High deductibles are a growing trend in health insurance. This article explores how they work and why they could be a good choice.
To attract and retain talent, employers are increasingly looking at benefits. And at the top of the list? While it’s not healthcare (paid vacation has maintained its “most desirable benefit status”), healthcare continues to be a major factor. Rather than be constrained to one category, health benefits have been separated into mental health, wellness programs, and traditional healthcare benefits.
In fact, mental health coverage is the third most wanted perk by employees, and wellness programs follow up in fifth place. But HSA healthcare spending plans are also popular, with 68% of employees interested in more flexible health plan options.
When it comes to choosing a health insurance plan, employers need to balance plan benefits with its costs. This means you often have to choose the healthcare plan or service that will provide the widest coverage that is within budget.
For many businesses and employees, a high deductible health plan can be just what they need.
What is a High Deductible Health Plan?
A High Deductible Health Plan (HDHP) is a healthcare plan where the monthly premium isn’t so high, but the deductible is. At first, it can be hard to see the upside. What if you or your employees can’t afford such a costly upfront cost?
That is why so many people shy away from HDHPs. But if you run the numbers, an HDHP isn’t necessarily more expensive.
After all, most people never even hit their deductible, so why spend all of that money? This is a major reason why an HDHP is more convenient for both parties. Both sides are paying much less on premiums per year this way.
Generally speaking, an HDHP is usually better for younger employees or those who don’t require regular healthcare costs.
Generally speaking, an HDHP is usually better for younger employees or those who don’t require regular healthcare costs. This plan can also benefit your higher-paid employees who may be able to take advantage of the tax benefits related to the high deductible health plan.
How is an HDHP different from other health plans?
We’ve already covered that HDHPs have high deductibles and lower monthly premiums. But HDHPs have other significant distinctions.
Unlike standard healthcare plans, most preventative care is completely covered by the plan in-network. This includes things such as vaccines and your yearly wellness check. Your employees may need to seek out doctors and/or facilities covered by your HDHP, but they don’t need to worry about out-of-pocket expenses after they meet their deductible. In fact, until they meet their deductible, it is impossible to use copays for doctor’s visits or prescriptions.
An HDHP is the only health care plan that’s eligible for a Health Savings Account (HSA), and it’s very common for employees to combine the two.
However, the maximum limit on an out-of-pocket cost can be quite expensive if your employees have recurring healthcare costs. In 2021, for example, users on the individual plan have to reach a $7,000 limit and the family plan is $14,000.
Secondly, an HDHP is the only health care plan that’s eligible for a Health Savings Account (HSA), and it’s very common for employees to combine the two.
Health Savings Account (HSA)
An HSA is like a personal savings account for healthcare costs that covers whatever the HDHP doesn’t. Employees can fund their HSA through either payroll-deducted pre-taxes or claim a dedication on their tax returns.
Every year, employees decide how much they want to contribute to their HSA from their taxes, and most HSAs even issue a debit card. However, HSA funds must only be used for qualified medical expenses. Employees can’t use their HSA to pay for an insurance premium, for example. If they have a chronic illness or disability that may require some heavier procedures such as surgeries, these also may not be covered. HSAs are only available to those who have an HDHP and are not eligible for Medicare.
In addition, not all HDHP plans qualify for an HSA, so if this is something you want to offer employees interested in, it’s best to look for anything that says, “HSA-eligible.”
How can employees use their HDHP?
HDHPs also offer a lot more choices for both the employer and employee. An employer can dictate what they’re willing to reimburse with the HDHP, such as choosing to cover medical and vision, but not dental.
At the same time, employees also are not forced to choose between different plans via the same carrier. This helps them decide which is best for them based on their needs, not simply what the company offers. This kind of flexibility can really relieve a lot of stress for everyone involved.
Finally, an employee’s HSA is not dependent on the employer. If an employee decides they wish to leave that company, that money remains theirs to use on healthcare regardless of who they work for. This can alleviate a lot of stress on the employee.
The alternative to an HSA is a flexible spending account (FSA), which tends to be a more popular option, but there are more restrictions to using this account. Once employees leave the company, they cannot take their FSA with them unless they are eligible for Consolidated Omnibus Budget Reconciliation Act (COBRA). However, employees benefit from higher HSA contributions in comparison to an FSA.
Still, because of the higher annual deductible, many may hesitate on signing up for an HDHP. Both employees and employers may worry the higher deductible won’t be worth it in the end, even if they’re relatively healthy.
As a result, some employers have started to give out incentives to encourage their workers to consider an HDHP. For example, they may offer a special contribution for employees who have gotten their flu shot this year or taken advantage of preventive services.
Tax benefits of HDHP
One significant advantage of an HDHP is that they offer significant tax savings. Payments used for medical procedures are tax free as long as they’re qualified to be covered by the HDHP. However, anything that’s not qualified to be covered will cost you a penalty of 20% if you’re under the age of 65.
If you don’t end up using all of the money you set aside that year in your HSA, it rolls over to the next year. That means you have even more tax-free funds to spend on healthcare the following year.
Furthermore, HSAs can even earn tax-free interest. That’s quite the benefit for anyone who routinely has been spending too much on the healthcare they hardly use! The money you put in your HSA rolls over year after year; there is no limit to how much money you can save if you keep good health.
Once you turn 65 and have reached the age of retirement, the money becomes yours to do as you please. If you continue to use it on yearly wellness checks and other health-related things it covers, it remains tax-free. However, if you decide to use it for unrelated, unqualified medical expenses, it’ll be taxed according to your income tax rate at the time.
Payments used for medical procedures are tax free as long as they’re qualified to be covered by the HDHP.
Are HDHPs right for your employees?
Deciding on the right healthcare plan for your employees requires care and consideration. If your workforce is made up of primarily young and healthy workers, or you have a small team with high salaries, an HDHP might be the perfect plan for your office. Lower premiums for both individual and family coverage, as well as potential tax benefits, can both make an HDHP more affordable than a regular health insurance plan.
To learn more about finding the best health care plan for your employees, check out our free Benefits Benchmark Report for SMBs.