Many employers are intrigued with health savings accounts (HSAs) — one of the most recent consumer-driven health plan concepts. HSAs offer individuals who are covered by a high-deductible health plan a tax-favored way to save and pay for medical expenses.
Created by the Medicare Prescription Drug and Modernization Act, HSAs became a choice for employers beginning on January 1, 2004. Many employers seriously considering HSAs have delayed implementation, in part because the IRS had issued little guidance and in part because they are concerned about resistance from employees. Now with solid IRS guidance in place, the time may be ripe to move forward.
While IRS guidance has now provided extensive detail on requirements for the high deductible health plan that accompanies an HSA, insurance products vary, so employers will find it worthwhile to shop around and compare plan features, premium rates, administrative fees and participation requirements.
Employers also need to decide what to do with existing health plan options. It’s generally best to keep the number of plan choices low in order to minimize complexity. If you implement an HSA plan, employees will already have a new health concept to absorb. Numerous other choices may exacerbate any confusion. Some experts also suggest that the alternatives to the HSA/high deductible health plan option be clearly distinguishable in their design.
Employers Need to Lay the Groundwork of Understanding
Communication issues have caused some employers to take a slow approach in implementing HSAs. Although some businesses already have consumer-driven plans (such as a health reimbursement arrangements), most employees find HSAs look very different from what they have been accustomed to in health plan offerings. Employers planning to roll out HSAs face a challenge in presenting this new type of plan to employees, so they form a positive perception.
Employers implementing HSAs obviously want employees to embrace the concept. But in order for this to happen, employees must first understand the option. Thus, before implementing HSAs, communications should convey the rationale for the move. For example:
- Health care costs have been rising rapidly. The impact of the healthcare legislation, passed in 2010, is being felt now and will continue in the future.
- The growing share of company dollars allocated to health care represents money not spent on product innovation, capital investment and other corporate and employee needs.
- Increased employee involvement in how health care dollars are spent can lead to better health care decision-making by employees, along with improved overall cost containment.
Complementing such educational messages should be communications that inform employees of the advantages HSAs offer them:
- HSAs allow employees to control their health care dollars. As long as the IRS defines expenses as payable from an HSA (and the employer doesn’t narrow the definition in its plan design), employees can use HSAs to pay for them regardless of health plan authorization requirements or other limitations.
- The accounts provide employees with flexibility in spending their health care dollars. Health care expenses typically not covered by some primary health plans — such as dental, vision and orthodontic expenses — can be paid from the HSA.
- Unused dollars contributed to an HSA roll over into subsequent years and the account earns interest. This allows the account to grow, creating a nest egg for future health care expenses, even into retirement.
- HSAs are portable, meaning that employees can take their account balances with them if they leave the sponsoring employer.
- The accounts offer significant tax savings. Employer contributions are not considered part of the employee’s gross income and employee contributions can be made on a pre-tax basis (or they are deductible if made with after-tax dollars). Plus, withdrawals for qualifying health care expenses are tax-free.
Taking time to carefully plan for an HSA rollout enhances the likelihood that the accounts will meet your company’s goals and be accepted enthusiastically by employees.