We’ve all heard the timeless adage “don’t judge a book by its cover.” These are sage words that taught us as children to never judge the value of something by its outward appearance alone. In the world of employee benefits, these words are resoundingly applicable to the way in which some employees view High Deductible Health Plans (HDHPs).
HDHPs have become a mainstay in the benefits world, with many employers opting to provide these consumer-driven options, paired with access to and/or contributions toward a Health Savings Account (HSA). In fact, 48% of Bay Area employers that provide medical coverage offer an HDHP/HSA option*.
That being said, the most prevalent medical plan option remains the Preferred Provider Organization (PPO) plan, a plan that generally includes a much smaller deductible and access to first dollar coverage for services that require a copayment (e.g. office visits, prescription drugs). As such, when employers and brokers alike present HDHPs and PPOs side-by-side during new hire orientations and open enrollment meetings, employees see the plan details and often make quick judgments based on the plan that initially appears to have richer benefits.
The common judgment is that the HDHP option is the objectively less-preferable option, because of the higher deductibles and out-of-pocket maximums. However, in order to make an honest and accurate assessment of the HDHP option, employees must first fully comprehend how HDHPs function, as these plans have nuances that require a deeper understanding, such as the ability to open an HSA.
HSA-qualified HDHPs allow eligible participants to open, contribute and receive contributions toward an HSA. More details about the eligibility requirements to open an HSA can be found here. HSAs are powerful tax-saving vehicles. In fact, an HSA is the only triple-duty tax-free investment vehicle in the IRS tax code. An HSA is an individually owned account that allows participants to contribute money on a pre-tax basis** to pay for eligible medical, dental and vision expenses. Since these accounts are individually owned, the funds are not subject to any use-it-or-lose-it provision; funds will continue to be available year after year. Any gains made on the account are also tax-free. (Many institutions provide investment options for HSA balances, including stocks and mutual funds!) Lastly, any money withdrawn and spent toward those eligible expenses is tax-free.
As powerful as the HSA is on these points alone, any employer funding into the HSA would be an even greater incentive to consider enrollment into the HDHP. Employer contributions into an employee’s HSA belong to the employee as soon as a deposit is made. Therefore, even if an employee opted to transition away from the HDHP on a later date or terminated employment, any employer contributions deposited into the HSA remain with the employee.
One final consideration is the difference in per-paycheck contributions for coverage. HDHPs typically have lower premiums than traditional PPOs or HMOs. As a result, the per-paycheck contribution for HDHP coverage is often lower than other coverage options. These contribution savings may actually result in the HDHP having a lower overall out-of-pocket expense for the employee. Any savings should be further captured by diverting it into an HSA so that the employee can take advantage of the triple duty tax savings!
Every employer’s philosophy and strategy with regards to HDHPs and HSAs is different. It is possible that the HDHP does not make sense to an employee, even when factoring in the finer details. However, simply making a decision based on the plan details, or “the book’s cover” would not serve anyone well, as the contents of the book beyond the cover may include key factors that would otherwise point the employee in a different direction.
* 2018 Silicon Valley Employee Benefits Index (SVEBI)
** Contributions to HSAs are pre-tax on a Federal level and most states do not tax contributions. However, there are two states who currently do tax eligible HSA contributions: California and New Jersey.