Consumer-Driven Options for Open Enrollment Success

A variety of strategies and incentives promote smarter health care decision-making

By Natasha Rankin Oct 27, 2014

When it comes to employer-sponsored health insurance benefits, cost containment has been a decades-long battle. And the rollout of the Affordable Care Act’s (ACA) employer “shared responsibility” provision—commonly referred to as the employer mandate—will only further burden an employer’s health care bottom line.

This is the year employers have made tough decisions about the type and level of coverage they can offer their employees as they strive to manage costs and comply with new rules. These decisions increasingly include a cost-sharing approach that brings employees into the equation with increased accountability and financial responsibility for their own health care. But this doesn’t mean an employer has to leave employees to fend for themselves.

Below are a few easy-to-implement, tax-advantaged strategies to help employees manage out-of-pocket costs:

Adopt the flexible spending account (FSA) $500 carryover rule.

In 2013, the IRS removed the biggest deterrent to FSA participation—the “use-or-lose” forfeiture provision—with a rule change that allows a carryover of up to $500 in unused health FSA funds into the next year’s plan. This is great news for employees who rely on FSAs but feel pressured at year’s end to spend down their funds or forfeit unused dollars. Workers who turned down FSAs because they didn’t want to risk losing money now have the option to set aside $500 in pretax dollars to pay for qualified medical expenses. The $500 carryover will have no impact on the maximum health FSA contribution limit ($2,500 in 2014, rising to $2,550 in 2015).

For the employer, adopting the carryover rule can promote increased employee participation—which, in the end, means 7.65 percent FICA tax savings on voluntary employee salary reduction contributions.

Offer consumer-directed plan designs.

Health insurance costs for large employers are expected to increase 6.5 percent in 2015, according to the National Business Group on Health. Coupled with impending ACA coverage requirements, business owners are looking to tighten their belts with the adoption of high-deductible health plans (HDHPs).

While HDHPs are gaining momentum due to immediate bottom-line savings with reduced premiums, employees are now responsible for greater out-of-pocket costs before their health insurance kicks in. In 2015, allowed deductibles for health savings account (HSA)-eligible HDHPs will range from a minimum of $1,300 to a maximum of $6,450 for single coverage; family plan deductibles range from a low of $2,600 to a high of $12,900.

A smart, affordable health care financing strategy employers can easily implement is a consumer-directed approach that pairs HDHPs with defined-contribution, tax-advantaged FSAs, HSAs or health reimbursement arrangements (HRAs), known collectively as consumer-directed health plans (CDHPs). These plans put employees in charge of how, how much, when and where their health care dollars will be spent. Depending on the plan design offered, employers, employees or both together can make tax-advantaged contributions to these plans.

Create wellness programs with financial incentives.

The increased adoption of CDHPs can help connect employees with the cost of their health care. And when paired with a wellness program, it can connect employees with their physical health as well.

Creating or expanding a wellness program offers the opportunity to improve employee health–and, ultimately, contain health care costs. A 2010 study in the journal Health Affairs found that every dollar spent on wellness programs reduced medical costs by $3.27 per employee, and cut absenteeism costs by $2.73. Additionally, the National Business Group on Health study cited above found that 61 percent of companies said wellness programs were one of the three most effective tools to keep health care costs down.

Starting in 2014, the ACA outlined new wellness program parameters to promote a healthier workforce: the maximum amount an organization can designate for wellness was bumped up from 20 to 30 percent of the total annual cost of premiums. And for wellness programs tied to smoking cessation, the maximum amount was increased to 50 percent of the cost of premiums. The good news for business owners: FSAs, HSAs and HRAs can be used to deliver these financial awards to wellness-program participants.

Educate, Educate, Educate

While employers are moving toward a consumer-directed approach for health benefits, the successful adoption of HDHPs, FSAs, HSAs and HRAs will be contingent on employers’ ability to effectively educate employees. For instance:

Connect with employees early and send frequent reminders—especially if this is the first time your company is using CDHPs.

Keep it simple, clearly explaining all the employee benefits, like pre-payroll tax deductions and employees’ ability to exert greater control over their health care. And tailor communication to your workforce’s demographic.

You know your employees best, so be sure to use language that resonates with them—as well as delivering communications through channels that will best reach them. Your broker can provide resources, language guidance and communications materials to help make the transition to CDHPs go smoothly.

Five Reasons Employees Should Invest in an FSA

Here are a few talking points for promoting employees’ participation in flexible spending accounts.

Unprecedented tax savings. Employee contributions to an FSA are made through pretax salary reductions exempt from federal income tax, Social Security tax and most state taxes. Reduced taxable income means an employee can save an average of $25 for every $100 they spend for medical services, co-pays, prescriptions and out-of-pocket medical expenses.

Ability to carry over unused funds into the next plan year. The IRS relaxed the 30-year-old “use-or-lose” forfeiture rule for health FSAs in 2013 (see above), allowing for greater flexibility with a carryover of up to $500 in unused funds into the next plan year. The “use-or-lose” rule was the No. 1 deterrent for FSA participation. While 85 percent of large employers offered FSAs, fewer than 22 percent of employees took advantage of this tax-advantaged health benefit, citing “fear of losing unused funds” as the main reason why they didn’t enroll.

Management of out-of-pocket costs. An increasing number of employers are moving to HDHPs that lower premium costs but leave the employee exposed to greater out-of-pocket expenses before insurance kicks in. Although medical FSAs can’t be combined with HSAs, limited-purpose FSAs covering dental and vision services are allowed with HSAs. For those who have an HDHP but no HSA, an FSA can help offset increased deductible costs for health care services.

Tax-advantaged payment of over-the-counter (OTC) drugs and supplies. There are more than 32,000 OTC items eligible for reimbursement by a FSA, including first aid supplies, sunscreen, pain relievers and thermometers. In addition, most plans offer a debit card that provides easy access to funds. As of January 2011, however, certain OTC medicines require a doctor's prescription to be eligible for FSA reimbursement.

Better health and wellness benefits. The security of having funds directly withdrawn from each paycheck—creating a health care fund that can be tapped on the first day of the plan year—means an employee will have the funds available to help pay for unplanned or planned dental, vision and medical procedures.

Natasha Rankin is executive director of the Employers Council on Flexible Compensation (ECFC), a nonprofit organization of industry professionals who champion choice in benefit solutions through advocacy and education. ​​

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