With the cost of traditional group health insurance growing more and more unsustainable, many small and medium-sized businesses (SMBs) are looking to other health benefits solutions for a more affordable and flexible alternative.
One solution is a health savings account (HSA)—a special savings account where money that’s put in can be used to pay for medical expenses without being taxed. While an HSA is a great option when combined with other benefits, many employers don’t understand that HSAs don't work as a stand-alone benefit.
In this article we’ll look more into how HSAs work, why they can’t be offered by themselves, and finally explore other alternatives to group health insurance that can be offered on their own.
How do HSAs work?
An HSA is an account of pre-tax money that can be used to pay for medical expenses. Contributions can come from both the employer and the employee, so long as the combined contributions don’t exceed the annual limit that’s updated every year by the IRS.
Whether offered by an employer or opened by an individual, the account is always owned by the employee. That means after an employee leaves their job, all of the money in the account—including any employer contributions—stays with the employee.
In order to participate in an HSA, an employee must meet the following requirements:
- They’re enrolled in an HSA-qualified high deductible health plan (HDHP)
- They’re not enrolled in any other non-HSA qualified health insurance plan
- This would include any plan that doesn’t meet the requirements for a high deductible health plan
- They’re not eligible to use a general purpose flexible spending account (FSA)
- They can’t be claimed as a dependent on someone else’s tax return
- They’re not enrolled in Medicare Parts A & B or Medicaid
Why can’t I offer an HSA as a stand-alone benefit?
As listed above, in order for an employee to participate in an HSA, they must be enrolled in an HSA-qualified HDHP. The vast majority of individuals participating in an HDHP are being offered the plan by their employer, which means the likelihood that one of your employees would be enrolled in a HDHP on their own is slim to none. Because they don’t have a HDHP, these employees wouldn’t be eligible to participate in the HSA.
In addition, an HSA doesn’t cover individual insurance premiums. PeopleKeep customer data shows that individual insurance premiums are the largest medical expense employees have today. So if you’re not offering a health insurance plan beyond an HSA, your employees will need to shop for their own individual plan and pay for it entirely out of pocket. While you could offer a stipend to offset the cost, this is not tax-free for you or your employees.
Are there other stand-alone health benefits I can offer?
If you’re wary of the high costs of traditional group health insurance, an HSA isn’t the only alternative or supplement to a group health insurance plan. Health reimbursement arrangements (HRAs) are an excellent option that can be offered entirely on their own.
An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees tax-free for all of the same HSA-qualified out-of-pocket medical expenses, in addition to individual health insurance premiums.
With an HRA, you set a monthly allowance for each employee, then your employees will purchase the individual health insurance and other healthcare expenses they need with their own money. Finally, they’ll submit proof of those expenses to you for reimbursement.
Because HRAs are owned by employers—not the employee like HSAs—any unused funds left at the end of the year stay with you. What’s more, employers only have to reimburse employees when an eligible expense is incurred, rather than simply pouring in money to the account on a monthly basis like an HSA.
Can I offer an HSA with an HRA?
While an HSA doesn’t work as a stand-alone benefit, it can be offered alongside an HRA. In fact, this approach often provides the best value to employees. However, there are certain requirements that must be met for employees to use both compliantly.
Because employees participating in an HSA must be covered by an HSA-qualified HDHP, all policies that the employee uses must also be HSA-qualified, including the HRA.
In order to ensure that your HRA is HSA-qualified, you’ll simply need to offer a “limited-purpose HRA” that only reimburses employees for expenses that are exempt from the HSA deductible requirement.
These expenses are:
- Health insurance premiums
- Long-term care premiums
- Dental expenses
- Vision expenses
A standard HRA will make an employee ineligible for an HSA because it would provide coverage for all medical expenses, including copays for prescriptions, which aren’t exempt.
If you plan to offer an HRA through a provider, it’s important you make sure they give you the ability to limit expenses to just these categories so you can ensure compliance with federal regulations.
While offering an HSA on its own is an unrealistic option for SMBs, combining it with a limited-purpose HRA is a great alternative to enrolling employees in an expensive traditional group health insurance plan. Your employees get a flexible benefit that covers their qualifying medical expenses and individual insurance premiums, while you get a cost-controlled plan you can consistently budget for month to month.