Are HSA Health Insurance Plans Always Right for Your Employees?

February 14, 2022

By Praby Ram

Founder at agencyEZ

We explore the characteristics of health insurance plans with Health Savings Accounts (HSAs), and when they may be right for your employees.

HSA plans are gaining attention among employers, due to increasing healthcare costs. Super rich plans with $0 or $500 deductibles are gradually diminishing 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. For the year 2022, the contribution limit is $3,650 for individual coverage and $7,350 for family coverage and with an additional catch-up amount of $1,000 for 55 or older employees.

If you take two plans with similar plan designs, one being traditional and one being an HSA, for instance, a $2,000 / $4,000 individual/family deductible, $4,000 / $8,000 out-of-pocket maximum, and 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.

In addition, HSA plans have a triple tax advantage for the employee. With federal income tax 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 contribution into an HSA account. HSA contribution, when routed through employee payroll deduction, can reduce the FICA taxes of 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.

So this sounds great, right? But still, the adoption of HSA has not become mainstream as a 401K retirement account. Some of the reasons are:

HSA plans pay for services only after the deductible (Individual deductible for a single person and Family deductible for more than one person) is entirely met. So, in our example, any person in a family of two or more will get paid only after $4K is met as deductible. (whereas a traditional plan pays for copay-based services from day one and deductible-based services after $2,000Kis met by that person.)

A lot of employees who are used to co-pay-based services in traditional plans may not like this, 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, 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?

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.

Lastly, the employees are not informed about HSA plans, how they work, how to estimate an ‘expected cost’ and it just appears a little scary or unknown.

Overall, we have a lot of work to do, in terms of educating the value of HSA plans but at the same time, suggesting scenarios of employees 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.