With healthcare costs high and forever on the rise, employers that provide medical plans such as HSAs and HDHPs likely will have an advantage over those that don’t.
Americans are paying more for gas, food, and most goods and services because of today’s high inflation. Those in High Deductible Health Plans (HDHPs) with Health Savings Accounts (HSAs) shouldn’t be surprised to learn that starting on January 1, 2023, they’ll be paying more to lower their healthcare expenses, according to the IRS. Changes in HDHP deductibles will begin on or after that date.
The IRS released Revenue Procedures 2023, which raises:
- HSA contribution limits for employers and employees
- HDHP minimum qualifying deductibles
- HDHP maximum out-of-pocket limits
The annual increases are tied to inflation and amount to hundreds of dollars above 2022 levels.
An overview of HDHP and HSA provisions may give insight into how the 2023 cost increases could affect employers who currently offer, or plan to offer, these benefits.
The benefits overview
Currently, most large employers (200 or more employees) offer HDHPs, compared to small businesses (SMBs with three to 199 employees). More than half (56%) of large firms offer HDHPs with a savings option (SO) versus 25% of SMBs.
Kaiser Family Foundation 2021 research shows that of the employers offering health coverage, 22% offer an HDHP/HRA (health retirement account) plan, an HSA-qualified HDHP, or both.
Here’s what employees need to know about HDHPs and HSAs, and what advantages and shortfalls employers should help them understand before they choose coverage:
- Pre-tax dollars can cover health plan deductibles, copays, coinsurance, and other qualified expenses, including vision, dental and drug costs.
- People can only contribute to an HSA if they have an HSA-eligible HDHP.
- HSAs allow account holders to roll over their funds from year to year rather than lose unused funds annually.
- People can deduct the funds in their HSAs from the income on their federal tax returns.
- When account holders with money in their HSAs turn 65, they can spend the funds any way they choose.
It’s important to note that if the funds aren’t used to pay for qualified medical expenses, the funds will be taxed as regular income – at the account holder’s current tax rate.
A deductible is what insurance plan participants must pay annually for their medical expenses before their insurance coverage kicks in.
Other provisions include:
- HDHP deductibles are designed to be high, allowing plan participants to save on medical expenses once they satisfy the minimum deductible.
- An HDHP’s monthly premiums are generally lower than most traditional health care plans.
- Plans may cover preventive medical care without a deductible or with a deductible that’s lower than an annual minimum deductible.
According to the Mayo Clinic, businesses are more likely to offer HDHPs than other medical plans or as one of a few limited options.
Based on the Patient Protection and Affordable Care Act’s (ACA’s) official website, Healthcare.gov, HDHPs are available through employers or directly through insurance companies but are not always accessible in every U.S. location. The site helps people locate plans.
2023 limit increases
The table below breaks down HSA and HDHP increases for self-only (individual) and family coverage. The chart also illustrates the rise in limits from 2021 to 2023.
Employers should ensure that they and their employees know the ACA’s effect on health benefits. In December 2021, the Centers for Medicare and Medicaid Services (CMS) announced that the maximum out-of-pocket medical costs for non-grandfathered group health plans under the ACA are higher than the 2023 HDHP out-of-pocket maximums.
ACA maximums are $9,100 for self-only coverage and $18,200 for other types of coverage.
What employers must do
How will the steep increases in HSA contribution and HDHP deduction limits for 2023 impact employers? Since the limits won’t set in until the first of next year, any adverse effects haven’t yet surfaced.
However, benefits experts recommend that employers take these steps to prepare employees for the changes:
- Update their benefits plan communication, open enrollment information, and other materials to address the higher HSA and HDHP limits.
- Review their plan’s minimum deductibles and maximum out-of-pocket expenses – or cost-sharing limits – to prepare for the new plan year.
- Base matching contributions on IRS limits.
- Ensure that their qualified HDHPs meet the new required deductibles.
- Make plan-design changes for 2023, if necessary.
- Increase their HSA contribution.
Communicating these changes early and clearly will help your employees have the facts they need.
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Pros and cons of HSAs and HDHPs
SMBs that plan to offer HDHPs and HSAs should review the pros and cons of sponsorship. It is also essential to make sure employees understand how these benefits work.
These accounts can benefit SMBs and their employees by being a:
- Potential magnet for high-caliber talent, especially millennials
- Tax deduction for SMBs and employees
- Tax-free vehicle that can cover various medical expenses, from copays, prescriptions, corrective vision surgery, and dental care to smoking cessation, nursing home care, physical therapy, and COBRA payments
- Benefit that pays for qualified medical expenses for family members and independents, even if they’re not covered by the employee’s HDHP
- Vehicle for investing in stocks, bonds, and other types of investments
- Federally insured by banks and credit unions for up to $250,000
Since these accounts can be used for a variety of purposes, they can be a benefit for many.
The downsides of these accounts predominantly affect employees. Things to consider include:
- A 20% penalty by the IRS on account holders under 65 for using HSA funds for non-medical expenses
- Potential IRS audits. They can audit expenses; therefore, businesses should encourage employees to keep all receipts for expenses paid with HSA funds
- Possible penalties. The IRS may levy tax penalties if employees stop contributing to their accounts six months before applying for Social Security benefits
Not all employees are eligible to participate in an HSA. For instance, a person who claims to be a dependent on someone else’s tax return isn’t eligible to participate in the plan
Besides typically having lower premiums than a point of service (POS) or preferred provider organization (PPO) plans, other advantages include:
- Networks for the program aren’t necessarily as limited as home maintenance organizations (HMOs)
- Plan participants who seldom use their benefits may save money if they’re not on expensive medications
- Participants’ monthly medical bills may be lower
- Healthcare providers and insurers negotiate rates for out-of-pocket expenses, as opposed to the plan setting these costs at market rates
- Plan participants’ HSA accounts never expire
Many employees like the long-term nature of this benefit because it allows them flexibility.
Disadvantages of these plans include:
- Employees with chronic medical conditions may find that their out-of-pocket expenses are high
- Policyholders pay for office visits, prescriptions, and diagnostic tests out of pocket until they reach their deductible
- When policyholders need surgery, they must reach their deductible before their insurance kicks in to cover it
- High monthly out-of-pocket expenses could mean that employees aren’t maximizing the use of their plan
- Deductibles can be extremely high, especially for family coverage
High deductible health plans are great for someone who can plan for major expenses. However, for employees who live paycheck-to-paycheck, these can be problematic.
SMBs can and do sponsor HDHP with HSAs. Deductibles are high compared to other plans, and HSAs require contributions. Still, these benefits can help SMBs compete with large employers for talent.
Employees cite health coverage as their most important benefit. And with health care costs high and forever on the rise, employers that provide medical plans likely will have an advantage over those that don’t.
For SMBs to offer HDHPs, they must:
- Have at least two employees, including the business owner and someone other than the owner’s spouse
- Pay at least 50% of the health plan’s premium. According to American Express, an 80/20 ratio between businesses and employees is typical
SMBs can give employees a bonus by contributing to the employees’ HSA, although that’s not a requirement.
By weighing the pros and cons of HDHPs and HSAs, SMBs can make an informed decision about what works best for their organization and its employees.