Employees Still Perplexed by HSA Plans During Open Enrollment

Misunderstandings keep many from maximizing health savings accounts

Stephen Miller, CEBS By Stephen Miller, CEBS October 8, 2019
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Employees often don't know how to use health savings accounts (HSAs) and the high-deductible health plans (HDHPs) the accounts are coupled with. This leads some to bypass an HSA option during their employer's annual open-enrollment period, while others who enroll in HSA-eligible plans often fail to take full advantage of them.

HDHPs have lower monthly premiums than traditional health plans, making them less expensive for employers and a cost-effective option for many employees—if they open an HSA to help pay the higher deductibles and take advantage of the triple tax-saving opportunities:

  • HSA contributions are free of payroll and income taxes when deducted from employees' paychecks.
  • Account funds can be invested and grow tax-free.
  • No taxes are owed on withdrawn funds if used for qualified medical expenses.

Employees may not realize that payroll-deferred HSAs contributions are not subject to Social Security and Medicare (FICA), and federal unemployment (FUTA) taxes. In other words, when employees contribute to their HSA through a payroll deduction, the money is excluded from federal income taxes and FICA/FUTA taxes. Only three states—California, New Jersey and Alabama—tax employer and employee HSA contributions at the state level.

During open enrollment for the 2020 plan year, employers should highlight the unique tax advantage given to HSAs in their communications about HSA-eligible health plans, pointing out why this health insurance option now may be more appealing, benefit experts advise.

[SHRM members-only HR Q&A: Are employer contributions to an employee's health savings account (HSA) considered taxable income to the employee?]

Coverage for Chronic Conditions

New IRS regulations allow HDHPs to pay for more chronic-condition treatments before enrollees meet their plan deductible, and HR benefit managers should inform employees how this expanded coverage makes HSA-eligible plans a more attractive choice, said Paul Fronstin, director of the health research program at the nonprofit Employee Benefit Research Institute (EBRI) in Washington, D.C., during an EBRI webinar.

Notice 2019-45, which became effective when issued July 16, adds 14 cost-effective items and services to the types of medical care that the plan can pay for, in whole or in part, outside the deductible. These treatments include beta blockers for coronary artery disease, insulin for diabetes and statins for heart disease, as well as devices such as blood pressure monitors for hypertension and glucometers for diabetes.

Allowing HDHPs to pay for these expenses before the employee meets the deductible "will accelerate enrollment in the plans," Fronstin expects. "I think you'll see both more people enrolling in them and more employers offering them because of this."

Targeted HSA Communications

Employees often confuse HSAs with flexible spending accounts (FSAs) and their annual "use it or lose it" restrictions on unspent funds; however, HSAs have no such restrictions.

"We'll often hear people confidently say that HSAs are 'use it or lose it' in focus groups or when we do interviews," said Jennifer Benz, national practice leader at benefits communications firm Segal Benz in San Francisco.

Creating clear examples of how HSA/HDHPs work in different situations "can help tremendously in overcoming initial hesitations about enrolling in a high-deductible plan," Benz said. "Targeted messages can show how these plans work for people in different situations."

Create tailored communications for situations such as when "someone is currently in family coverage or just covering themselves, whether they are heavy or light users of their health plan, and whether they've participated in well-being programs," Benz suggested. Targeting messaging "makes it feel more personal."

Benz led a team that helped software firm Adobe roll out its HSA/HDHP option a few years ago and encouraged employees to select the new, lower-cost plan. The campaign presented the math in a simple way, so people could see exactly how the new plan compared to traditional coverage, and it included an infographic showing the HSA's tax advantages in a visual format, she said. As a result, she explained, "we were able to move 62 percent of their employees into their HSA-eligible plan in the first year."

Don't overlook text messages and phone-friendly apps, said Eric Record, well-being and benefits leader at Steel Dynamics Inc., a Fortune 500 steel producer in Fort Wayne, Ind. "Up to three-quarters of the enrolled members in our health plans now use mobile devices to get access to information about their HSAs and other benefits."

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HSAs for Saving, Not Just Spending

Another common misstep made when communicating HSA information to employees is that "we often gloss over the long-term savings potential of the HSA during enrollment," said Benz. "One of the greatest mistakes we made was introducing HSAs as a souped-up version of a flexible spending account instead of as a health care 401(k). We now have to correct that by being very clear about the long-term benefits."

Once people have sufficient funds in their HSA to meet their deductible, Benz advises urging them to consider investing their remaining HSA funds by "helping people to see the power of long-term investing."

Record suggested clarifying that "once participants invest HSA money, it's not like a 401(k), where they have to jump through a hoop to get those funds out if they need them. Make sure to educate employees that HSA funds can be moved back and forth for investment and spending" within the account.

Communications should make clear that "the invested portion of the funds are subject to short-term losses, as any investment would be within their 401(k) plans," he advised.

Another point to clarify: Although HSA participants aren't eligible to also contribute to a full-purpose FSA, they can contribute, up to the annual limit, to a limited-purpose FSA for dental and vision care, which can help them to keep money in their HSA for long-term savings or investing.

The Step That's Right for Them

"Help people take that next step that's going to be right for them," said Benz, which can mean first saving enough in their HSAs to pay for care up to the deductible. If they need to achieve a higher balance, "work with them through financial-wellness programs," she advised, noting how employees might be able to save in both their 401(k) and HSA. If they're at the point when they're able to invest HSA funds, "show them how to do that," she said.

Fronstin added, "Let's recognize that there are going to be those who cannot afford to contribute to the HSA [and invest for future expenses] because of their income. The advantage of the account for them may be the ability to put money in," deferred automatically from their paycheck and not subject to payroll and income taxes, he said, so that they can "at least benefit from the tax break that they get by using the account to pay for expenses they incur."

Next-Generation HSA Platforms

"The best way to make HSAs more effective is to make it as easy as possible for employees to get the answers they need, not only to decide to enroll but to maximize the benefits of HSAs once enrolled," said Tom Torre, CEO of HSA administrator Bend Financial in Boston.

"Employers should work to get technology in their corner," he advised.

Online platforms make HSAs easier for participants to use by automating enrollment and showing:

  • Employer contributions to date and planned.
  • Employees' contributions to date and planned.
  • Contributions made as a percent of the annual contribution limit set by the IRS.
  • Tax savings to date.

HSA platforms also let participants adjust their contributions and manage investments in mutual funds offered through the HSA administrator.

"Enrollment periods can always be chaotic, but platforms that incorporate technology such as chatbots can answer employees' routine questions, freeing up HR staff to provide more challenging assistance," Torre said.


Related SHRM Articles:

2020 HSA Limits Rise Modestly, IRS SaysSHRM Online Benefits, May 2019

Address HSA Misconceptions During Open EnrollmentSHRM Online Benefits, October 2016

How to Explain High-Deductible PlansSHRM Online Benefits, October 2016

Health Care Consumerism: HSAs and HRAsSHRM Online Benefits, updated May 2016

Related SHRM Resource:

Open Enrollment Guide & Resources


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