Are you considering an HSA (Health Savings Account) qualified High Deductible Health Plan for your employees? For yourself? Are these plans a sensible choice? It depends on your motivation and your situation.
Minimizing Costs
If you only want to minimize your premium dollars and don’t plan to contribute funds to employees’ HSAs, a better choice may be a traditional high-deductible PPO with more immediate benefits.
Most HSA-qualified plans don't pay for anything except a few preventive services before the annual deductible is met. If your employees can’t afford to pay the up-front pharmacy and medical services costs, the coverage is still too expensive, however low the premiums.
In contrast, a traditional PPO will cover key services such as office visits and pharmacy benefits (usually with a separate brand drug deductible) before the plan deductible is met.
Maximizing Value
If you’re looking to save money on premiums and to take advantage of the tax benefits of Health Savings Accounts, you’re on the right track.
HSA-qualified plans can help you maximize benefits dollars—when conditions are right. To determine suitability, you’ll need to look at the relationship of three financial variables between your current plan and the HSA plan:
- Premium savings—will depend on the current and proposed plans, your employees’ ages (for small groups), and the type of coverage (individual or family)
- Deductibles—the amount employees pay for services and/or brand name pharmaceuticals before the plan pays
- Maximum out-of-pocket costs—the most that employees pay before the plan pays 100% of covered services
Premium Savings
Your current plan is the baseline for your premium savings. Your premiums will depend on your plan benefits and the ages of your employees.
If you already have a high-deductible PPO plan, or if your employees are in their 20s or 30s, an HSA-qualified plan might not save enough in premiums to justify a change.
However, if you're offering an HMO and/or a comprehensive PPO plan, you might save enough on employee premiums to add an HSA-qualified plan and fund all or part of the deductible.
You’ll also need to calculate your employees’ contributions for their own and their dependents’ coverage with both plans to determine their premium savings.
Deductibles
Once you know the potential premium savings for you and your employees, look at the difference in plan and pharmacy deductibles between your current plan and the HSA-qualified plan, for individual and family coverage.
You’ll want to determine if the savings will allow you to fund all or part of your employees’ deductibles by contributing to their HSAs. Small businesses may find that the success of the HSA offering depends on the enrollment of a few employees with high premiums.
Employees won’t sign up for the plan if their annual premium savings don’t at least cover the difference in their deductible amounts.
If premium savings do cover the deductibles, great. If there are additional savings, even better. The HSA-qualified plan is looking like an attractive option.
Out-of-Pocket Maximums
The next factor to compare is the maximum out-of-pocket (OOP) cost.
The max OOP gives a measure of total risk, after premiums are paid. Often, HSA-qualified plans have much lower maximum out-of-pocket costs than traditional counterparts. This can be a great selling point to employees if their deductible is already covered.
One advantage of HSA-qualified HDHPs is that they generally include pharmacy benefits within the plan deductible and maximum OOP. Traditional plans separate pharmacy benefits out with a separate brand deductible and no out-of-pocket maximum, making it more difficult to estimate costs for unexpected pharmacy needs. Some HSA plans are designed so that the maximum out-of-pocket equals the deductible, making it easy to calculate the total financial risk. We like these plans!
The Bonus—Tax Advantages
After the basic costs have been compared, factor in the tax savings for employees. To get a ballpark figure multiply the HSA contribution by the federal income tax rate. Neither employer nor employee contributions are counted as federally taxable income for employees. (Some states, however, including California, do not exclude HSA funds from taxable income.)
Often, a business owner will choose an HSA HDHP for him- or her-self, because the savings are so advantageous. They can fully cover their plan deductible and still have money left to either fully fund their HSA or reinvest in their business.
The Age Advantage
HSA-qualified plans are one insurance product where age is a comparative asset. Small group premiums are usually age-banded, as are premiums for individual market plans. For one California insurance carrier’s small group plans, a 55-year-old employee’s premium is close to three times that of a 29-year-old employee.
This creates greater savings for older employees. A $2000 deductible HSA-qualified plan costs 25% less than a traditional PPO $500 deductible.
For employee only coverage, annual premium savings for the 29-year-old would be $800 – not enough to cover the $1,500 difference in deductibles; but savings for the 55-year-old would be $2,300 – more than enough to cover the deductible and have funds left over.
For family coverage, with double the deductibles, annual savings for the 29 year-old are $2,700; for the 55-year-old, $5,200.
Individuals over 55 also can make the additional catch-up contribution of $1,000 to their HSA, giving an extra boost to their pre-tax medical expense or retirement savings, and an extra break on income taxes.
For more about HSAs visit www.hsainsider.com, or, if you’re a California individual or business, contact us for a quote.
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