Are HSAs a Viable Cost-Saving Option?

The ongoing debate around High Deductible Health Plans (HDHPs) coupled with an HSA continues to stir discussions among industry experts. Recently, two professors with differing political viewpoints, who are also authors of ALM's Tax Facts, shared their perspectives on whether HDHPs remain a valuable option for saving money for both employees and employers.

The HDHP Structure: A Quick Overview

HDHPs have long been promoted as a cost-effective way for employers to offer health insurance. These plans require employees to meet higher deductibles before certain health services are covered. Alongside HDHPs, employees can contribute to Health Savings Accounts (HSAs) with pre-tax dollars, which offer a significant tax advantage. However, HDHPs come with annual out-of-pocket limits, currently set at $8,050 for individuals and $16,100 for families.

The Debate: Pros and Cons of HDHPs

Professor Bloink argues that HDHPs, particularly when paired with HSAs, empower employees to take control of their health care spending. The higher deductibles lead to greater out-of-pocket costs, but HSAs help mitigate this by allowing pre-tax contributions. This structure encourages employees to make more thoughtful health care decisions, ultimately leading to savings.

On the other hand, Professor Byrnes contends that HDHPs can be costly for employees, especially those who do not fully utilize their HSA benefits. Many employees may not maximize their HSA contributions, or may not contribute at all, resulting in higher out-of-pocket expenses without reaping the tax benefits. This situation challenges the perception of HDHPs as a money-saving tool.

Professor Bloink further notes that the HDHP/HSA combination provides a way for employees to build health savings for future needs, especially during low-cost years. These savings can be crucial during later stages of life or in health emergencies, offering long-term financial security.

However, Professor Byrnes highlights a critical concern: not all employees have the ability to effectively evaluate their health care options. This lack of financial literacy can lead to higher spending over time, even with the tax advantages of an HSA.

Moreover, Byrnes raises the point that HDHPs may not be as beneficial for employers as they appear. Typically, higher-income, lower-risk employees opt for HDHPs, while those with higher medical costs tend to select lower-deductible plans. This selection pattern challenges the assumption that HDHPs offer immediate cost savings for employers.

Conclusion

The debate around HDHP HSAs underscores the importance of understanding both the benefits and potential drawbacks of these plans. While they can offer significant tax advantages and encourage more deliberate health care spending, they may not be the best fit for everyone. Employers and employees alike must carefully consider whether HDHPs align with their financial and health care needs. The good news is that there are several other alternative funding arrangement options available to consider for your particular benefits objectives. Ask your broker for guidance or- feel free to reply with questions.