As a quick recap from last week’s post, most employees a have a health insurance plan with a deductible. Deductibles and premiums are rising. To fund a deductible with tax benefited dollars an employee generally needs a program sponsored by their employer.
The good news is employers have several options to help employees fund deductibles based on the goals of the company, medical plan options offered to their staff, and individual employee benefit elections. There are six primary ways to fund a deductible. One is totally up to the employee which is cash. As I wrote in my last post, this is the worst option for everyone. The other five require an employer to sponsor a program and in some cases, share in the cost. These five are: Flexible Spending Accounts (FSA), Health Savings Accounts (HSA), and Health Reimbursement Arrangements (HRA), gap policies, and worksite (think Aflac) policies. Come to think of it, I guess you could buy an individual Aflac policy without your employer’s involvement but that’s not the focus of this article. Each employer option has its own advantages which I will begin to describe in this post and continue to explain as part of this series.
You may know this as that “use-it or lose-it” money. Ever felt the overwhelming urge to buy a lot of band aids at the end of the year….me neither but I’ve done it to make sure I use as much of this money as possible.
To be eligible for a Flexible Spending Account (FSA) the employer must set up a plan and offer it to eligible employees. FSAs allow for an employee to set aside money each paycheck to pay for medical and/or child care and/or transportation costs. The employer can choose which of these to offer but for this blog, I’ll focus on medical expenses. Essentially the employee authorizes their employer to withhold some money from each paycheck to pay for certain medical expenses (medical, dental, or vision) whether covered by insurance or not. The expenses just must be allowable by the IRS. This money must be used within the designated plan year with some minor exceptions. The employee gets the added benefit of having this money withheld pretax lowering her or his taxable income. This pretax withholding also benefits the employer.
Money set aside in a FSA this way is immediately eligible to be used by the employee. For example, an employer sets up a medical FSA with a $1,500 limit per employee. The employee signs up and authorizes the employer to deduct this amount out of her or his paycheck based on the number of payrolls in their plan year. So, for a semi-monthly payroll the employee is authorizing the employer to deduct $62.50 per paycheck. The risk to the employee is that if he or she doesn’t spend $1,500 in the allowable time, they lose the unused money. The risk to the employer is the employee can claim all $1,500 right away even though only a fraction of that amount has been withheld. If she or he leaves the company there is no collection option for the employer. This risk to the employee generally results in a personal medical expense budget being built to only put aside money for likely expenses. Or you end up by a lot of band aids at the end of the year. This risk to the employer often results in newly established FSA plans to have smaller limits than the maximum allowed by the IRS. Typically, neither the employee or the employer get too “hurt” year after year with this type of plan.
I’d encourage you to have your FSA plan year in sync with your health insurance plan year. The type of health insurance plan will dictate how employees participate in the plan. If they are out of sync for some reason it can be fixed. To align the plan years, you generally would run a short year on your next plan year but not shorten an already active plan year.
There is also a Limited Purpose FSA which I will address in a later post.
A Health Savings Account (HSA) is part of the High Deductible Health Plan (HDHP) “family” and are sometimes referred to as Consumer Driven Health Plans (CDHP). “Consumer Driven” is a good bit of marketing. The theory is that American’s are good consumers, so if we have more responsibility for what we spend our health care dollars on, we’ll get better deals. Healthcare isn’t a retail store or Amazon. We haven’t been able easily price compare in any meaningful way. Besides, if you have a major-medical condition that requires treatment that’s 10x to 20x your deductible why worry too much about the cost, right? The deductible is going to be met no matter what, so what’s the difference at least from the employee’s perspective. From the employer’s perspective those high claims are exactly what they want to control but a HDHP doesn’t do this. So, the theory is very flawed in my mind but there can be a place for HSAs in both the carrier-funded and employer-funded scenarios. There are better ways to control those high dollar claims for the employer which I'll cover in another post.
To be eligible to open a HSA and to continue depositing money into the bank account, the employee must be enrolled in a HDHP that is a HSA qualified health insurance plan. To be clear HSA is often used interchangeable to describe both the health plan and the bank account but the term is correctly associated with only the bank account. HSAs provide a similar tax advantage to FSAs but the money doesn’t have the “use-it-or-lose-it” expiration date like the FSA does. Again a HSA is a bank account that is opened and owned by the employee. Money can be deposited into a HSA by the employee through payroll deduction and/or deposited by the employer. Unspent funds at the end of a plan continue to grow year over year and can be used for allowable medical, dental, and vision expenses without incurring taxes. Some accounts allow for the funds to be invested in the market allowing for the funds more growth potential. A HSA qualified health plan has a minimum deductible of $1,350 for a single and $2,700 for a family. These minimums are going up slowly every year or two. HSA qualified plans require the insured to pay the full allow amount for all expenses both medical and pharmacy before any copays with an exception for preventative services. Preventative services are basically routine check-ups and screenings for someone without a current disease or condition under management. This has changed somewhat recently due to updated regulations by the IRS.
So, a family of three (or more) would have a minimum deductible of $2,700. Minimum as the employer may not offer a plan with a deductible this low. You could be offered a $10,000 family deductible or higher. The most you can put into a HSA account in any calendar year in 2019 is $7,000. That’s right you could offer a plan with a deductible that is higher than the annual contribution maximum.
Any non-preventative expense would be subject to the deductible first. For example, your then 13-year-old son somehow curled a ballpoint pen spring around one of his finger tendons (I know cringe, shiver or squirm whichever suits you best) while in class…you’ll pay $1,200 (or whatever the bill is based on your experience). Not that I have any experience with that scenario…but my lovely wife has been to the ER for this very thing!
As mentioned in an earlier post, most American’s don’t have $1,000 saved up in the case of an emergency; so, where does this money come from? A HSA is not a credit card, money must be in the account to use for payments to providers or reimbursements to yourself. You will notice when you look at the difference in price for a copay plan and a HSA plan that typically the HSA is lower by a factor that is close but often less than the copay plan. Meaning the extra financial risk of the your HDHP plan isn’t completely offset by a reduction in monthly premiums. Insurance companies don’t lose money.
I don’t necessarily dislike HSA qualified plans but they are not a solution to rising healthcare costs in any way. A tax advantaged account doesn’t provide the employee with the tools necessary to make complex medical decisions, it’s only a method of payment. You wouldn’t buy any product from Amazon without knowing it’s cost but we do this every day with our healthcare dollars, but that’s a different article.
If you spend HSA money on non-eligible expenses then you will have to pay both taxes and a penalty when you file taxes for that year. Although money in a HSA can be spent on anything after age 65. If you buy a TV with your HSA funds after 65, you would just be required to pay whatever your personal tax rate is for that year the funds were used for this ineligible expense but not a penalty. There are no taxes on eligible medical expenses at any time.
So, this can function as a secondary retirement savings account that does give account holders access to the funds for normal medical expenses throughout her or his life without having to take a 401(k) loan or hardship withdrawal. Those that can employ this type of strategy tend to be higher earners. This isn’t a financial strategy that the average employee will see any real value in except for the lower premiums. This can be a trap as without a solid financial and insurance literacy campaign your employees may sign up to save money and never fund their HSA or in some cases not even set one up. This is where things can get tough. If the employee incurs a claim prior to the HSA being established and funded they likely will not be able to reimburse themselves. Established technically requires funding. Where these types of plans can be more successful is when the employer allows contributions to be payroll deducted and when the employer puts some money into the account for the employee. A caution, employer contributions once made to a HSA account can’t be pulled back by the employer and are 100% vested or owned by the employee. As far as the banking relationship is concerned the employer can dictate the institution they will deposit money into via payroll deduct but they can only deposit money because the accounts are owned by the employee.
Why would the employer want to allow payroll deductions besides it being the best thing for employees? To save on taxes. A dollar withheld into a FSA or HSA saves the employer’s FICA matching requirement on that dollar. So, for every $1,000 an employee withholds the employer saves $76.50 in taxes. While this isn’t any great amount of money, it does help pay for any administration costs of the plan. It’s simple math to figure out if the program will break even. Your insurance professional should help you with this. Also, it’s just the right thing to do. If you are offering plans with deductibles, you should allow your employees the most efficient and effective way to manage their household finances.
Hey, if you agree, disagree or have any valuable contribution please post a comment.
Ever had an employee ask for you to pay them since they aren’t taking your health insurance? I have and without a plan it’s a bit of a mess. First and foremost, having a stated corporate compensation philosophy will mitigate the risk of making decisions on the fly that could open you and your company up to liability. Too many times I’ve seen a back of the napkin calculation from an executive wanting to hire this “rock star”. It appears disorganized and while it may provide the candidate with what he or she wants, it may compromise your company’s internal structures. I’m necessarily for or against these types of arrangements but am proposing that they be thought out and documented.
I’ll outline a couple of simple steps to help you develop your own plan. First you need to determine what you are willing to pay the employee cash in lieu of enrolling in and what value you assign to it. Certain benefits aren’t waived and the employee is automatically enrolled such as basic life and disability coverage, at least for most employers. Retirement plans are structured and regulated in a such a way that most employers don’t have much they can do there.
There are benefits that allow for some creativity by the employer. They are typically what’s called contributory benefits. Meaning that the employee will have to pay some amount if they choose to enroll. Since they must elect to enroll, they can then waive enrollment. That’s really the first test, can the employee waive this benefit. The second is does the employer pay some portion of that benefit if the employee were to enroll. Health, dental and vision are benefits that typically meet the above criteria. Next you would need to determine which and then how much each of these benefits are valued at. Do you have two health plans with different contribution strategies? Do you have a HSA that the employer deposits employer funds into? Think these things through up front.
One of the most important steps is determining the eligibility of the employee to waiver coverage. For an employee to be eligible for a cash in lieu program they should have other qualified coverage in place and provide HR with a waiver or attestation to that effect. Should the employee’s life situation change and the enroll in your group plans then the cash in lieu arrangement would cease. Aside from having a compensation plan this type of arrangement for be part of a plan document to ensure that your company is abiding by the required laws and regulations of your jurisdiction.
Hey, if you agree, disagree or have any valuable contribution please post a comment.