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Help Your Clients and Their Employees Fully Understand HSAs and HDHPs

Jan 26, 2021, 4 Minute Read

High Deductible Health Plans (HDHP) can reduce premiums, and when combined with a Health Savings Account (HSA) they can provide investment opportunities and tax advantages with flexibility over how participants use their healthcare dollars.

What is an HDHP?

An HDHP is a health insurance plan with low premiums and high deductibles (meaning participants pay for more of their health care before the insurance plan pays), compared to traditional health plans. With an HDHP, the annual deductible must be met before plan benefits are paid for services other than in-network preventive care services, which are fully covered.

How does an HDHP work?

In general, a health plan starts paying for eligible medical expenses after the deductible has been met, meaning members must pay out-of-pocket (OOP) up to the amount of the plan’s deductible. This applies to high deductible health plans, as well as traditional plans. The amount of the deductible depends on the plan selected.

HDHPs also protect against unexpected and catastrophic out-of-pocket (OOP) expenses for covered services. Once the annual OOP expenses for covered services from in-network providers, including deductibles, copayments, and coinsurance reach the pre-determined catastrophic limit, the plan pays 100% of the allowable amount for the remainder of the calendar year.

HDHPs are great for people who are healthy and usually go to the doctor once a year for an annual check-up or to get a flu shot (both of these are considered preventive care). As a result of the Affordable Care Act (ACA), no payment is required for preventive care for things like cancer screenings, routine prenatal care visits, and vaccines for illnesses like chickenpox.

HDHP Advantages

• Lower premiums: Most HDHPs come with lower monthly premiums. If only preventive care is needed, which is covered at 100% under most plans in-network, then the lower premiums may help save money in the long run.
• Tax-free spending account: Some qualified HDHPs may be paired with a Health Savings Account (HSA). The funds in an HSA can help pay for eligible medical expenses. The money deposited into an HSA is tax-free, which can also help save money.

HDHP Disadvantages

• Higher deductible: If the deductible is higher it means OOP payments are required for medical care up to that amount before the health plan begins to help pay for covered costs. The exception is for preventive care, which is covered at 100% under most health plans when in-network.
• Costly OOP medical expenses: If an HDHP is selected and there’s a need for non-preventive medical care or costly medical care, all of the deductibles will have to be paid before the plan begins to help pay for covered costs. Depending on the participant’s medical needs, these costs could be significant OOP expenses.

What to Consider When Choosing an HDHP

When choosing between an HDHP and a more traditional insurance plan, consider the participant’s anticipated health needs. Are they likely to require medical care above and beyond preventive? If a participant has a long-term health condition or frequent medical needs, an HDHP will be ineffective. These participants will be faced with the high deductible constantly and will essentially be paying for all medical expenses OOP. If so, an HDHP plan with a lower monthly premium may not be an advantage — a more traditional plan with a higher premium and lower deductible might offer improved cost savings.

What is a Health Savings Account (HSA)?

An HSA allows individuals to pay for current health expenses and save for future qualified medical expenses on a pre-tax basis. Funds deposited into an HSA are not taxed, the balance in the HSA and interest grows tax-free, and that amount is available on a tax-free basis to pay eligible medical expenses, including copays, coinsurance, and deductibles. When enrolled in an HDHP, the health plan determines whether the individual is eligible for an HSA or a Health Reimbursement Arrangement (HRA). Like other pre-tax accounts, money is added into the account before taxes are applied, passing on savings of 30-40% to the participant.

HSA Benefits:

• The participant owns the account and can take it to another job.
• Accounts can be funded by the participant, their employer, or a third party.
• Contribution limits for an HSA are higher than contribution limits for a Medical FSA.
• Participants can change their HSA contributions at any time without the need for a qualifying event.
• The funds carry over from year to year, so participants can build up reserves to pay for health care items and services needed later.
• Investment opportunities are available once there’s a certain amount of money in the account.
• Triple-tax benefit. Funds are deposited into the account tax-free, they grow tax-free and they remain completely tax-free when used for eligible medical expenses. This saves 30-40% on every dollar contributed.

What can HSA dollars be used for?

Eligible medical expenses include doctors, hospitals, prescription drugs dental care/ortho, vision care, chiropractic/acupuncture, lab fees, over-the-counter medicines, and more.

HDHP participants don’t automatically qualify for an HSA. To be eligible for an HSA, participants:

• Must be enrolled in an HDHP HSA-compatible health plan.
• Cannot be enrolled in any other health plan including an HRA or FSA (Limited Purpose FSAs are compatible).
• Cannot be enrolled in Medicare.
• Cannot be claimed as a dependent on someone else’s tax return.
• Cannot be in receipt of VA or Indian Health Service (IHS) medical benefits within the last three months.

If at any point the participant becomes ineligible to contribute to an HSA, they can still continue to use the funds in their account until they run out.

If medical expenses are more than the HSA balance, the employer may offer an HSA Bridge that will enable the participant to access future scheduled HSA deposits before a balance has been built. The expense can also be paid with another payment source and reimbursed to the participant later when funds are available.

Carefully weigh the pros and cons of high deductible health insurance plans to offer your clients the healthcare coverage they need and save money.

To learn more, check out this BRI article and video.

Contact us at 800.696.4543 or info@claremontcompanies.com for assistance when you’re ready to enroll a group in a BRI plan.

Questions?
Contact your Claremont team at 800.696.4543 or info@claremontcompanies.com.

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