Part of a HR professional's job is to explain complicated compensation and benefits structures in layman's terms. Here is one way to describe it; if an employee does not pay retail price for items, they are likely a planner and have a set budget for before going shopping, if they try on clothes before buying them that shows they like to be precise. Both of these traits are essential if when obtaining and understanding a HSA.
As a human resources professional, how should you explain the nature of a health savings account? A health savings account has been described as a medical IRA since it combines a health insurance plan with a tax-free health savings account so that your money can grow depending on market performance. In order to purchase an HSA, you must first have a high-deductible health plan.
With a high-deductible health plan (HDHP), an employee's annual deductible must be at least $1,150 for an individual and $2,200 for a family. However, the deductible for a family can be as high as $11,000. Human resource professionals are often asked for their opinion when company management considers allocating resources for HSA contributions as the HSA can be funded by pre-tax employee contributions, employer contributions, or both. Presently only a small percentage of employers put money into HSAs for their employees. In addition, it is important to note to employees that money an employee places in his/her HSA account lowers his/her taxable income by the same amount.
When employees inquire about the cost of health savings accounts, are you prepared with the right answer? The correct answer, unfortunately, is vague; it depends on the amount of the employee's deductible. In general, an employee may deposit up to $2,600 annually for an individual and $5,150 annually for a family into an HSA. The amounts withdrawn for healthcare can be withdrawn tax-free. If the employee decides that they need the HSA money for something other than covered medical care, they should be prepared to pay income tax plus an additional 10% penalty if under the age of 65. In addition, HR professionals will need to make certain that employees realize that contributions made to the HSA are not their only out-of-pocket expense; they must also pay the premiums on the HDHP.
How can an HR professional explain the functionality of the HSA to employees? If employees currently participate in an HMO (health maintenance organization) or PPO (preferred provider organization) plan, they are already familiar with the concept of co-pays. HSAs do not have any co-pays. Instead, HSA holders use the deferred money in their accounts to pay for the full cost of each medical service or prescription medication that they need until the deductible is met. Once the deductible is met, the plan acts as a traditional health planthe participants continue seeking medical care but are only responsible for co-pays. Since an HSA account holder is responsible for the full cost of services until the deductible is met, some people will use their bargaining savvy. The burden is on the employee, (the consumer) to seek a discount and comparison shop. This is where the skills and discipline of waiting for sales and never paying full price come in handy.
It is important for HR professionals to explain to employees that money placed in an HSA does not have to be used by a certain date or it will be lost. Employees can accumulate money in an HSA over time and use it for healthcare expenses at any point in your life. If the employee still has money in the HSA after reaching age 65, s/he can use the money for any purpose, health-related or not.
HR professionals should be aware that HSAs do leave more costs for employees to cover. But the theory is that with the right planning, the HSA can accumulate enough money to pay for expenses when the employees are elderly and financial assistance is limited. It's much like trying clothes on before buying them. If you try the clothes on in the store, you have a better chance of getting the right fit and look you want without wasting time and money. If you take things home without trying them on, you may realize that your pants don't fit quite right. With tighter refund rules at certain stores, you may be gambling with your ability to obtain a full refund and end up foregoing part of the cost of the returned item!
So as an HR professional, how should you answer the perennial question of whether an HSA is good for your organization's employees? The answer as you may have expected is: Maybe.
1. Help your employees make the right decision by asking them to review their yearly spending on health care and compare that to what they would have paid in premiums and fees with an HSA plan. Make sure they know all the details of the HSA plan, including what it covers when it comes to doctor visits and prescriptions. Websites are available that help calculate an estimated difference in cost between their existing health care plan and an HSA. Those employees who are dealing with pain management, chronic illnesses and the like will not be good candidates for an HSA. It is best to counsel those individuals to stick with a traditional plan.
2. Advise employees about some of the potential benefits or drawbacks of HSAs. For instance, with an HSA, an employee can accumulate large amounts of cash over the long term that can be used as a resource later in life when healthcare costs will be higher. On the other hand, an HSA requires more of an effort from the account holder. The account holder is responsible for tracking how much money is in the account and making sure it's spent only on IRS-approved health care otherwise it will be treated as taxable income. Hence, the exacting science of trying clothes on first. We all know size numbers change with every designer. No purchasing and returning later here. One wrong expense can leave employees with a hefty IRS bill.
3. Beware that having an HSA may be a deterrent to seeing a doctor. It is important that employees do their research regarding the cost of services and medical procedures. Since, it is difficult to ascertain the exact cost of services, whether it is for an MRI or an X-ray and healthcare providers have varying contracts with different insurers and look upon their costs as trade secrets that they do not reveal, some employees will forego a doctor's visit or procedure to avoid paying for treatment.. As such, HSAs may tempt people to skip necessary treatments in hopes of creating a large account. This, in turn, may lead to higher medical bills in the future.
4. As HR professionals, you have the knowledge to determine whether your employees have the good health and discipline necessary to take advantage of an HSA. Families with young children will likely benefit from traditional insurance vehicles. Although healthy families with minimal medical expenses can do well with a HSA.
5. There are tax advantages for employees who participate in an HSA whereas individuals who take out health savings accounts on their own have to contribute after-tax dollars to their accounts. However, other tax advantages are common to both individual health savings accounts and those provided by employers.
6. Money contributed to an HSA does not have to be spent during that year on medical care, but can be carried over to future years. This distinguishes HSAs from flexible-spending accounts where contributions in any year have to be spent in the same year. The balance in a health saving account plus the interest earned can be carried over to later years without being subject to taxes. After age 65, the money in these accounts can be spent on non-medical items without penalty, but this spending is treated as income and is subject to income taxes.
7. Most uninsured will not be able to save the amount of money required for the HSA. Low wage earners that have a difficult time making ends meet will rather tend to their basic needs than place $1,000 into a HSA.
In sum, if your employees don't mind shopping around for the best deal, are relatively healthy and only go to annual check ups, an HSA may be a good tax-deferred vehicle for your employees. Their money can grow and after 65, they can use the money for any expense, medical or not. If your employees don't have the time or the desire to follow each and every expense; if they have a have a chronic condition that necessitates ongoing doctor's visits; or take prescription medications on a regular basis, stick with a traditional health insurance plan.
If your company decides to offer a HDHP with an HSA, the HR professionals' role will be greater. It is wise to offer your employees education regarding exactly how these accounts work and which expenses are qualified. HR executives should ensure that employees know if they spend money from their HSA on a medical treatment or medication that is not qualified, the money withdrawn becomes taxable.
It would be equally beneficial to the employees and HR staff to hold bi-annual meetings to discuss the importance of obtaining medical care and the pros and cons of using an HSA as a supplemental retirement account. HR executives should also consider cautioning employees using HSAs in this manner not to ignore their symptoms in hopes of increasing their nest eggs as the latter could be dangerous to their health. HR professionals will be the first line of defense against health care catastrophes that will likely occur from participants misunderstanding the functionality of the HSA.
