Despite the growth in health savings account (HSA) usage, [1] most employees still miss out on America’s most valuable, tax-favored benefit. As of 2019, fewer than 11% of American adults have an HSA, with an average account value of less than $300. [2] We offer some “best practice” guidance on maximizing the utility and value only possible through an HSA.
No Benefit Without Access
Why do health plan sponsors fail to offer HSA-eligible coverage? Here’s a look at coverage challenges:
- Only 26% of employers who offer health coverage offer HSA-eligible coverage. [3] Among the 75% who only offer one option, only twenty % offer HSA-eligible coverage. [4]
- Surveys confirm some don’t offer HSAs because: “HSAs are not the best option for every employee,” “HSAs are too complex,” “many employees can’t afford the high deductible,” “asking employees to contribute to the HSA might negatively impact participation in our 401(k),” and “large deductibles will inhibit our ability to attract top talent.”
- However, HSA-eligible coverage may be the best choice for many, it need not be complex, most employees won’t satisfy the deductible most years, a new savings opportunity may prompt greater savings, and “top talent” recruits may actually prefer HSA-eligible coverage!
Lack of access places employers and their employees at a competitive disadvantage—foregoing the HSA’s utility and tax preferences.
The HSA is a unique, flexible tool—the Swiss Army Knife© or Leatherman© of employee benefits. For the plan sponsor, the HSA can be a payroll tax reduction opportunity, an anti-selection sentinel, an executive benefit, and/or a “pay for performance” or “pay for results” value added component within a total rewards strategy. For employees, the HSA can fund out-of-pocket medical, dental, vision, and Long-Term Care (LTC) expenses, today and tomorrow, as well as future insurance premiums—Medicare, COBRA, LTC, and premiums for coverage while receiving unemployment compensation. Employees can also use HSA assets to replace income in retirement, as a survivor benefit, as an income tax averaging scheme, and/or as an emergency account. [5]
Others may not fully appreciate the tax preferences. For example, for employees who set aside the same amount of take-home pay, HSA dollars go 60% further than the 401(k) when it comes to funding Medicare premiums. [6]
Where plan sponsors fail to offer an HSA-eligible option, it means your rewards package is sub-optimal—incorporating fewer tax-preferred benefits and savings options. Employees miss out on America’s most tax-favored benefit.
Simply, an HSA may offer the coverage that best meets the diverse needs of your workforce, today and tomorrow.
Solution: Offer a (new) HSA-eligible coverage option effective Dec. 1, 2020 so employees can make a maximum HSA contribution for both 2020 and 2021.
Eligible Employees Won’t Benefit Unless They Enroll
Where an HSA-eligible coverage option is offered, 79% offer it as a choice alongside PPO or HMO options, according to PSCA’s 2020 HSA Survey. [7] The survey also showed that only 51% of employees whose employer offered HSA-eligible coverage enrolled in that option. [8] Here’s a look at relevant marketing and education challenges:
Many poorly position the HSA-eligible choice in their enrollment, education and marketing materials by:
- positioning the HSA-eligible option as the less valuable coverage;
- focusing solely on current needs and fail to highlight future needs beyond the next twelve month,
- ignoring or discount the opportunity to accumulate wealth; and/or
- disproportionately highlighting the deductible, instead of delivering a comprehensive comparison of value—all costs and all benefits.
- Typical annual enrollment structures may inhibit enrollment by:
- using passive schemes that allow current elections to remain in effect until there is an affirmative election; and
- minimizing communication throughout the plan year—few employees prepare/save for a change in coverage.
- Options with higher deductibles will often be undersubscribed—even where they offer greater value.
Consciously or unconsciously, enrollment processes and communications tend to favor existing coverage options. Decades of annual enrollment experience confirms:
- Healthy employees are sensitive to contribution differences (point-of-enrollment cost sharing),
- Employees with health conditions are sensitive to differences in copayments and deductibles (point-of-purchase cost sharing), resulting in
- Positive risk selection when employees are given a choice of plans and disenrollment in HSA-eligible coverage. [9]
Some prominent reasons why HSA enrollment has lagged:
- Myopia. Many annual enrollment processes focus solely on coverage needs for the next 12 months.
- Prioritization. Most Americans live paycheck-to-paycheck; many need a “nudge” to save.
- Inertia and/or status quo bias. Many prefer things remain relatively unchanged.
- Availability bias. People over-insure. They overestimate the likelihood of events with greater "availability" – they are influenced by size, recency, or how the event was emotionally charged.
- Knowledge Inertia. We often don’t learn from others’ or our own mistakes—suffering from stagnant, outdated information and/or experience, a lack of exposure to new thinking, or an unwillingness to invest time/resources in decision-making.
- Continuation bias and present bias. Some fail to recognize how the challenge has evolved or that the initial enrollment decision was incorrect.
- Position bias. Too frequently, the HSA-eligible coverage is positioned as the last option, the low coverage option, or as substandard coverage. Studies show that the presentation order and methods affect decision-making.
Solutions that might level the playing field where HSA-eligible coverage is offered as a choice:
- Avoid focusing on deductibles in comparisons. Present a complete picture, including employer HSA contributions.
- Carefully name the HSA-eligible option. Avoid “high deductible” or the deductible amounts (e.g. $1,400 option).
- Use the same minimum general deductible structure for all options.
- Implement a full positive re-enrollment and set the HSA-eligible option as the default.
- Reduce over-insurance by creating an “informed annual enrollment process.” Highlight the employee’s own medical spend or use data that confirm most Americans won’t meet their deductible most years. [10]
If each coverage choice has the same level of employer financial support, HSA-eligible coverage is often the best choice, but undersubscribed. Employees end up in the wrong option.
Enrollees May Still Miss Out
Many who enroll in HSA-eligible coverage fail to open an HSA. Some haven’t contributed to their HSA. Others haven’t accumulated enough assets to allow for investment. [11] Here’s a look at participation challenges:
- In 2018, only 50 % of HSA owners made contributions, while 46 % of accounts received employer contributions; 37 % of HSAs did not receive any contributions (owner or employer); only 14 % contributed the fully allowable annual amount; and, only 6 % of HSA owners had investments other than cash [12]
- Surveys vary, but at year-end 2019, unfunded accounts represented about 21 % of all accounts. [13]
Too many focus the HSA marketing and education as a “Super-FSA.” HSA education remains a roadblock to enrollment in, contributions to, and investment in HSAs according to a white paper from The American Retirement Association. [14] Only a handful of HSA owners have consistently optimized America’s most valuable benefits tax preference. [15]
Solutions include:
- “Start the clock” for eligible expenses. Deposit $1 into the HSA upon initial enrollment in HSA-eligible coverage. [16]
- For those who enroll in HSA-eligible coverage, incorporate an automatic contribution default.
- Market the HSA as an emergency account, especially for unexpected medical, dental, vision, hearing, and long term care out of pocket expenses. [17]
- Educate employees about the benefits of the HSA at retirement by highlighting anticipated retiree medical costs. [18] https://www.ebri.org/content/a-bit-of-good-news-during-the-pandemic-savings-medicare-beneficiaries-need-for-health-expenses-decrease-in-2020
- For those enrolled in HSA-capable coverage, consider a mid-year “re-enrollment”:
- Open the HSA with a $1 contribution;
- Add a default, automatic contribution; or
- Escalate the HSA contribution amount.
Some plan sponsors have started to adjust their offerings to remove impediments, allow for apples-to-apples comparisons, deploy defaults like automatic enrollment and escalation, and deploy communication strategies that highlight the opportunity that an HSA provides.
Someone’s knocking on the door. Somebody’s ringing the bell. Do them a favor, open the door, let ‘em in [19]… to the HSA.
Jack Towarnicky is Principal Researcher for the Plan Sponsor Council of America.
Footnotes
[1] P. Fronstin, Enrollment in HSA-Eligible Health Plans: Slow and Steady Growth Continued Into 2018, Employee Benefit Research Institute, 3/28/19, Accessed 9/4/20at: https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_478_hsaenrollment-28mar19.pdf?sfvrsn=e86b3f2f_4 See also: Devenir, 2019 Year-End Devenir HSA Research Report, 3/3/20, Accessed 9/4/20 at: https://www.devenir.com/research/2019-year-end-devenir-hsa-research-report/ HSA owners may have multiple accounts due to turnover and changes in HSA-service providers, including accounts with a $0 balance.
[2] Devenir, note i supra. See also: Kaiser Family Foundation, Population Distribution by Age, 2018, Accessed 9/4/20 at: https://www.kff.org/other/state-indicator/distribution-by-age/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
[3] Kaiser Family Foundation, 2019 Employer Health Benefits Survey, 9/25/19. The average annual deductible was $1,655, $2,476 for HSA-eligible coverage ($1,912 once reduced by the employer HSA contribution). The average out of pocket expense maximum for single coverage for all surveyed plans was $4,065 compared to $4,492 for HSA-eligible health options. Accessed 9/4/20 at: https://www.kff.org/health-costs/report/2019-employer-health-benefits-survey/
[4] Kaiser, note v, supra. 26% offer an HSA-eligible plan.
[5] J. Rau, Surprise Medical Bills Are What Americans Fear Most In Paying For Health Care, Kaiser, 9/5/18, Accessed 8/28/20 at: https://khn.org/news/surprise-medical-bills-are-what-americans-fear-most-in-paying-for-health-care/ See also: National Opinion Research Center, University of Chicago, New Survey Reveals 57% of Americans Have Been Surprised by a Medical Bill, 8/30/18. Two-thirds of survey respondents said they worry more about unexpected medical bills than insurance deductibles, prescription drug costs, or basic living expenses such as rent, food, and gas. Accessed 9/4/20 at: https://www.norc.org/NewsEventsPublications/PressReleases/Pages/new-survey-reveals-57-percent-of-americans-have-been-surprised-by-a-medical-bill.aspx
[6] J. Towarnicky, But I Repeat Myself - You Should Offer a Health Savings Account-Capable Health Option, 10/11/18 Accessed 9/4/20 at: https://www.psca.org/news/blog/i-repeat-myself-you-should-offer-health-savings-account-capable-health-option
[7] Plan Sponsor Council of America (PSCA), 2nd Annual HSA Survey, 2020.
[8] PSCA, note vii, Supra.
[9] P. Fronstin, M. C. Roebuck. “The Impact of Health Status and Use of Health Care Services on Disenrollment From HSA-Eligible Health Plans.” EBRI Issue Brief, no. 465, 11/12/18. Accessed 9/4/20 at: https://www.ebri.org/content/the-impact-of-health-status-and-use-of-health-care-services-on-disenrollment-from-hsa-eligible-health-plans
[10] PSCA, note vii, supra. 88.6% of employers confirm that education occurs primarily at annual enrollment. See also: American Payroll Association, Getting Paid in America, Q&A 6, September 2019. 70+% of employees live paycheck to paycheck. Accessed 9/4/20 at: https://www.nationalpayrollweek.com/wp-content/uploads/2018/10/2018GettingPaidInAmericaSurveyResults.pdf See also: Board of Governors of the Federal Reserve Bank, Report on the Economic Well-Being of U.S. Households in 2019, Featuring Supplemental Data from April 2020. A substantial minority have no emergency savings. Accessed 9/4/20 at: https://www.federalreserve.gov/publications/2020-economic-well-being-of-us-households-in-2019-executive-summary.htm See also: Kaiser Family Foundation, Health System Tracker. Few working Americans have significant medical spend. Most never satisfy their annual deductible. In 2016, 5% of the population accounted for half of all health spending. At the other end of the spectrum, the 50% of the population with the lowest spending accounted for only 3% of the total; an average of just $276. Well over 50% of all medical costs are incurred by the Baby Boom and older generations who represent just 29% of Americans. Accessed 9/4/20 at: https://www.healthsystemtracker.org/chart-collection/health-expenditures-vary-across-population/ See also: J. Towarnicky, Rock, Paper, Scissors – Average, Median, Mode – Deceiving Data, 10/06/19, Accessed 9/4/20 at: https://www.psca.org/news/blog/rock-paper-scissors-%E2%80%93-average-median-mode-%E2%80%93-deceiving-data
[11] PSCA, note vii, supra. More than 80% of surveyed plans limit access to investments of assets in excess of $1,000.
[12] P. Fronstin, J. Spiegel, Trends in Health Savings Account Balances, Contributions, Distributions, and Investments, 2011-2018: Estimates From the EBRI HSA Database, 1/9/20, Accessed 9/4/20 at: https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_497_hsalong-9jan20.pdf?sfvrsn=a30f3d2f_10 See also: Health Savings Account Balances, Contributions, Distributions, and Other Vital Statistics, 2018: Statistics From the EBRI HSA Database, 12/5/19, Accessed 9/4/20 at: https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_496_hsas-5dec19.pdf?sfvrsn=f13e3d2f_8
[13] Devenir, 2019 Year-End HSA Market Statistics & Trends, 3/3/20, Accessed 9/4/20 at: https://www.devenir.com/wp-content/uploads/2019-Year-End-Devenir-HSA-Research-Report-Executive-Summary.pdf See also: P. Fronstin, M. C. Roebuck, Do Accumulating HSA Balances Affect Use of Health Care Services and Spending? 5/23/19. “At the beginning of 2014, 20 percent of those with employee-only coverage and 17 percent of those with family coverage had a zero balance.” Accessed 9/4/20 at: https://www.ebri.org/content/do-accumulating-hsa-balances-affect-use-of-health-care-services-and-spending
[14] N. Adams, J. Towarnicky, Learning Objectives, What’s Holding HSAs Back? February 2020, Accessed 9/3/20 at: https://www.psca.org/sites/psca.org/files/uploads/Research/hsa_survey/HSA_Whitepaper.pdf
[15] J. Towarnicky, Retiree Medical Super Hero – The Health Savings Account, 7/20/19, Accessed 9/4/20 at: https://www.psca.org/news/blog/retiree-medical-super-hero-%E2%80%93-health-savings-account See also: Access: The HSA In Your Future: Defined Contribution Retiree Medical – Part 2 of 3, 6/6/18, Accessed 9/4/20 at: https://www.psca.org/news/blog/access-hsa-your-future-defined-contribution-retiree-medical-part-2-3
[16] Almost all states require a deposit to set the start date for coverage of eligible expenses – all eligible expenses incurred on or after that date qualify for tax-free reimbursement, even if the expenses precede the actual contributions.
[17] J. Rau, Note iii, supra.
[18] Paul Fronstin, Jack VanDerhei, A Bit of Good News During the Pandemic: Savings Medicare Beneficiaries Need for Health Expenses Decrease in 2020 But Some Couples Could Need as Much as $325,000 in Savings, Employee Benefits Research Institute, 5/28/20. Accessed 9/4/20 at: https://www.ebri.org/content/a-bit-of-good-news-during-the-pandemic-savings-medicare-beneficiaries-need-for-health-expenses-decrease-in-2020 See also: Sudipto Banerjee, Cumulative Out-of-Pocket Health Care Expenses After the Age of 70, 4/3/18. “For all surveyed people, the median out-of-pocket nursing home expense is zero. But… the distribution of nursing home expenses is also skewed toward those with higher expenses, which means a small percentage of retirees face very high expenses. For those who die at age 95 or later, the 90th and 95th percentiles of nursing home expenses are slightly over $87,000 and $175,000, respectively. When the sample is restricted to include only those who enter a nursing home, the 90th and 95th percentiles go up to nearly $182,000 and $266,000, respectively. Accessed 9/4/20 at: https://www.ebri.org/content/cumulative-out-of-pocket-health-care-expenses-after-the-age-of-70 See also: Long Term Care Consulting Services, Long-term Care Statistics You Need to Know in 2018, 10/3/18. Accessed 9/4/20 at: https://www.ltccs.com/blog/long-term-care-statistics-2018/#.XsK3kGhKjcc See also: J. Tomlinson, New Estimates of the Need for Long-Term Care, 5/25/20. Various estimates of the percentage of Americans who will need “any LTC” range from ~33% to ~70. Accessed 9/4/20 at: https://www.advisorperspectives.com/articles/2020/05/25/new-estimates-of-the-need-for-long-term-care
[19] Paul McCartney, Let ’em in. Accessed 6/28/20: https://www.youtube.com/watch?v=C2mnHA51NQE
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