Entrust Learning Center > Retirement Plans > SPECIAL REPORT: Health Savings Accounts Convincing Employees

SPECIAL REPORT: Health Savings Accounts Convincing Employees

When it comes to dollar amounts having anything to do with spending, Americans firmly believe that lower is better, higher is worse. In the year and a half since the new IRS acronym HSA emerged on the scene, many American businesses are finding difficul

By: Bill Humphrey CPA

IRA Insights

When it comes to dollar amounts having anything to do with spending, Americans firmly believe that lower is better, higher is worse. In the year and a half since the new IRS acronym HSA emerged on the scene, many American businesses are finding difficulty dealing with employees that have that common belief.

To refresh your memory, Health Savings Accounts (and the tax deductions and tax free reimbursements that go with them) require as a prerequisite a “High Deductible Health Plan”. Notice that a HDHP starts with “High” and you might have an insight into the problem businesses are facing.

Not surprisingly, a HDHP is one that includes a high deductible which means that you have to spend a higher amount before you get any reimbursement or insurance benefits. The IRS provides individuals covered by a HDHP the opportunity to make tax deductible contributions to their HSA and take funds out of their HSA to reimburse health care expenses tax free. Unlike most tax deferred plans such as IRAs and retirement plans, the HSA provides both a deduction going in and tax free distributions when you take it out.

Many individuals, a significant number of whom were previously uninsured, have purchased the HDHP type of insurance coverage. They have found that having a higher deductible means the insurance company is less likely to have to make payments on the policy and thus the cost is often lower. In many cases, the cost is significantly lower. As we know, lower is good. When rolled in with the tax advantages of the HSA, the individual often finds that the plan pays for itself over a few short years. The amount in the HSA can be invested for long term growth providing a medical cost nest egg for retirement years when income is limited.

The HDHP may be great for a person who has to write a check monthly for health insurance; however the story is a little different when a company proposes a new HDHP. The individual employee hears the higher but doesn’t see or particularly care about the lower premium cost. The majority of that premium savings does not directly benefit the employee’s pocket.

The employer’s reading along right now will be thinking that the employee should realize that the savings do impact the employer’s ability to pay the employee anything and even stay in business. Even though they should and probably do, realize it is hard to expect them to give up something for what appears, in the short term at least, as nothing much.

What approach should an employer take when offering a HDHP/HSA plan to reluctant employees?

• Don’t call it a High Deductible plan! Perhaps something like “Maximum Benefit Tax Advantaged Health Plan”. MBTAHP doesn’t exactly roll off the tongue though. If you have a creative writer around, you may be able to work on some new words that communicate value and savings rather than high deductible payments.

• Elect, as many companies have, to take the middle of the road option that insurance companies, if pressed, will provide—a dual coverage plan. The employee has the option of picking the HDHP or the traditional lower deductible plan all within one overall plan with the insurance company. Plans with as few as 4 or so employees can adopt this option. Naturally, the employees taking the higher cost plan have to pay all or a portion of the higher cost or no one will choose the HDHP. You may want to give the employee a cash incentive to join the plan and an opportunity to elect the lower cost plan.
  

• Give the employee an incentive to contribute to the HSA by making company contributions to the employee’s individual plan. Any employer contribution should be accompanied by an education program to help them take the best advantage of the HSA.
  

• Another less financially attractive option is to offer employees the option of electing the HDHP but include a side plan, called a Health Reimbursement Arrangement, or HRA, which will provide company reimbursement of a portion of the deductible. The HSA must come into effect after the HDHP plan deductible is met or it might modify or eliminate the ability to contribute to the HSA. It could ease some employee worries regarding the potential cost of the new plan, particularly during the first years of the plan.
  

None of these options are guaranteed to win over the employees to the long term advantages of the HSA. Given recent rises in health insurance costs, employers are finding it ever more difficult to provide the coverage they have in the past. The HSA/HDHP combination gives the employee an incentive to be careful about health care spending plus a powerful long term tax free growth investment account that can help them pay expenses now and in retirement. Wisely invested, the HSA can grow significantly to provide retired individuals valuable help with medical expenses on a tax free basis in the future.

HSA investments are governed by the same rules as IRAs, including the ability to be self directed into nontraditional investments such as real estate. Your Entrust office will be able to help you understand the investment options with a self directed HSA.

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