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Easing Employees into a High Deductible with an HSA

With premium costs on the rise, employers are looking for new ways to save on benefit costs without demoralizing their employees.  High Deductible Health Plans or HDHP are one way to reduce employer premium costs, but many employees are skeptical of these plans that lack the usual co-pays of traditional health insurance.  Employees are accustomed to only paying a set amount for office visits and using an FSA to pay for any out-of-pocket expenses.  HDHPs require employees to pay the full cost of most office visit to treat ailments and have a higher deductible to meet.  These two features of HDHPs can create a double whammy for employees, more up-front cost per visit and more cost before reaching the deductible threshold for co-insurance to start sharing healthcare costs.  To help employees mitigate these higher costs, employer can offer a Health Savings Account or HSA to employees that have a HDHP.

HSAs are just as their name implies; Taxpayers and employers contribute funds into the account and save the funds to pay for medical expenses.  The advantage of HSA over a traditional savings account is the tax savings.  Funds go into the account on a pre-tax basis, grow tax free, and funds used for qualified medical expenses are tax free as well.  These tax advantages make the HSA a great vehicle to save for health expenses now, in a few years, or during retirement. Employers can also contribute funds into the employee’s HSA tax-free as well.  If structured correctly, employer and employee’s tax savings from HSA contributions combined with premium savings from HDHP can reduce the drawback of a HDHP or even make the HDHP a better value for both employees and employers.

One way a savvy employer might use some of the premium savings from the High Deductible Health Plan is to fund an employer contribution to the HSA to offset the higher premium.  For example, an employer currently offers a traditional health plan with a $1,000 deductible and the monthly premium for single coverage is $422.  The employer pays 80% of the premium cost ($337.60) and the employee pays the other 20% ($84.40).  The employer finds a High Deductible Health Plan that has a $1,500 deductible and the premium for single coverage is $355.  The employer continues to pay the 80% of the premium cost for the High Deductible plan and the employee continues to pay 20%.  This arrangement saves the employer $53.60 per month and the employee saves $13.40 per month.  If the employer encourages its employees to put the full $13.40 in savings back into the HSA and the employer put in $35 of their $53.60 in saving as an employer contribution into the HSA, this would equal a $48.40 contribution into the HSA, for a total annual contribution of $580.80.  This arrangement makes the deductible lower for the High Deductible health plan after you factor in the premium savings and employer HSA contributions.  It also saves the employer $223.20 per employee in annual premium costs.

Employer can also match employee’s HSA contribution to encourage employees to make HSA contributions.  Employee’s HSA contributions are exempt from income taxation, which saves the employer their portion of FICA taxes (7.65% in 2017).  If the employer in the example above modified their employer contribution to be 100% match up to $35 per month ($420 per year) and 100 employees contributed at least $420 annually, that saves the employer $3,213 annually in FICA taxes ($420 x 7.65% x 100).  If the employees do not take advantage of the match, the employer is under no obligation to make the contribution and saves $420 per year for each employee that did not contribute.

With the FSA contribution limit at $2,600 and the HSA contribution limit for family coverage at $6,750 in 2017, the FICA savings for the employer can be substantial even if only a few employees max out their contribution into the HSA when compared to maxing out the FSA.  If 10 employees contributed the HSA maximum for family coverage $6,750 that would save the employer $6,196.50 in FICA taxes, which is $3,809.70 more than if the same employees maxed out their FSA.  Employers could use some of these FICA savings to fund additional HSA employer contributions to further encourage employee contributions into the HSA, creating a virtuous cycle in tax savings.

Although High Deductible Health Plans are considered by many to be second-class insurance, a properly designed plan that incorporates a HSA and employer contributions can be a win-win for employers and employees.  If you are thinking of adding a High-Deductible Health Plan, please call us to see how we can leverage your health plan with the benefits of an HSA.

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