More and more employers are offering high-deductible health plans, or HDHPs. These are specially-designed major-medical health insurance plans that come with a relatively high deductible. To compensate for the high deductible, plan participants can contribute pre-tax dollars to a health savings account, or HSA. Money in HSAs compounds tax-deferred, and funds spent for qualified health care expenses are tax free. HSAs are only available in combination with a high-deductible health plan.
Because the plan isn’t on the hook for common but small expenses, HDHP/HSA plans are able to save a good deal of money in claims. Part of this savings, of course, flows back to plan sponsors in the form of reduced health care premiums.
These reduced premiums have been a key driving factor in causing employers to migrate to HDHP plans. Case in point: In 2006, only 4 percent of covered workers were covered under an HDHP; as of 2012, that figure had exploded to 19 percent. Likewise, the percentage of workers covered under a plan with at least a $1,000 deductible also exploded, from just 10 percent in 2006 to 34 percent this year. At small employers, the percentage of workers with deductibles over $1,000 was close to half.
According to the 2012 Kaiser Family Foundation’s Employer Health Benefit Survey, the average cost to employers was $4,163 per year per worker for an individual plan, while family HDHP plans cost employers $10,409 per covered worker, on average. HMOs, on average, cost employers $4,554 for individual plans and $11,166 for family plans, on average. Other plan types are even more expensive, both for employers and workers.
When contributions from employees and employers are combined, the total premium for HDHP workplace plans was $411 for individuals and $1,177 for families. This compares favorably with $468 per month for individual plans and $1,362 for family plans of all types.
Of course, to maximize the efficiency of these plans, the employers and employees can’t simply pocket the cash savings. They should also contribute part or all of the premium savings to health savings accounts.
For tax year 2013, the IRS sets an annual limit of $3,250 for contributions to individual health savings accounts. That limit is increased to $6,450 per year for family plans.
The IRS also sets a minimum annual deductible for health plans to qualify as HDHPs – and thus qualify participants to make deductible contributions to HSAs. For individuals, the health plan must feature a minimum annual deductible of $1,250 for self-only coverage, and $2,500 for family coverage. Out of pocket expenses are capped at $6,250 per year for individual coverage, and $12,500 for families.
Employers can choose to contribute to employee HSAs as part of the overall compensation package. Generally, you can’t match employee contributions, because that would run afoul of comparability rules. Employers must make a comparable match among all eligible employees. Generally, employers will make contributions gradually over the plan year, since they have no control over the funds once the contribution is made.
Communication is Key
For most employees in good health, there are advantages to going with an HDHP/HSA combination – especially for those in higher tax brackets. Premiums are lower for the employee as well as the employer, and it’s easy for most workers to grasp the value of pre-tax contributions. Some workers, however, focus on the higher deductibles, rather than on the long-term benefits.
Additionally, some workers and families with people with long term, chronic illnesses that require regular medical treatment don’t benefit much, or at all, from these plans. Owners and HR managers may want to make other types of plans available for workers who fall into this category. If you have any questions about your benefits program, call ACBI at 203-259-7580 or visit our website.