HDHPs Gain Traction In Group Market

Posted on Monday, April 22, 2019

Employers are looking to cut costs – and are turning to high-deductible health plans (HDHPs) to help them do it.

HDHPs are a special subset of health insurance plans designed to keep premium costs down. Because deductibles are relatively high, a substantial portion of overall medical costs remain in the plan participant's pocket, and are not absorbed by the insurance risk pool.

To compensate for the increased risk retention on the part of the employee, though, the HDHP comes with a kicker – the option to contribute money pre-tax to a health savings account. All contributions to health savings accounts (HSAs) grow tax-deferred. Anything the account owner withdraws to pay for qualified medical expenses is tax free, though a penalty applies to other withdrawals.

Only individuals covered under a high deductible health plan can contribute to an HSA. 

Do They Work?

They are pretty good at saving on premiums.

One Kaiser Family Foundation survey found that the average employer cost for family high-deductible health plans was $10,409 per covered employee. The annual cost for individual HDHP plans was $4,163 per annum. Both categories compared favorably with HMOs – the other favored low-cost alternative – which ran employers $11,166 and $4,554, respectively.

The savings allure has been irresistible to cost-sensitive plan sponsors: The total percentage of workers covered under HDHPs exploded from 4% in 2006 to 19% by 2012 – an increase of nearly fivefold.

The numbers reflect a broader trend of employers nationwide transferring an increasing burden for their medical costs onto employees. The percentage of workers covered under plans with $1,000 deductibles or more also blossomed to 34% by 2012, according to the Kaiser Family Foundation. That's up from 10% in 2006.

The trend was particularly pronounced at smaller companies: Nearly half of small employers expect workers to shoulder the burden of the first $1,000 in medical expenses before plan benefits kick in.

Total Contributions

You can get a better sense of overall costs when plan contributions are combined. For example, the total monthly premium for the average HDHP health plan, including both employee and employer contributions, is $411 for individual plans and $1,177 for plans covering families. In both cases, this is significantly less expensive than monthly health insurance premiums for plans of all types, which run an average of $468 per month for individual plans and $1,362 for family plans.

However, planners should still account for HSA funding. At least part of the savings should be redirected to health savings accounts, in order for the HDHP concept to function as intended.

2019 Limits and Guidelines

The IRS limits HSA pre-tax contributions to those covered by a qualified HDHP plan, and further restricts pre-tax contributions to HSAs to $3,500 for individuals (up from $3,450 in 2018) and $7,000 per year for families (up from $6,900 in 2018).

The minimum annual deductible that qualifies plans as HDHPs is $1,350 for individual plans, and $2,700 for families – an arrangement that tends to favor families with several children (unchanged from  2018).

Congress has also limited total out of pocket expenses to $6,750 per year for self-only plans, and $13,500 for family coverage (up from $6,650 and $13,300 in 2018). The insurance company must pick up all costs after that point. The Affordable Care Act now prohibits lifetime caps on medical insurance benefits for all plans.

Employer Contributions

Many employers choose to contribute to employee HSAs. This can be a valuable part of the overall compensation plan – especially for workers in higher tax brackets, or with fewer itemized deductions. However, the law generally restricts employers from funding HSAs on a matching basis. Instead, Congress requires contributions to be comparable among all workers eligible for the plan.

Amounts contributed to HSAs, from whatever source, are fully under the control of the worker from that point forward. They "vest" immediately, and if the worker leaves the company, the amounts contributed by the employer leave with them.

Who Are HDHPs Right For?

The combination of the HDHP/HSA is a frequent winner for plan sponsors because of the demonstrated cost savings, on average. HDHP/HSA combos generally work best for healthier workers in higher tax brackets. The higher the marginal tax bracket, the greater the value of the pre-tax contribution, as well as the tax-free distributions for qualified health care costs.

They work less well for employees with low or no net income tax liability, and for lower-wage workers who cannot bear the higher deductibles that higher-paid workers could take in stride. If these workers cannot afford to make significant contributions to HSAs, then they will be tempted to skip needed medical care, resulting in worse health outcomes for the worker and – incidentally – potentially lower productivity at work. HDHPs and HSAs also work less well for workers with chronic health problems that cause them to go through their deductibles every year for routine, predictable medical care and services. For these kinds of employees, a lower-deductible health plan may be more appropriate, despite the higher costs.

Posted in Tax Topics For Individuals

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