How Can Companies Help Workers with Early Expenses?

Many prospective enrollees in a Health Savings Account program worry about medical expenses early in the first year of enrollment in an HSA-qualified plan. Is this concern justified? Can employers help?

I've covered hundreds of enrollment meetings in which I explained how HSA-qualified plans work and the benefits of Health Savings Accounts. The most common concern that employees express is, "What happens if I incur large expenses early in the first year and don't have the money to pay my bills?"

It's a fair question. Before I offer some practical tips, I give my audience another thing to think about. "What if you don't? What if you, like many people, don't incur high claims in the first year . . . or second year . . . or third year? Then, in the fourth year, you do. But you have a balance of perhaps $4,000 in your Health Savings Account to pay your medical bills. Would you then feel a sense of security that you don't enjoy today?"

Of course they would. And they ponder that possibility. But it doesn't erase that fear of a high expense early in the first year. So, what are the solutions?

The Cash-Flow Issue

The concern here is cash flow. And it is a real issue.

Often, employers design their Health Savings Account programs so that the difference in payroll deductions versus other plans offered, an employer contribution to each employee's Health Savings Account, and each owner's tax savings more than cover the difference in the deductible versus other plans that the company sponsors.

But here's the problem: Both the difference in payroll deductions and the tax savings on contributions accumulate during the year. In other words, you may cover your entire deductible with the three variables discussed above, but it takes a year to accumulate those savings.

Example: At open enrollment, Suzy enrolls in her company's HSA-qualified plan with a $2,500 deductible rather than her current plan with a $1,000 deductible. Her payroll deductions are $30 less per biweekly paycheck ($780 less per year), and she deposits that amount into her Health Savings Account through pre-tax payroll deposits. The company contributes $40 per pay period ($1,040 annually). The sum of those figures ($1,820) exceeds the $1,500 difference in deductibles - but that money comes to her over 26 pay periods. If she reaches her deductible after four pay periods, she owes an additional $1,500 but has only $280 in her account to pay the expense.

A company can front-load its employer contribution to help with cash flow. Many companies do so specifically to help employees with early-in-the-year expenses. And employees certainly appreciate this approach, especially since those deposits vest immediately.

Other employers prefer spreading their contribution throughout the year with even deposits throughout the year. Employers who adopt this approach do so because it helps them manage their own cash flow and workers don't leave the company early in the year after receiving a lump-sum contribution that vests immediately.

Front-load Contributions

Many employers deposit a lump-sum employer contribution at the beginning of the year to help Health Savings Account owners manage high expenses. This approach helps account owners manage their cash flow.

Example: Suzy (above) receives the $1,040 employer contribution at the beginning of the year. When she satisfies her deductible after four pay periods, she has a balance of $1,160 ($1,040 lump sum plus four deposits of $30 each).

Not all companies front-load their contributions. Some prefer spreading their contribution throughout the year with level deposits each pay period. Employers who adopt this approach do so because it helps them manage their own cash flow and workers don't leave the company early in the year after receiving a lump-sum contribution that vests immediately. Others do so because they view their contribution as employee compensation, and employees must remain on the payroll to receive the other forms of compensation that they earn.

Larger Contributions Based on Income

In most cases, employers must design their contribution strategy to ensure that classes of employees are treated the same. For example, all workers enrolled on an HSA-qualified family plan who are HSA-eligible receive a $1,000 contribution (rather than, say, giving $500 or $1,000 based on height, first letter of last name, location, or participation on the company softball team).

There is an exception to this rule: Employers can contribute more to Health Savings Accounts owned by workers who don't meet the tax-code definition of highly compensated employees. When contributions are front-loaded, this approach helps lower-income workers. They're most likely to feel the strain of an unexpected bill early in the year or face the choice of delaying care to build a balance prior to receiving services or undergoing diagnostic or treatment services and then worrying about how to pay for the care. But this strategy doesn't help higher-income workers who don't have sufficient personal resources to cover their bills.

Accessing Future Contributions

Health Savings Account rules are clear that accounts can't include a cash-advance feature, as many personal checking accounts do, whether the arrangement is called a cash advance, overdraft protection, or a loan.

But many account administrators (or their technology partners) have developed a program that effectively replicates a standard cash advance or overdraft protection. Usually, the employer must opt in to offer this program, since the company may be at risk of the employee's leaving before repaying the loan (either through her Health Savings Account, with personal funds, or through a deduction from her final paycheck).

This feature addresses the cash-flow situation by allowing Health Savings Account owners to tap future contributions to pay current expenses. For many account owners, the ability to access future contributions provides confidence that they can manage unplanned expenses before they've built sufficient balances.

Payroll Loans

One of my first Health Savings Account clients was a specialty pharmacy with a young, innovative chief financial officer. He made a simple deal with employees: The family plan had a $3,000 deductible. The company would cover 2/3 of that amount with an employer contribution. If employees set payroll deductions to cover the balance of the deductible, he'd extend a payroll loan to cover an expense that exceeded the employee's Health Savings Account balance. Employees who didn't establish payroll deductions to cover the balance of the deductible were on their own. It was a great design to prompt employee engagement, encourage employee contributions, and address the cash-flow issue head-on.

Payroll loans have existed for years to help employees cover immediate expenses with future earnings without the high interest rates offered by loan sharks and commercial payday lenders. Because such an arrangement is independent of the Health Savings Account program itself (the account isn't pledged as collateral), the program presents no compliance risk.

Other Loan Programs

Some innovators in the consumer-finance market are developing programs that employers can offer to help employees borrow money to pay their medical bills, regardless of their medical plan. These plans vary in design (for example, some negotiate discounted payments to providers and split the savings with the employer or employee). Some are linked directly to the employee's Health Savings Account and draw funds from the account to repay the loan as you build your balance.

Many companies don't extend these programs to their employees, even if their Health Savings Account administrator offers the option. Depending on the program design, employers may be on the hook for any unpaid loan balances that they can't collect through the worker's final paycheck.

These programs don't represent a compliance issue because they're not tied directly to employees' Health Savings Accounts.

Personal Resources

Health Saving Account owners who don't have access to these employer programs can always tap personal resources to pay the bill. Sources may include personal emergency savings, credit cards (with the possibility of earning points), personal loans, gifts or loans from family members, or the sale of personal assets (that bicycle you never ride any more or part of your baseball-card or Barbie collection).

Do You Lose Your Tax Benefit?

Ah, the big question: Do you lose your tax benefit if you pay your provider bill with funds from outside your Health Savings Account?

No!

Once you establish your Health Savings Account (which you usually do when your first contribution is posted, though it may be earlier in some cases), you can reimburse any qualified expense with contributions that you make months, years, or even decades later. This feature is one of the distinctions between a Health Savings Accounts and Health FSAs, the other popular tax-advantaged health account. Health FSAs have a plan year during which qualified expenses are reimbursed with that year's elections. Health Savings Accounts, in contrast, have no plan years. Once you incur the expense, you have a lifetime to reimburse it with existing balances or future contributions or investment gains.

Example: Marcus has an unexpected inpatient stay early in his first year of HSA-qualified coverage. He receives cash to pay his financial responsibility through any of the employer programs listed above. He must make $125 after-tax payments per paycheck to service the loan. As he rebuilds his Health Savings Account balance, he can reimburse himself for these repayments to gain the benefit of tax-free withdrawals for qualified expenses. He checks with his account administrator to learn its process for receiving these distributions.

This is an important point. A program to relieve the cash-flow crunch would be less valuable if the Health Savings Account owner loses the tax benefit. But all the options outlined above allow owners to pay their loans directly or reimburse themselves for post-tax payments (the process varies by option) and enjoy tax breaks while avoiding distribution penalties.

The Bottom Line

Many new Health Savings Account owners don't have the account balances or personal resources to cover a high expense early in their first year of ownership. Fortunately, employers can offer a variety of programs to minimize this concern and drive greater adoption. Owners to have access to or use these programs remain eligible to make and receive contributions to their Health Savings Accounts. And they still enjoy tax benefits on distributions.

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The content of this column is informational only. They are not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.