Employers often look to high-deductible health plans (HDHPs) as an option for lowering health insurance premiums for their employees. On the upside, these plans offer lower premiums; on the downside, they present higher deductibles than traditional health insurance plans. However, an HDHP combined with a tax-advantaged Health Savings Account (HSA) can be an effective way to pay for medical expenses.
An HDHP has a higher annual deductible and out-of-pocket maximum limit than other types of insurance plans. For instance, in 2016 the HDHP minimum deductible level for an individual is $1,300 and for a family it’s $2,600. Out-of-pocket limits go as high as $6,850 for an individual and $13,000 for a family. Out-of-pocket limits include co-payments and other expenses, but not premiums.
These higher deductible amounts can be difficult for some employees to cover. However, after the insured pays the deductible amount, the plan might pay covered benefits at 100 percent for the plan year. This serves as a great catastrophic plan when medical expenses soar.
These plans also cover preventive services at 100 percent, which include:
- Annual physicals
- Routine prenatal and well-child care
- Immunizations for children and adults
- Stop-smoking programs
- Obesity weight-loss programs
- Screening services for cancer, heart conditions, mental health, pediatrics, vision, etc.
An HSA allows employees to save for qualified medical expenses on a pre-tax basis and use those savings to pay for health expenses not covered by a deductible. The money deposited into an HSA is not taxed and it can grow over time. The balance in the HSA grows tax-free, and that amount is available tax-free when withdrawn to pay medical costs. The HSA is portable — meaning that employees can take the HSA with them to another job.
In addition, anyone 65 or older may withdraw money from their HSA for services other than qualified medical expenses, but these will be subject to income tax. Anyone under 65 years old who withdraws money for expenses other than for medical reasons will be charged an additional 20 percent penalty.
An employee must be eligible to participate in a HSA. Those qualifications include:
- Being enrolled in an HDHP and not covered by another health plan (including a spouse’s health plan, although this does not include specific injury insurance and accident, disability, dental care, vision care, or long-term care coverage)
- Not enrolled in Medicare
- Not in receipt of VA or Indian Health Service (IHS) benefits within the last three months
- Not covered by spouse’s flexible spending account (FSA), unless it is a special “limited” FSA that only pays for non-major medical benefits such as dental and vision expenses.
- Not claimed as a dependent on someone else’s tax return.
Employees who are not eligible for an HSA may use a Health Reimbursement Arrangement (HRA). An HRA differs from an HSA in that an HRA does not earn interest and cannot be transferred to another job. The employee also cannot make contributions to an HRA: only the employer can contribute.
Contributing the Right Way
Employers do not have to contribute to their employees’ Health Savings Accounts (HSAs), but many do to help ease the transition from traditional health coverage to high-deductible health plans (HDHPs).
Keep in mind that there are limits to how much an employer can contribute. If an HSA is funded by an employee or by contributions from both the employer and the employee, total contributions must remain within the annual IRS limits. For 2016, the limit for self-only HDHP coverage is $3,350 per employee and for family HDHP coverage the limit is $6,750.
Employers can contribute the money at the beginning of the plan year or periodically throughout the year.