Are you offering your employees health insurance options that work for their budgets? While not ideal for everyone, a high-deductible health plan can be very appealing to some workers, especially when it’s paired with a health savings account. Offering a high-deductible health plan as part of an employee benefits package, therefore, may be a strategic option for your organization.
High-Deductible Health Plans (HDHPs) Explained
A high-deductible health plan is a health insurance plan with a higher-than-normal deductible. Employees must pay the deductible out of pocket before the plan contributes to covered care costs. However, depending on the specific plan, preventive care may be covered before the deductible is met with no out-of-pocket costs.
Advantages and Disadvantages of High-Deductible Health Plans
Although a high deductible may sound like a bad thing, in some cases, it makes financial sense. By opting for a higher deductible, employees can secure lower monthly premiums. This makes coverage more affordable, and it can be particularly appealing to young workers who do not expect to have major health issues.
Let’s say an employee enrolls in a high-deductible health plan providing self-only coverage with an annual deductible of $2,000. The employee is young and healthy and only uses health coverage for preventive care and vaccines, which their plan provides for free before the deductible is met. Therefore, this employee never pays the deductible and saves money by enrolling in a plan with a lower premium. In this case, selecting the HDHP was an economical choice.
However, for employees who are older or who have health challenges, pregnancies or dependents, a HDHP may be less appealing. These employees have more expensive treatment needs, and it may be cost prohibitive for them to pay their high deductible out of pocket before benefits kick in. Furthermore, even young and healthy workers who don’t expect to need their health coverage could become unexpectedly injured or ill. When this happens, the high deductible could become a significant financial burden.
However, there is a potential solution for these concerns: A health savings account.
Pairing High-Deductible Health Plans with HSAs
A Health Savings Account (HSA) is a savings account designed to cover qualified medical expenses. It can be funded with pre-tax dollars, and withdrawals are not taxed as long as they are used for eligible medical expenses, making it a tax-advantaged way to pay for medical costs.
Employers, employees or both can contribute funds to an HSA in the same year. However, unlike Flexible Spending Accounts (FSAs), HSAs are owned by the employee, and unused funds never expire. Once a person reaches age 65, the money in their HSA can be used for any purpose without incurring a penalty, although the account holder will pay income tax on the funds if they’re not used for eligible medical expenses.
Only people currently enrolled in a qualifying high-deductible health plan can make contributions to an HSA. As of 2024, the IRS requires that qualifying HDHPs have a minimum deductible of $1,600 for self-only coverage and a minimum deductible of $3,200 for family coverage. Additionally, a qualifying HDHP must have an annual out-of-pocket limit of no more than $8,050 for self-only coverage and an out-of-pocket maximum of $16,100 for family coverage.
A high-deductible health plan with an HSA can be a smart combination. If employees have unexpected medical costs, they can use the HSA to cover these expenses. If they don’t have any unexpected medical costs, they can keep their funds in the HSA and allow the account to grow. In this way, an HSA can pull double duty, potentially helping to pay for medical costs in retirement.
Understanding Qualified Medical Expenses
HSA funds are intended to be used for qualified medical expenses. If they are used for other purposes, the account holder has to pay income tax on the funds, along with a 20 percent penalty. To avoid this penalty, it’s very important to make sure an expense is considered an eligible medical expense before using HSA funds to pay for it.
According to HealthCare.gov, HSAs can be used to cover deductibles, copayments, coinsurance and some other expenses. However, they cannot typically be used to cover premiums.
The IRS maintains a list of HSA qualifying expenses. It includes many things that are not typically covered by health insurance, such as dental treatments, glasses and contact lenses.
HDHPs Are Increasingly Popular
According to KFF’s 2023 Employer Health Benefits Survey, enrollment in high-deductible health plans has increased over the last decade. In 2023, 24 percent of covered workers were enrolled in an HSA-qualified high-deductible health plan.
For many people, HDHPs are a practical way to control the rising cost of health plan premiums. When paired with an HSA, HDHPs can also help employees save for retirement while offering a safety net in case of unexpected health issues. Because of its potential advantages for some employees, it’s unsurprising that this option is becoming increasingly popular.
Should you offer a high-deductible health plan to employees?
Although HDHPs have become popular, they are not ideal for everyone. If you have workers who know they are going to have significant healthcare expenses, they may be dissatisfied with a health insurance plan that has a high deductible.
One way to address this is to give employees access to at least two health insurance plan options.
- One could be a high-deductible health plan with a lower premium, possibly paired with an HSA with some employer-provided funding.
- The other could be a health plan with a lower deductible and more robust coverage, but with a higher premium. This allows workers to select the health insurance option that works best for their needs.
Educating Employees on HDHP with HSA Plans
If you decide to make a high-deductible health plan with an HSA part of your employee benefits package, employee education is critical. Consider the following:
- Do your employees understand how deductibles work? Many people find health insurance terms to be confusing. Employees might enroll in a high-deductible health plan because the premium is low without fully understanding how the deductible works. Then, if they have unexpected health expenses, the large deductible may come as a shock. This can lead to financial problems and dissatisfaction with their employee benefits package.
- Do your employees know how to make the most of an HSA? Employees who don’t fully understand the tax advantages of HSAs may not use their account effectively. For example, an employee may not contribute to an HSA because they don’t realize that it can reduce their tax burden, or an employee might use HSA funds on minor expenses because they don’t realize they can keep the money in the account without it expiring. To make sure workers are fully utilizing their benefits, employee education is key.
Are you giving your workers the benefits they want?
There’s a lot to consider when designing an employee benefits package. You need to weigh benefits with costs, and the options that work well for one employee may not meet the need of another.
Higginbotham can help you put together an employee benefits package that works for your employees, regardless of whether that includes a high-deductible health plan (HDHP). Talk to a member of our team to learn more about our employee benefit options.
