HSAs Feature Cost Savings Opportunities For Businesses, Employees
Health Savings Accounts (HSAs) have become extremely helpful for those looking to secure affordable healthcare for themselves and their employees. That being said, the full potential of this particular tool remains unknown to many – despite the wealth of information available online from health insurance professionals the media and others. This article will outline a few of the valuable benefits associated with this cost-saving tool to determine whether it’s the right option for your workforce.
The HSA concept is derived from an effort to put the actual consumer of health care – the individual employee – in the position to decide which services and products to purchase based on competitive forces, such as price and quality. The theory behind this method is simple: If individual consumers first spend their own money to purchase health care products and services, they will be more likely to make better, more informed decisions. As a result, these decisions will ultimately result in higher quality and lower cost products and services. In a nutshell, this concept is generically referred to as consumer-driven health care.
How Do HSAs Work?
Consumer-driven health care accomplishes cost savings by establishing individual HSAs, similar to the way 401(k) plans revolutionized retirement savings. Employers or employees can make contributions to HSAs and any unused funds are permitted to be carried over to future years, allowing HSA holders to utilize savings from their healthy years to cover health care costs incurred in subsequent less healthy years. Contributions are tax deductible and earnings are tax deferred (tax free if distributions are used to pay for health care costs).
How Are HSAs Funded?
HSAs are funded by utilizing high deductible health insurance plans, also known as catastrophic care plans, which can be purchased at a lower premium than traditional low deductible plans. The differential in premiums is meant to be deposited into the HSA, which is then used to reimburse the owner for out-of-pocket health care expenses (if any) resulting from the high deductible insurance. The HSA concept depends on the significant assumption that the differential in premium between high deductible and traditional insurance plans is large enough to make significant contributions to the HSA affordable for the employer, and if it’s not affordable, that employees will see an advantage in (and be able to afford) funding a portion of the deductible themselves.
How Do Individual Healthcare Costs Impact HSA Effectiveness?
Another factor that complicates the decision of whether to adopt an HSA plan is the varying health circumstances existing in any workforce. Few individuals or families are similarly situated from a health care perspective. Therefore, the decision to move to HSAs will have varying financial impacts on the workforce. Expensive maintenance drugs without generic alternatives and age-related health conditions are just some examples of circumstances causing certain families or individuals to spend more on health care. Heavy consumers of health care will not find much appealing about any plan utilizing high deductible insurance because it means they may have to spend more of their own money to pay for health care.
What Are Some Other HSA Considerations?
One of the latest trends in health benefits planning is to offer several health plan alternatives to allow each employee the freedom to choose among available plans. This option features varying levels of coverage and premiums. An HSA plan may work very well in this scenario as the lowest cost alternative. It is likely to be the plan of choice for your youngest and healthiest (and likely single) employees. Additionally, because HSAs involve the creation of accounts similar to 401(k) accounts, another issue that must be addressed when considering the adoption of an HSA plan is the selection of a custodian for individual plan accounts and the resulting quality of custodial and investment service alternatives.
In addition to HSAs, other types of plans that should be considered in any comprehensive search for the best solution are cafeteria plans with flexible spending accounts and health reimbursement arrangements, so-called Health Reimbursement Arrangement (HRA) plans. In certain situations, the best solution may be a combination of these plans. Although these plans are not mutually exclusive, there are restrictions on the benefits that can be packaged together when these plans are combined. A plan advisor can help you determine the right approach for your specific situation.
How Do I Get Started?
HSAs could be a valuable part of a solution to controlling your health care benefits costs. Unfortunately, the devil is in the details and the advantages and disadvantages of these plans are not always obvious to employers. When considering whether to implement these types of employee benefits, we believe employers are best served when they take a team approach that involves both their health insurance professionals as well as expert benefit plan advisors.
As CPAs, the benefit services specialists at Rea & Associates are uniquely qualified to evaluate the financial impact of competing alternatives on your business and your employees. Contact me directly at 330.308.6827 or email Rea & Associates and request to speak with any member of our team. We are passionate about helping you confront escalating health care costs.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia office)