Two Strategies to Help Lower- Paid Employees on HSA-qualified Plans

Yes, they're called High-Deductible Health Plans. But employers can help workers with lower incomes manage their out-of-pocket costs - and perhaps chip away at the retirement gap.

One challenge for employers who've implemented or are considering a robust Health Savings Account program is how to attract lower-income workers for the right reasons. Sometimes these lower earners enroll in the HSA-qualified plan because the payroll deduction is low without considering how they'll manage the often-higher out-of-pocket costs.

Even among workers who understand the plans and can see that the company has structured the options so that the HSA-qualified plan costs less annually (the combination of lower payroll deductions and employer contributions to a Health Savings Account cover the out-of-pocket maximum), cash flow can be a barrier to enrollment. Lower payroll deductions accumulate during the year, so the full savings aren't realized until year-end. And employer contributions may not be front-loaded. In this scenario, a new enrollee who satisfies the deductible early in the year may face a cash-flow issue as the savings accumulate over 12 months, but provider invoices are due sooner.

Innovative employers can design innovative Health Savings Account programs that are attractive to all income ranges. The specific design depends on the company's financial health and employees' health and financial acuity.

Below are several approaches that may help employers enroll more workers in the company's Health Savings Account program.

Strategy No. 1: Unequal Health Savings Account Contributions

A little-used provision in the Health Opportunity Patient Empowerment Act of 2006 allows employers whose Health Savings Account contributions are governed by Cafeteria Plan rules to deposit higher amounts into lower-paid employees' Health Savings Accounts. This approach allows the company to effectively reduce the potential out-of-pocket financial responsibility that lower-paid employees must pay from their pre-tax payroll contributions or personal funds.

Here's how such a program might work when the company offers a plan with a $5,000 family deductible and 20% coinsurance up to a $10,000 out-of-pocket maximum:

• Top third of earners: The company contributes $2,000. The employee must fund the remaining $3,000 of deductible and $5,000 of coinsurance expenses, or $8,000 total.
• Middle third of earners: The company contributes $3,000. The employee must fund the remaining $2,000 of deductible and $5,000 of coinsurance expenses, or $7,000 total.
• Bottom third of earners: The company contributes $4,000. The employee must fund the remaining $1,000 of deductible and $5,000 of coinsurance expenses, or $6,000 total.

It's important to note that most families don't incur the $30,000 of covered expenses that bring them to the out-of-pocket maximum of $10,000 ($5,000 deductible plus 20% of the next $25,000, or another $5,000). In fact, most don't satisfy a $5,000 deductible in any year unless a family member has an expensive chronic condition or incurs a major acute illness or injury. Thus, although the out-of-pocket responsibility is still daunting, the amount of deductible expenses that employees must fund with their own money is small.

Does this strategy work? One large company thinks so.

Strategy No. 2: Post-Deductible Health Reimbursement Arrangement

A second option is to offer a Post-Deductible HRA. HRAs are reimbursement arrangements funded solely by the employer and are integrated with a medical plan (in this case - there are other designs that reimburse premiums). In a typical design, the HRA reimburses a portion of employees' deductible and coinsurance responsibility.

Employers are attracted to HRAs because they're notional accounts. They're unfunded obligations that don't require employers to spend cash unless employees incur qualified expenses. It's not uncommon for employers to pay between 30% and 50% of the potential liability (figures vary by HRA design and employees' claims experience).

Example: Strong Electric offers family coverage with a $3,000 deductible. It integrates an HRA that pays the final $2,000 of deductible expenses. Of the 10 employees, only four incur more than $1,000 in deductible expenses ($1,400, $1,800, $1,900, and $3,000). Strong's maximum liability is $20,000 (up to $2,000 in reimbursement for each of 10 employees), but it pays only $4,100 ($400 + $800 + $900 + $2,000), or 20.5% ($4,100 of $20,000) of the potential liability.

Traditional HRA designs are disqualifying, which means that any employee or dependent who has access to funds through the traditional design - even if she never receives reimbursement - is disqualified from funding a Health Savings Account.

But a Post-Deductible HRA is not disqualifying. This design has a deductible at least as high as the statutory minimum annual deductible for an HSA-qualified plan ($1,500 for self-only and $3,000 for family coverage in 2023), the HRA itself is HSA-qualified.

Example: Chad's family plan has a $6,000 deductible and then 20% coinsurance up to an out-of-pocket maximum of $10,000. His employer integrates an HRA that reimburses all deductible expenses above $3,500 and pays half the coinsurance.

Post-Deductible HRAs don't affect Health Savings Account owners' contribution limits. Owners can deposit up to the maximum, regardless of the value of the Post-Deductible HRA or reimbursement dollars claimed.

Here's how to utilize a Post-Deductible HRA to help lower-income employees when the company offers a family plan with a $5,000 family deductible and 20% coinsurance up to a $10,000 out-of-pocket maximum:

• Top third of earners: The HRA reimburses half the coinsurance. The maximum financial responsibility is $7,500 (the full deductible and half the $5,000 coinsurance). Maximum deductible is $5,000.
• Middle third of earners: HRA reimburses all deductible expenses after $3,500 and three-quarters of the coinsurance. The maximum financial responsibility is $4,750 ($3,500 of the deductible and one-quarter of the $5,000 coinsurance, or $1,250). Maximum deductible is $3,500.
• Bottom third of earners: HRA reimburses all deductible expenses after $3,000 (it can't reimburse expenses below this figure) and all coinsurance. The maximum financial responsibility is $3,000 ($3,000 of the deductible). Maximum deductible is $3,000.

The key to this design is to make the HSA-qualified plan (and thus the Health Savings Account program) attractive to lower earners and not to make the shift from one tier to the next too punitive as measured by out-of-pocket financial responsibility. In this design, only high earners who reach the out-of-pocket maximum (rare) face financial responsibility far higher than their lower-paid colleagues ($2,750 more than the middle third and $4,500 more than the bottom third).

Strategy No. 3: Hybrid

Nothing prevents a company from combining the first two strategies by offering different employer contributions based on income and different levels of reimbursement through an HRA. An employer might want to manage costs by covering more of the potential out-of-pocket financial responsibility through the HRA (employer pays only when employees incur qualified expenses) and less through different Health Savings Account contributions (which are paid in cash, whether or not the employee has corresponding qualified claims). The trade-off to this approach is that employers can cover the first dollars of deductible expenses only with Health Savings Account contributions. In contrast, the Post-Deductible HRA has a minimum deductible, and employees are responsible for all deductible expenses below the HRA deductible.

The Effect on Long-Term Financia Health

The Post-Deductible HRA has no effect on long-term financial health. Unused funds typically expire annually, so employees can't carry over unused balances to use in the future (although employers can allow carryover to the following year, as long as the HRA doesn't reimburse claims below the statutory minimum annual deductible, or roll over unused balances into an HRA that employees can't tap when they remain active in the company's Health Savings Account program).

On the other hand, Health Savings Account contributions, whether made by employer or employee, never expire because the program isn't subject to a plan year. Thus, a lower-paid worker who receives the $4,000 contribution (in our example above) and incurs minimal claims retains the balance (plus any pre-tax deductions that she designates from her paycheck) for use the following year, a decade later, or in retirement. Thus, this strategy can help address the retirement gap in which higher-income employees - who have the means and often greater financial knowledge - save more for retirement than lower-income workers.

The Bottom Line

It's unfortunate that current federal tax law requires HSA-qualified plans to have a broad deductible that's a financial barrier to many lower-income workers, an effect that is felt most acutely by those with chronic conditions that can be managed by regular low-cost care that prevents acute episodes. Employers must recognize that this shortcoming is a barrier to enrollment. Fortunately, employers have several levers at their disposal to reduce those financial barriers. Doing so can have surprising results on the medical and financial health of their employees.

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