overall healthcare costs.

Why should you consider offering an HSA and HDHP?

The use of a high-deductible health plan with a health savings account is becoming more common each year, primarily due to the cost savings associated with this type of benefit. An HDHP provides an alternative to traditional health coverage and is often a better match for certain employees' usage of healthcare plans.

Higher participation in an HDHP is likely when the plan is combined with an HSA. To ensure that employees understand the tax savings and cost structure of an HDHP with an HSA, employers should provide education prior to the open enrollment period. As part of this, employers may want to include some of the benefits associated with the combination of an HSA and HDHP:

How an HDHP with an HSA can benefit employers

• Increased employee engagement. Increased employee engagement often occurs when employees feel appreciated by employers and are given benefits that offer a high value at a lower cost. An HDHP allows even smaller businesses to offer a health plan to employees, who often look to their employer for this benefit.
• Additional payroll tax savings. Employers save on payroll taxes for the contributions that employees make to an HSA account. Further, when employers contribute to an HSA on their employees' behalf, these contributions are tax-deductible.
• Enhanced employee benefits. An affordable healthcare plan with an HSA account is a highly desirable benefit option for current and potential employees. The generally lower cost of HDHPs versus traditional healthcare plans can leave room in the benefits budget to apply toward other items, like wellness programs or retirement services.

How an HDHP with an HSA can benefit employees

• Long-term savings opportunity. Using an HSA and HDHP allows participants to save money on a pre-tax basis that can be carried with them from job to job, and rolled over to future years. This allows them the flexibility to save more and not worry about losing their savings if amounts aren't spent within the same plan year. Balances can be accumulated and invested as well. 
• Potential for lower healthcare expenses. When employees are paying a greater percentage of their out-of-pocket medical expenses, they may be incentivized to make more conscientious choices about how they utilize their benefits. This may result in lower healthcare costs, as employees will spend more time researching healthcare providers and other services.
• Ownership over healthcare decisions. Giving employees ownership over their healthcare decisions enables them to make the choices that are best for their situations. They may choose a higher-cost plan if they need one, but an HSA-eligible plan like an HDHP offers a lower-cost alternative to those who prefer it, and it still provides coverage in the case of higher healthcare costs stemming from unexpected illnesses or medical conditions.

Need help getting started with a high-deductible health plan with an HSA? We can help.

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