HSAs for All?

The pros and cons of universal availability of health savings accounts (HSAs).

There has been extensive debate about HSAs focusing on access, utilization, and more specifically if they should be accessible beyond high deductible health plans (HDHPs), which is a current requirement. 

Several organizations have promoted for HSA universal access. “HSA for all” advocates have proposed reforms that include de-linking HSAs from HDHP healthcare plans and allowing HSAs under any type of medical plan, unlimited pre-tax contributions, unlimited tax-free distributions, disconnecting requirements such as insurance deductibles, and open access to those enrolled in Medicare, to name a few.   A large part of advocates’ focus is also on retirement planning since HSA funds can be another source of income or can continually be spent for healthcare expenses, including Medicare premiums. 

Presented below are two differing views for consideration.

Yes, HSAs should be available to all.

For many years now, not only have healthcare costs been rising faster than inflation but out-of-pocket deductibles have also significantly increased. This fact has forced employers to offer more than one health option to ensure their employee base has choices based on needs and income levels. HDHPs offer lower monthly premiums with higher deductibles. They were designed to create a “consumerism” mindset amongst the participants – to place consumers in charge of their own health-care purchases.  This is an advantage to participants as it allows them to find the best price on services and therefore preserve funds in their HSAs. These accumulated funds can then be used for healthcare expenses incurred at a later time, including in retirement. The employer also benefits from this since the consumer must meet the higher deductible first before the plan pays its portion of the costs. This translates to lower plan claim costs.

People enrolled in other types of plans typically pay higher monthly premiums for the benefit of having lower deductibles, lower copays, and lower out of pocket maximums.  A result of these lower out-of-pocket costs is that consumers will give very little consideration, if any, to the cost of the services incurred since having a lower deductible means the plan will cover its share of the cost sooner.  This results in a heavier risk to the plan as consumers will seek treatment without cost considerations. 

However, deductibles and out-of-pocket maximums in both HDHPs and non-HDHPs have significantly increased, blurring the line between them. With fewer and fewer differing criteria between plans, now is the time to allow anyone enrolled in a medical plan access to an HSA. 

The impact of higher out-of-pocket costs has resulted in many employees needing hardship withdrawals, taking loans from their 401(k), or even filing for bankruptcy to pay for unreimbursed health care costs.  As financial wellness is a growing trend, HSAs fill a health care savings need.  As HSAs have evolved, many employers have attempted to address this problem by making an employer contribution to the HSA.  Some employers contribute this amount at the beginning of the plan year, and some make it as a match or per-pay contribution. Many base this amount on the deductible of the HDHP. As compared to a Flexible Spending Account (FSA), commonly used in non-HDHP plans, HSAs allows higher annual contribution limits. In addition, an HSA allows the balance to rollover year to year (versus the use it or lose it requirement in the FSA). This allows for greater total possible accumulations in the HSA. This also allows the account to potentially accrue more to pay more for those years in which employees have higher claims costs.  Actuarily, most employees occur higher claims approximately every one in three years. The marketplace has seen an increasing number of individuals change employers and those that have an HSA can take their accounts with them – similar to a 401(k) – and continue to build their HSA balance to help plan for retirement.

When employees are coached on using the HSA and investing unused balances, the HSA becomes a supplement to the 401(k) to pay for Medicare and unreimbursed health care costs in retirement.  Health care costs in retirement are expected to be $150,000 (source Fidelity). If health care costs are not funded in an HSA, employees will need to pay for them with after-tax withdrawals from their 401(K) or IRA or other savings.  For this reason, even though FSAs are great, we think the long-term advantages of the HSA exceed that of the FSA.    

To move forward with HSA-for-all initiatives, advocates will need Congress’s involvement. Without it, legislation is unlikely to be passed to expand and strengthen HSAs. In addition, healthcare reform will be needed to educate and encourage participants to shop around for medical care and equip them with the tools to do so.  HSAs are a powerful tool to improve access to quality healthcare, one reason why advocates continue to support the idea of universal access.

No, HSAs should not be available to all.

Proponents of HSA-for-all will state that deductibles and out-of-pocket limits on non-HDHP plans have greatly increased over the past several years to where there is very little differentiation between those plans and HDHPs.  They may also offer up that employees gravitate to a non-HDHP option as being a safer choice with the higher premiums thinking that this translates to better coverage.

When HDHPs initially came to market, the expectation was that individuals enrolled in the plan would help drive down overall healthcare costs by finding the lowest cost option for services. The HSA was established as a means for individuals to help pay for these out-of-pocket expenses.  But studies have shown that the majority of these individuals spend no more time searching for the lowest cost option for services than individuals on a non-HDHP medical plan.  Recommendations from providers and ease of convenience still play a big part in the decision making process.

Employers should be able to offer benefit choices to their employees and choice means that the employee can make the decision on what is right for them – including enrolling in an HSA through a HDHP.

Employers make healthcare plan design choices for deductibles and out of pocket limits. Typically, they set the premiums for a non-HDHP higher than a HDHP while the deductible is lower for a non-HDHP.  This is intentional and is a function of risk. For a non-HDHP, the insurer bears the risk once the lower deductible is met – hence higher premiums.  With a HDHP, the employee bears the risk until the higher deductible has been met – hence lower premiums. 

The Healthcare Flexible Spending Account (HCFSA) benefit is an option that many employers offer to employees.  This pre-tax benefit has advantages including covering many of the same qualified expenses that an HSA does, and the individual enrolled in it has access to spend the entire annual election at the start of the plan year before any payroll deductions have been taken.  Even if an employee is enrolled in a non-HDHP that has a larger deductible, they can use a HCFSA to help pay for the deductible and reduce any pressure on out-of-pocket expenditures. With the HSA, only funds that have been deposited into the account can be spent. Therefore, individuals may still have to pay out-of-pocket and wait until they have funds in their HSA account before they can reimburse themselves for the expenses.  Or worse, when faced with financial pressures, they may forgo necessary medical services because they do not have enough funds in their HSA to cover the costs.

The IRS does not allow individuals to be enrolled in both an HSA and a full HCFSA. Individuals enrolled in a HDHP can only elect a ‘limited’ FSA which allows dental and vision expenses only. There are additional IRS rules for HSA eligibility – cannot be enrolled in Medicare, cannot be participating in benefits from the VA and Tricare, cannot be claimed as a tax dependent by someone else, among others. These exclusions were intentional.  If someone is not HSA-eligible, they can utilize the HCFSA benefit, even if enrolled in the HDHP. But if these restrictions were removed, an employer may decide to only offer a HDHP, not provide a HCFSA benefit and then not contribute at all to their employees’ HSAs, potentially jeopardizing an employee’s financial situation.

An HSA is designed to provide great value to participants with the taxation benefits it offers and it can also be a very important tool as part of a retirement plan strategy. But that does not mean that it should be offered to everyone participating in any type of medical plan. The HSA benefit may not be the right option for all individuals. It is true that many employees do not fully understand the HSA benefit and employers who offer more than one medical plan option may want to focus on educating their employees about the options presented so that employees can make truly informed decisions on what is best for their needs. But there should still be the element of choice provided to employees and employers when an employer offers more than one medical plan option – how a PPO/POS medical plan can work with a HCFSA, how a HDHP can work with the HSA, and how the HDHP can work with the HCFSA when there is HSA ineligibility involved.
 

Blanca Gonzalez Karim is the Director, Employee Benefits for PBS.
Cynthia Obenland is the Director, Benefits Solutions, Precision Medicine Group
Carol Sedlacko is the Manager, Benefits & Payroll, Austin Powder Company and Vice Chair of PSCA’s HSA Committee.
Karin Rettger is the President, Principal Resource Group, Inc., and Chair of PSCA’s HSA Committee