Raising the stakes for HSAs
Sykes Enterprises, an IT consulting and business outsourcing multinational, moved boldly two years ago to do what few companies have dared to do: It ditched its traditional health insurance plan and made its high-deductible health plan the only healthcare option for its 15,000 U.S. employees.
“We would have had to increase the premium rates to employees to a point where the value wasn’t there any longer,” Timothy Dugan, senior director of global HR benefits and shared services at Sykes, says of the plan it eliminated.
The move followed another audacious decision it made just three years earlier to match employees’ contributions to the individual health savings accounts tied to the high-deductible health plan it offered. On top of the $250 it was putting into employee HSAs annually, the company would match up to another $250 for employees with single coverage and up to $750 for those with family coverage.
“We wanted employees to have some skin in the game and be involved,” Dugan says of the decision to implement the match, which he claims boosted HSA participation dramatically.
As companies struggle with high healthcare premium costs and worry about their employees’ ability to afford healthcare in retirement, they’re increasingly employing tactics to drive the adoption of HSAs among their workforces. Some, like Sykes, are taking a hardline approach by making high-deductible health plans the only health insurance option and enticing employees with HSA contributions and even matches. Others are more subtle, designing plans in such a way that high deductibles are far and away the best choice among the plans offered.
Whatever tactic they take, they’re encouraging employees to think of HSAs as a retirement account for their healthcare expenses with many touting them as the new medical 401(k). Many exhort employees to stash away as much money as they can into the HSA and use their own personal savings to pay for medical expenses, rather than tapping their health savings accounts. The funds, companies are quick to remind employees, enjoy a triple-tax advantage: the money that goes in the HSA from their paychecks is exempt from payroll taxes, the earnings they gain on them grow tax-free, and when they need to tap funds to pay qualified medical expenses — hopefully in retirement — they aren’t taxed on the withdrawals.
Despite the tax benefits, employees are barely saving anything at all, dipping into their accounts whenever they have medical expenses. Only about 8% of employees are saving the money entirely for retirement, according to a recent survey of more than 2,100 employees by Willis Towers Watson.
“Some people live paycheck to paycheck. It’s not going to matter what you tell them, it’s not going to change their behavior,” says David Speier, managing director of benefit accounts for Willis Towers Watson.
Eric Gulko, president of employee benefits brokerage firm Innovo Benefits Group, is even more direct about the shortcomings of HSAs. “If people don’t have the money to put in them, it’s sort of an empty benefit,” he says.
Indeed, HSA balances are modest. At the end of December 2017, the average balance in health accounts opened in 2005 was only $8,592, according to Devenir, an HSA research and investment services provider. About 20% of the accounts were unfunded.
Still, employers are pushing the HSAs hard in the belief that better information and education about the tax-advantaged saving vehicles will increase their use. Many are providing generous contributions while others are beginning to provide decision-support tools that help employees decide how much to allocate to their HSA and 401(k) and which to contribute to first.
Sykes, for example, has three to four employee communications campaigns a year highlighting the long-term benefits of HSAs. The campaigns emphasize HSAs as distinct from the “old FSA — or flexible spending account — model,” where employees were urged to “use their savings or lose it,” according to Dugan.
“We talk about it side-by-side with our 401(k) plan,” he says.
The company offers employees the opportunity to invest their HSA funds, much like a 401(k). Once they hit a $1,000 savings mark, employees can invest their HSA funds in 16 mutual funds.
Shutterstock, a New York-based stock photography provider, also has taken an aggressive stance on educating its 600 U.S. employees about the tax advantages and other benefits of HSAs and “what HSAs are for,” says Jason Cabrera, the company’s benefits manager.
“I like to talk about it as if it were a medical 401(k) plan,” he says. “It helps people get to the place where I want them to be.”
Like Sykes, Shutterstock gives employees the opportunity to invest their HSA funds in mutual funds once they hit a $1,000 balance. “They can actually take that money and put it to work for them,” Cabrera says of employees who are not using the funds for medical expenses.
HSA participants to date have proven to be conservative investors, putting less than $1 out of every $5 into HSA investment accounts. At the end of 2017, roughly 18% of the estimated $8.3 billion in HSAs were in investments, according to Devenir. The average balance in an HSA investment account was $16,457.
Sarah Weiner, compensation and benefits manager for real estate development company Aspen Heights Partners in Austin, Texas, would like to encourage the company’s 450 employees to use HSAs as long-term investments but stops short of that due to concerns over fees.
“Having an investment option is great, but make sure you’re looking at the fees they’re charging on a monthly basis to make sure you’re earning more than those fees. Otherwise,” Weiner says, “you’re just paying them extra money.”
The company’s primary goal, she explains, is not to increase HSA participation or to promote long-term HSA savings, but rather to get as many employees as possible enrolled in the high-deductible health plan, which Weiner believes is the better consumer choice, particularly for a young workforce such as Aspen’s.
“We want employees to make the best choice that will cost them the least amount of money,” she says.
To entice its employees to enroll in the high-deductible health plan, the company contributes between $1,000 to $2,000 to employees’ HSAs, a contribution that Weiner notes is “above market.”
“We want to make the high-deductible health plan the more attractive option,” she says, adding that employees need not contribute to get the HSA funds.
Whether to ensure that employees enroll in high-deductible health plans or to boost employee participation in HSAs, employers across the board are making contributions to employee health savings accounts. More than three in four companies (77%) do so, with the average contribution being $500 for individuals with single coverage and $1,000 for those with family coverage, according to Tracy Watts, a senior partner at Mercer.
Some companies, like Sykes, are even matching what employees put into the accounts. Sykes’ Dugan says that roughly half of the 2,600 employees enrolled in the high-deductible health plan now have an HSA, up significantly from when the company provided only a $250 contribution. “Very few even bothered to open an HSA,” he says of employee engagement prior to the match.
Companies brushed off criticism that high-deductible health plans forced employees to shoulder a greater healthcare burden due to the higher deductibles they now need to meet before their insurance kicks in. Many argued that the lower premiums for high-deductible health plans coupled with HSA company contributions made high-deductible plans the more cost-effective choice for many employees, especially after factoring in the tax advantages of an HSA.
“It’s not just your deductible or your out-of-pocket maximum. One thing that people don’t always consider is the premium,” says ShuttErstock’s Cabrera. “When you factor in the cost of access to the plan in which you’re in, in some cases that premium can be 50% of your annual financial exposure, if not more.”
Due to its cost-share arrangements with employees, Shutterstock’s popular $1,500 high-deductible plan is “actually dollar for dollar in a worst-case scenario our most cost-effective plan for the employee,” Cabrera says.
The math especially works out for young healthy employees without much need of healthcare, many say.
Even in a year where employees have high or even catastrophic health expenses, employees can still come out ahead in the long-run, according to Tracy Hill, content strategist at Lumity, a technology-enabled benefits consultant.
“Even if you have a one-off bad year, think of it more in the long-term financial planning strategy,” she says.
Others argue that high-deductible plans make employees savvier consumers of healthcare services.
“The reason for the high-deductible plan is to help employees think about the choices that they’re making because now they have a stake in it too,” says Aspen’s Weiner.
Because they need to meet high deductibles, they may decide, for example, to go to Urgent Care for a bad sore throat rather than go to the ER, she explains.
Before “nobody knew or cared what the service really cost,” says Dugan.
Still, some worry about taking consumerism too far.
“I hear that more and more where employees might ignore or defer care because they’re afraid of the bills,” says Innovo’s Gulko. “You want people to be smart consumers, but you also don’t want them to avoid or defer care they should obtain.”