Can a Company Disqualify All Its Employees from an HSA? Yes.

Some businesses craft medical coverage with an HSA-qualified plan at its base that disqualifies employees from opening and funding a Health Savings Account.

It seems counterintuitive at first glance. A company chooses an HSA-qualified plan, which most companies select because they want to offer a Health Savings Account program. Sensitive to employees' out-of-pocket financial responsibility, the company integrates a general Health Reimbursement Arrangement that reimburses a large portion of workers' deductible expenses. This plan is disqualifying because the integrated medical coverage is no longer HSA-qualified.

Does this coverage make sense for the company? For employees?

The Benefits of an HRA

In this context, an integrated HRA is an employer-sponsored, -designed, and -funded account that reimburses out-of-pocket responsibility under the medical plan. It's integrated with the medical plan is the sense that employees don't have an option to enroll in the medical plan without the HRA, or receive reimbursement from the HRA for qualified expenses without enrolling in the medical plan.

Example: Brocket Sprockets, a bicycle retailer, offers employees a medical plan with a $1,250 self-only deductible and a $2,500 family deductible. (This plan is not HSA-qualified). It then integrated an HRA that pays all deductible expenses after $500 (self-only) and $1,000 (family), leaving workers with, in effect, a $500/$1,000 deductible plan.

Of course, the company can just offer a medical plan with a $500/$1,000 deductible without integrating an HRA. So, why choose an HRA?

• The employer, in effect, self-insures the deductible corridor covered by the HRA. The company knows that its HRA costs (claims reimbursement and administrative fees) generally are less than the premium savings from choosing the plan with the higher deductible.
• Insurers sometimes don't price their plans consistently. They may adjust premiums to encourage or discourage employers from choosing that plan. In the example above, if the insurer offers a discount on the $1,250/$2,500 plan, the company can pocket that discount and use the HRA to bring the net deductible back to $500/$1,000.
• The company can adjust the deductible as it chooses (for example, by increasing it $100/$200 annually) in increments that the medical plan doesn't offer.

A key feature of an HRA is that it's a notional account. Employers in effect issue an IOU to each employee. Employees can tap this promise to pay when they incur deductible expenses that qualify for reimbursement, but enrolled employees don't have a funded account in their name from which they can demand cash. Thus, employers don't spend any money (other than HRA administrative fees) unless employees or their covered dependents incur qualifying claims.

The Disqualifying HRA

An HRA integrated with a medical plan disqualifies enrollees from opening and funding a Health Savings Account if the HRA reimburses covered claims before the employee has incurred at least $1,500 (self-only coverage) or $3,000 (family plan) of deductible expenses.

Example: Salivation Army, a local chain of dental practices, offers its associates an HSA-qualified medical plan with a $4,000/$8,000 deductible. It then integrates an HRA that reimburses all deductible expenses after $1,000/$2,000 (paying the final $3,000 of self-only and final $6,000 of family claims). This plan is disqualifying because the addition of the HRA brings the net deductible to $1,000/$2,000, which is below the statutory minimum annual deductible of $1,500/$3,000 for an HSA-qualified plan.

Do employees feel a sense of loss that they can't fund a Health Savings Account? Some who are financially astute may be discouraged. But the company never offered a health Savings Account program, so this integrated disqualifying HRA doesn't represent a benefits take-away. And in many cases, employees would rather have an HRA than an HSA.

Why?

Simply put, if the company saves, say, $20,000 in premiums, it can do one of two things. It can eliminate the HRA or retain it with an HSA-qualified HRA design and contribute that $20,000 to employees' Health Savings Accounts. Employer contributions are in cash, so the company spends the full $20,000.

In contrast, the company can offer an integrated HRA. The company has run an analysis of its claims (or its HRA administrator has provided information on claims distribution for similar companies) and determined that, in an average year, it will incur total HRA costs (claims reimbursement and admin fees) equal to half the total face value of employee's HRAs. In other words, the company can allocate that $20,000 to HRA expenses and give employees IOUs that total $40,000. This approach benefits workers with high deductible expenses (a family in the example above would claim $6,000 to offset its $8,000 of deductible claims) and offers no benefit to workers with no or low deductible claims.

Simply put, in the case of a company whose actual HRA expenses are projected to be 50% of the value of its total HRA liability, it can promise to pay twice the level of cash that it allocates to the program.

The Little Tweak That May Make Everyone Happy

An alternative is to design the HRA so that it doesn't disqualify enrolled employees from opening and funding a Health Savings Account.

Example 2: Royal Flush, a Reno-based plumbing company, has offered the same $4,000/$8,000 HSA-qualified medical plan as Salivation Army to its workers for four years. It integrated an HRA that reimbursed all deductible expenses above $1,400/$2,800 (the statutory minimum annual deductible at the time). As the minimum deductible requirement increased, Royal Flush increased the reimbursement point of the HRA, so that it's $1,500/$3,000 in 2023 and will rise to $1,600/$3,200 at the 2024 renewal. This HRA is called a Post-Deductible HRA because it reimburses only expenses above ("post") the statutory minimum annual deductible of an HSA plan. This arrangement is HSA-qualified.

If Salivation Army (above) were to introduce this program in 2024, employees who don't understand the benefits of a Health Savings Account (or who have other disqualifying coverage) might object. Why? A family's deductible responsibility increases from $2,000 to $3,200. That's a substantial increase for a family that incurs high deductible expenses.

So, what's a company to do? It can contribute to eligible employees' Health Savings Accounts. For example, Salivation Army might offer families an $800 cash contribution to their Health Savings Account. If the family incurs high deductible expenses, it can apply the $800 to reduce the family's responsibility to $2,400. That's higher than the current $2,000. But the employee can fund the HSA through pre-tax payroll deductions to fund the $400 difference. At a 30% combined federal and state tax rate, the tax savings reduce the family's net cost of the $400 of deductible expenses to $280.

Thus, in exchange for a net increase of $280 in deductible responsibility, the family can fund a Health Savings Account up to $7,500 in 2024 (the $8,300 statutory maximum annual contribution for a family contract, less the company's $800 contribution). Even if the family contributes only $3,000 to cover out-of-pocket qualified medical, dental, vision, and OTC expenses, the tax savings amount to $900 at the 30% tax rate. In other words, the family can buy $3,000 of qualified expenses for only $2,100. That's an enticing discount for consumers who need to replace a refrigerator, want to go on a cruise, or are repaving their driveway.

The Bottom Line

Post-deductible HRAs are a powerful tool for employers who want to extend to their workers the opportunity to open and fund a Health Savings Account. But some budget-conscious companies are looking for ways to continue to offer affordable coverage without increasing dramatically employees' share of premiums or deductible responsibility. For the budget-conscious company, choosing an HSA-qualified plan with its greater premium savings and pairing it with an HRA whose reimbursements are funded with those premium savings is the best approach for both the company and workers. And although the underlying medical plan is HSA-qualified (and may even have some form of HSA in its name, such as Saver 3000 HSA Plan), there is no requirement that employers who offer an HSA-qualified plan to design their benefit program so that the design itself isn't disqualifying.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.