Thinking about an HSA?


  • Table of Contents

  • Introduction

If you’re thinking about adding an HSA to your list of employee benefit options, please give us a call before finalizing that decision.

While we will be offering HSA services to our clients in 2009, we strongly believe that the vast majority of our clients will not benefit from an HSA. Over the next few months, we will be addressing common HSA issues, HRA alternatives and how to decide what’s best for your company. Please take a few minutes each week to review this information.

Should you have any questions or if you would like to discuss your specific plans, please give us a call. A little advanced planning could save you time, money, and hassle.


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  • You Have Options

With today’s emphasis on consumer driven healthcare, many employers are moving to High Deductible Health Plans (HDHP) to save premiums and encourage employees to be more judicious about how they appropriate their healthcare.

Having determined that a HDHP is the right choice, employers are faced with the question of how to help their employees be the most efficient with their out-of-pocket costs. Many employers look to Health Savings Accounts (HSA) to help offset these expenses. However, Health Savings Accounts (HSA’s) are not the only option available to coordinate with their HDHP programs.

Primary options include the HRA (Health Reimbursement Account), HSA (Health Savings Account), or the FSA (Flexible Spending Account). While every circumstance cannot be illustrated in a brief of this nature, we encourage you to review the attached flowchart which outlines a basic decision tree that can guide your decision as to which plan might be best for your company’s needs.

Our future weekly emails will provide additional information regarding the advantages and disadvantages of each plan. If you have any questions about these topics, please feel free to contact our office.


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  • Unrecognized Costs of HSAs

Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs) are very similar. They are both used as a pre-tax means of funding out-of-pocket medical expenses and are normally coordinated with High Deductible Health Plans (HDHP). While HSA accounts may be helpful to employees, they offer a very different outlook for employers who contribute to these accounts. Employers who examine the differences between HRAs and HSAs usually find that HRAs will provide a better solution.

The main reason for this is that an HSA account will cost more than an HRA account. An HSA significantly expands medical coverage to include over-the-counter, dental, vision and non-medical expenses, thus defeating the purpose of establishing the plan in the first place…i.e. saving money.

Participants can legally spend their HSA funds on non-medical expenses if they pay taxes and a penalty fee. Most employers choose these plan designs to help reduce their employees’ out of pocket medical expenses. Allowing employees to buy tires, groceries or that really nice flat screen tv they’ve always wanted does not help to accomplish this goal.

In contrast, an HRA plan allows employers to control their plan’s eligible expenses. An employer can allow or exclude over-the-counter items, co-insurance, deductible, prescriptions, vision, dental expenses and even out-of-pocket expenses from another employer’s medical plan. The design options allow limitless customization.

This chart shows two examples of how an HRA could save money over an HSA. The medical expenses represent claims that would normally be covered by the insurance plan. Lasik surgery, vision, over the counter (OTC), dental, and other non-medical expenses are shown to illustrate the negative impact an HSA can have when the employer is funding this account.

Overall, "healthcare" dollars through an HSA quickly become "anything" dollars and employers have no way to limit spending. An HRA allows employers to select their plan’s eligible expenses and help control what their “healthcare” dollars are funding. For employers who are attempting to reduce their healthcare costs, HRAs are the way to go.


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  • Flexibility and Control

Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs) and Flexible Spending Accounts (FSAs) are very similar. All three help offset out-of-pocket medical expenses and can be coordinated with High Deductible Health Plans (HDHP).

One main difference between the three account types is their design options. HSAs offer a very straightforward plan design set by the IRS (indexed annually) while HRAs and FSAs allow the Employer flexibility in plan design. This HSA, HRA, FSA comparison chart lists the basic design options among the three account types. If your benefit goals require more control than an HSA plan allows, an HRA or FSA plan might be a better fit for your company.


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  • Eligibility

For Flexible Spending Accounts and Health Reimbursement Accounts, eligibility rules vary from employer to employer but are normally easy to understand and ensure you qualify for the benefit.

For Health Savings Accounts, the IRS sets the eligibility rules. These basic rules are:

  1. You must be enrolled in a qualified high deductible health plan (HDHP). The criteria for a HDHP is set by the IRS and indexed annually.
  2. You cannot be claimed as anyone’s dependent.
  3. You cannot have any disqualifying coverage.

The first two rules are straightforward. However, the third rule is very easy to overlook and could inadvertently result in disqualification for an HSA account.

As a general rule, you cannot have any health coverage other than your HDHP. This includes all primary and secondary insurance plans including private healthcare, Medicare, Medicaid and Tri-care along with pre-tax reimbursement plans such as Flexible Spending Accounts (FSA), Medical Reimbursement Plans (MRP) and Health Reimbursement Arrangements (HRA).

Also, your spouse’s participation in any of these plan types will also make you ineligible for an HSA account. This can create timing issues for married couples with benefits that run on different plan years. If your spouse participates in a disqualifying plan (non-HDHP, FSA, HRA, MRP, etc.) running on a different plan year than your employer’s plan, you cannot contribute to an HSA account until your spouse’s coverage has ended.

Another timing issue relates to the FSA 2.5 month grace period. Many overlook this detail, but employees cannot contribute to an HSA until either their FSA account is empty or until their 2.5 month grace coverage has ended.

While there are plan designs that can allow you and your spouse to be enrolled in a portion of these benefits (post deductible, limited coverage, single coverage), unless you specifically enroll in one of these special benefit designs, you or your spouse’s enrollment in any of these benefit types will make you ineligible for an HSA account.

Many well intentioned employees find out at tax time that they have inadvertently become ineligible for their HSA account. Contributions made by an ineligible individual are subject to tax and may also be subject to penalties. This is always an unwelcomed surprise.

Unfortunately, most employers can only ensure their employees are enrolled in appropriate benefits sponsored by their company. It is nearly impossible to track other insurance coverage maintained outside the company. So while your employees may appear to qualify for pre-tax HSA contributions, their spouse’s elections or other secondary insurance may prove otherwise.

This may be especially challenging for Employers who wish to contribute to HSA accounts. How will you handle contributions for participants who are not eligible for an HSA account? How will you handle retrieving contributions for participants who thought they were eligible for an HSA account but at tax time find out they are not? FSAs and HRAs don’t have these complex eligibility requirements. Employers can rest easy knowing they can contribute equitably to all participants and employees can be assured that employee and employer contributions will remain tax-fee regardless of their family’s insurance selection.

Overall, most legal responsibilities fall to the employee to ensure they are HSA eligible each month they contribute to an HSA account. Merely hoping employees understand the plan’s requirements is not enough. Education is the key to a successful HSA plan. As such, HSA eligibility should be reviewed in detail with your employees and you should partner with an administrator who can advise and support employees through these complex situations.


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  • Benefit Portability

A nice feature of a Health Savings Account (HSA) is benefit portability. An HSA account legally belongs to the employee and is not related to their employment status so when an employee leaves your company, their HSA account goes with them. This is a nice perk for employees considering an HSA account and is intended to encourage employees to maintain their long-term medical savings regardless of where they are currently employed.

While this is a nice feature for employees, employers who contribute to employee HSA accounts may not see this in the same light. This is because terminated employees take their employer contributions with them. Many employers' benefit budgets are already stretched thin. They are not interested in funding terminated employee's medical expenses.

One way to reduce this liability is to design your employer contributions as monthly pro-rated amounts. This option ensures you are not continuing to contribute to terminated employee's HSA accounts. One potential issue to consider is that employees cannot spend their HSA money up-front. They may have to pay for a large expense out-of-pocket and reimburse themselves as your monthly employer contributions accumulate.

While portability is a nice feature, the concept is not exclusive to HSA accounts. Health Reimbursement Arrangements (HRAs) offer similar features should an employer choose to include this option in their benefit plan. Retired employees can remain active simply by including them in your eligibility requirements. Terminated employees can remain active by implementing an option commonly referred to as the "spend down" feature. While this option does not allow for additional employer contributions, it does allow the employee to incur services after they leave your company. If portability is a high priority for your next plan year, HRAs and HSAs are good options to consider for your company.

However, if portability is a concern for your company, consider an HRA account. Many employers choose HRAs because of this concern. Very similar to 401k vesting schedules, employers are looking for ways to incentives retention. Providing a benefit that does not leave with the employee can help accomplish this goal.


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  • Alternative Coverage Types

Health Savings Account (HSA) eligibility can create some complicated situations for employees - especially those who are married. As discussed in our earlier email, either you or your spouse’s participation in any non-HDHP program can make you ineligible for an HSA account.

If you are covered on your spouse’s non-HDHP insurance, you have non-HDHP coverage that excludes you from HSA eligibility. If you are not covered under your spouse’s non-HDHP, then you have no issue with your HSA eligibility.

Determining your coverage for group health benefits is normally straightforward. Most employees can select appropriate coverage options at open enrollment to avoid interfering with their spouse’s HSA eligibility. However, many employees do not have the option to select alternate coverage options for pre-tax benefits (FSA, HRA, and MRP). Generally, by default, every family member is covered, and therefore also by default, all family members are ineligible for HSA contributions.

In order to allow employees to select coverage that doesn’t interfere with HSA eligibility, employers have to amend their pre-tax plan documents to include alternative coverage types. There are four main alternative coverage types:

  1. Limited Purpose – this option allows only preventive care, dental and vision expenses to be reimbursed from the plan. Enrolling in a limited purpose benefit will not interfere with you or your spouse’s HSA eligibility.
  2. Post Deductible – this option allows for all eligible expenses to be reimbursed after the employee has incurred at least the minimum deductible set by IRS criteria. Enrolling in a post deductible benefit will not interfere with you or your spouse’s HSA eligibility. However, employees can only submit expenses incurred after they meet the deductible amount. For 2009, minimum deductibles are as follows:
    1. Single Coverage – $1,150
    2. Family Coverage – $2,300
  3. Single or Single Plus Children Coverage – this option allows employees to select which family members should be covered under the benefit. This allows a spouse to participate in the FSA, HRA, or MRP while excluding their spouse and/or dependents, thus maintaining the spouse’s eligibility in an HSA.
  4. Suspended Coverage – Suspending your enrollment will allow you and your spouse to remain HSA eligible.

There are creative legal combinations of all the alternative coverage options. However, while these combinations are legal, you may find it difficult to cost effectively administer more complicated plan designs.

If you are not sponsoring an HSA plan and you decide not to amend your pre-tax plan, you have no compliance issues. However, your employees may be locked out of participating in an HSA account offered through their spouse’s employment or personally owned insurance on the spouse. Amending your plan documents to allow for alternative coverage types may be something to consider for future open enrollments.


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  • COBRA

Among the previously discussed complications that Health Savings Accounts (HSA) can bring to an employer s benefit plan, there is an administrative perk unique to HSAs. Unlike Flexible Spending Accounts (FSA) and Health Reimbursement Arrangements (HRA), HSA accounts are not subject to COBRA.

A popular question is Practically everything else is subject to COBRA, why the exception? The answer is that HSAs are an entirely different benefit structure and there is no special exception. An HSA account legally belongs to the employee and account ownership does not change when their employment status does. As such, their HSA benefit remains active during employment transition. Although employer contributions will cease along with employment status, their HSA account is always active so long as the employee remains HSA eligible. In short, because the benefit does not end, there is no need for COBRA.

Some employers may see this as a welcomed perk while others may not have a preference either way. Although Health Reimbursement Arrangements (HRA) and Flexible Spending Accounts (FSA) are subject to COBRA, few participants select to continue these benefits. As such, this perk may not significantly lighten an employer s administrative burden. None the less, this unique HSA perk is a factor to consider as you decide what benefit structure works best for your company.


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  • An Important Distinction

The phrase “I am enrolled in an HSA plan” could mean two things to you.

  1. I am enrolled in a High Deductible Health Plan (HDHP) that is HSA qualified.
  2. I am enrolled in a Health Savings Account (HSA) that allows me to save for out-of-pocket medical expenses.

Although it is common to use the term “HSA” interchangeably, it is important to distinguish between your HDHP and HSA plans in an employee benefits program. Although the two benefits are related, commingling these terms can lead to confusion on an already complicated topic.

While these programs can be coordinated, HDHP and HSA accounts are entirely separate plans. Each plan has its own independent eligibility rules, enrollment process, ERISA obligations, contributions, and many other distinguishing factors. Also, while employees are required to have an HDHP to qualify for an HSA account, they are not required to have an HSA account to qualify for an HDHP.

With all the important distinctions between HDHP accounts and HSA accounts, keeping these terms separate will help differentiate between the benefits and hopefully make your employee education program more effective.


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  • Quiz Time

Over the past three months, we have discussed the options available to coordinate with a High Deductible Health Plan (HDHP), how those options interact with each other, and provided tips on how to decide which option works best for your company. As we navigated Health Savings Accounts (HSA), Health Reimbursement Arrangements (HRA), and Flexible Spending Accounts (FSA), we reviewed costs, flexibility, control, eligibility, portability, alternative coordinating coverage, COBRA, and terminology clarification.

In today’s final article, we’ve decided to mix-up our format and incorporate a short quiz that encompasses the overall theme of our previous articles.

  1. True or False - An HSA is the only option an employer has to coordinate with a High Deductible Health Plan.
    False, an employer can choose among many coordinating plans such as FSA, HRA, HSA and others or simply choose not to offer any coordinating plan with their HDHP program.
  2. True or False - An HSA is the best option an employer has to offer with a High Deductible Health Plan.
    False, each employer should consider their benefit goals to determine which option is best for their company. While an HSA can be a good option for some groups (mainly those not contributing to employee accounts), many factors lead other groups to incorporate an HRA and/or FSA plan instead.
  3. True or False - An HSA will always save an employer money.
    False, although every insurance market differs on premium savings, the inability to limit HSA distributions to medical expenses can actually increase total costs.
  4. True or False - An HSA is simple for everyone involved.
    False, while an HSA design can be simple, employee eligibility can be complex. If a significant portion of your employee base has conflicting coverage (FSA, Medicare, retired military, coverage through spouse plan, etc.) an HSA can become cumbersome for all involved.
  5. True or False - An HRA provides maximum flexibility in design and cost controls for employer contributions.
    True, HRAs offer employers practically limitless design options including eligibility, contributions, portability, roll-forward, plan year, run-out, and most importantly eligible expenses. Among the available alternatives, HRAs provide employers the highest level of flexibility to design a plan that works best for their company.

We trust these communications have been helpful as you research which option works best for your company. Regardless of which option you select, myCafeteriaPlan will be available to support you through the entire process.


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