With the cost of traditional group health insurance growing more unsustainable, many small and medium-sized businesses (SMBs) are looking to alternative health benefits solutions for a more affordable and flexible experience.
One solution is a health savings account (HSA)—a special savings account where the money that's deposited can be used to pay for qualifying medical expenses without being taxed. While an HSA is a great option when combined with other benefits, some employers may not realize HSAs don't work as stand-alone health benefits.
In this article, we'll look more into how HSAs work, why they can't be offered by themselves, and explore alternatives to group health insurance you can offer.
How do HSAs work?
Much like the name suggests, a health savings account is a savings account of pre-tax money that your employees can use 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 contribution limit updated yearly by the IRS.
For 2022, the self-only contribution limit for employers and employees is $3,650. The maximum contribution for family coverage is $7,300. Those over the age of 55 can make $1,000 in additional contributions known as annual catch-up contributions.
With an HSA, your employees can use an HSA debit card or online bill payments to pay for eligible healthcare products and services. If they are age 65 or older, they can even use their HSA funds for non-medical expenses, though the withdrawn funds would then be subject to income taxes. However, if your employees are under 65 and decide to spend their allowance on non-medical expenses, they'll be subject to tax and an additional 20% tax penalty.
An HSA allows your employees to earn tax-free interest, just like a traditional savings account.
Whether offered by an employer or opened by an individual, the account is always owned by the employee and can be established at almost any financial institution or credit union. After an employee leaves their job, all of the money in the account—including any employer contributions to HSAs—stays with the employee.
To participate in an HSA, an employee must meet the following requirements:
- They’re enrolled in an HSA-qualified high deductible health plan (HDHP)
- The HDHP minimum annual deductibles for HSAs are $1,400 for self-only coverage and $2,800 for family coverage in 2022
- HSA-qualified HDHP out-of-pocket maximum amounts are $7,050 for self-only coverage and $14,100 for family coverage in 2022
- 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 mentioned above, for an employee to participate in a health savings account, 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 an HDHP on their own is slim to none. Because they don't have an 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.
Downsides to HSAs
While HSAs can be an excellent benefit for your employees, there are a few downsides for employers.
As we mentioned, employees take their HSA funds with them when they leave your organization. This is because their HSA belongs to them. Some employees use their HSA as an extra retirement fund instead of a health benefit. With an HSA, you can't guarantee that your employees will use their HSA as a medical benefit.
Additionally, you have to offer an HDHP for your employees to be eligible for an HSA and the tax savings that come with them.
Finally, employees can't use their HSA on monthly premiums, as they can only have an HDHP, not an individual health plan.
Thankfully, there are other alternatives to HDHPs, HSAs, and traditional health insurers.
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 employee health plan or supplement to a group health insurance plan. Health reimbursement arrangements (HRAs) and health stipends are excellent options that you can offer independently.
Health reimbursement arrangements (HRAs)
An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees with tax-free funds for the same HSA-qualified out-of-pocket medical and preventive care expenses plus 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. They'll then submit proof of those expenses to you for reimbursement.
Because HRAs are owned by employers—not employees 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 every month like an HSA.
Three of the most popular HRAs are:
- The qualified small employer HRA (QSEHRA)
- They are specifically designed for small organizations with fewer than 50 full-time equivalent employees (FTEs). Annual allowance amounts are capped by the IRS and updated annually.
- The individual coverage HRA (ICHRA)
- An ICHRA is an excellent option for organizations of all sizes. Employers can set up employee classes to differ allowance amounts and eligibility. Unlike HSAs, there are no contribution limits for reimbursement.
- The group coverage HRA (GCHRA), also known as an integrated HRA
- A way to supplement your existing group health insurance policy, such as an HDHP. This can work as an alternative to offering 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. This approach often provides the best value to employees. However, certain requirements 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.
To ensure that your HRA is HSA-qualified, you'll simply need to offer a “limited-purpose HRA” that only reimburses employees for expenses exempt from the HSA deductible requirement.
These expenses are:
- Health insurance premiums
- Long-term care insurance premiums
- Dental expenses
- Vision expenses
A standard HRA will make an employee ineligible for an HSA because it would provide coverage for all qualified expenses, including copays for prescriptions, which aren't exempt.
If you plan to offer an HRA through a provider and want to offer an HSA, it's crucial you make sure they give you the ability to limit expenses to just these categories so you can ensure compliance with federal regulations.
Another alternative to HSAs and group health insurance coverage is a health employee stipend. Much like an HRA, a stipend allows you to reimburse employees for their medical expenses. Unlike an HRA, however, there are fewer restrictions on which expenses are eligible for reimbursement.
Stipends are considered taxable income and must be reported on your employees' Form W-2s. You and your employees are responsible for paying federal income taxes.
While a stipend doesn't have the tax advantages of HSAs or HRAs, it can be an extremely flexible option for small organizations looking to provide their first benefit or an additional benefit, especially for employees who receive advance premium tax credits (APTC).
With rising healthcare costs and traditional group health insurance plan rates, offering a quality health benefit is essential for employee retention and engagement.
While offering an HSA on its own is an unrealistic option for SMBs, combining it with a limited-purpose HRA is an excellent alternative to enrolling eligible 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.
If you're ready to offer your employees a health benefit, PeopleKeep can help. Our personalized benefits administration software makes it easy to set up and manage HRAs and employee stipends in minutes each month.
This blog article was originally published on July 28, 2021. It was last updated on August 31, 2022.