Are HSA Health Insurance Plans Always Right for Your Employees?
April 1, 2023
By Praby Ram
Founder at agencyEZ
HSA plans are gaining attention among employers, due to increasing healthcare costs. Super rich plans with $0 or $500 deductibles have diminished and increasingly higher deductible plans are being considered.
HSA plans are high-deductible health plans that are eligible for tax savings on contributions to an HSA account, subject to limits set by the IRS.
What are the HSA contribution limits for 2023?
For the year 2023, the contribution limit is $3,850 for individual coverage and $7,750 for family coverage. The additional catch-up amount for employees 55 and older is $1,000.
Comparing HSA plan with a similar plan design
If you take two plans with similar plan designs:
- $2,000 individual/$4,000 family deductible
- $4,000/$8,000 out-of-pocket maximum
- 100% co-insurance
The HSA premiums can cost 20% less, and this can amount to an annual savings of $2,000 to $3,000 for a family or $750 for a single individual.
HSAs: Triple tax advantage
In addition, HSA plans have a triple tax advantage for the employee.
With federal income tax assumed at 25%, state income tax at 5%, and FICA (payroll taxes) at 7.65%, it creates a savings of $1,100 on a $3,000 annual contribution into an HSA account.
The HSA contribution, when routed through employee payroll deduction, can reduce the FICA taxes for the employer as well.
The employee may be able to invest funds beyond $2,000 in a non-insured HSA investment account with mutual funds. The employee owns the account and can use it anytime to cover qualified medical expenses.
Do HSAs have mainstream adoption?
So this sounds great, right? But still, the adoption of HSA has not become as mainstream as a 401K retirement account. Some of the reasons are:
How the service is paid for…
HSA plans pay for services only after the deductible – the individual deductible for a single person or family deductible for more than one – is entirely met. So, in our example, any person in a family of two or more will get paid only after their $4,000 is met as deductible.
A traditional plan pays for copay-based services from day one and deductible-based services after $2,000 is met by that person.
And from a psychological standpoint…
A lot of employees who are used to co-pay-based services in traditional plans may not like having to pay the contracted amount for services until deductibles are met.
This is not based on economics, but more on psychology. They would rather pay a higher premium through their payroll. It’s something they are not conscious of rather than paying the full amount every time they consume services.
So, it makes them think, “Why am I paying so much even with insurance?”
Or the plan may not be a great fit due to circumstances…
HSA plans may not be preferred by employees who need to consume services frequently or on a schedule such as medication, therapy, etc…
This is because they feel that the insurance is not paying anything for their services as they try to keep meeting the deductible of $4,000.
If an employee has a planned event such as childbirth, or major surgery, leaving no uncertainty on their out-of-pocket expenses, they may prefer taking a lower deductible plan at a higher premium. When you estimate the expected cost, chances are HSA plans may not prove to be any better significantly.
And battling the unknown…
Lastly, the employees are not informed about HSA plans, how they work, and how to estimate an ‘expected cost.’ It just appears a little scary or unknown.
Educating on HSAs
Overall, we have a lot of work to do in terms of educating about the value of HSA plans. At the same time, they are suggested to employees in scenarios where they may not be the best.
This is exactly what agencyEZ, as a cloud platform, specializes in. Firstly, it offers a variety of plans including HSA, integrates tax savings for employers as well, and helps employees understand how the HSA plan or a traditional plan is better for them based on their situation.