Managing Benefit Costs with an HRA/HSA Combination

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William G. (Bill) Stuart

Director of Strategy and Compliance

Oct. 13, 2016

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A benefits adviser called recently to ask for advice with a client renewal. The client offered an HSA-qualified plan with a $3,000 (self-only)/$6,000 (family) deductible. To help employees with their out-of-pocket costs, the employer funded participating employees’ HSAs to the value of the deductible.

The employer’s goal was to keep employees enrolled on the plan HSA-eligible, offer them additional opportunities to reduce taxable income, cover most or all of employees’ deductible expenses and, if possible, save the employer some money.

Some of those goals conflict with each other (like “cover most or all of employees’ deductible expenses” and “save the employer some money”). As we discussed the options we constructed a program that indeed met all the employer’s goals. Here’s what we did:

  • Kept the same medical plan.
  • Reduced employer contribution to employees’ HSAs to half the deductible.
  • Introduced a Post-Deductible HRA to reimburse remaining deductible expenses.
  • Offered a Limited-Purpose Health FSA.

Let’s analyze this proposal in steps.

Kept the same medical plan. The employer wanted to minimize medical plan disruption as employees gain understanding of how the plan works. This medical plan offers low premiums relative to most other plans on the market because of the increased up-front cost-sharing.

Reduce employer contributions to employees’ HSAs. The employer has been incredibly generous in funding HSAs. If his population reflects the total population, most of his employees (about 80% on self-only coverage and about 60% on family coverage) were able to end the first year with positive HSA balances if they spent their funds on deductible expenses only. These contributions represent a major commitment to the employer because HSA contributions are in the form of cash and vest immediately, whether or not employees and their dependents need that much money to reimburse claims in a given year.

Introduce a Post-Deductible HRA. For years, benefit advisors have been told that employees whose employer offers an HRA can’t be HSA-eligible. And that’s true – for most HRAs. There are several plan designs that allow individuals to receive reimbursements and remain HSA-eligible. Of these, the Post-Deductible HRA is the most popular. We’ll examine it in greater detail in a moment.

Offer a Limited-Purpose Health FSA. This product was the subject of our September 15 blog (read it here).

Employees can elect to place a portion of their income (Up to $2,550 in 2016) into an account from which they can draw funds tax-free to reimburse dental, vision and preventive services not reimbursed through other coverage.

Exploring the Post-Deductible HRA

An HRA integrated with a medical plan reimburses tax-free certain medical plan out-of-pocket expenses – usually deductibles and sometimes coinsurance as well. While employers, employees and even administrators view HRAs as reimbursement accounts, the Internal Revenue Service, or IRS, considers HRAs to be additional medical plans. An employer who offers an HSA-qualified medical plan with a HRA to help employees manage their cost-sharing is offering two distinct medical plans to its employees. The employees can’t become HSA-eligible unless both plans are HSA-qualified.

A popular solution to this issue is to make the HRA an HSA-qualified plan. Introducing an HRA deductible of at least $1,300 for self-only coverage or $2,600 for family coverage (2016 and 2017 figures) accomplishes this goal by creating a Post-Deductible HRA. Note that “Post-Deductible” refers to the IRS statutory minimum deductible, not the deductible of the medical plan with which the HRA is paired.

When we pair the medical plan with the Post-Deductible HRA, the design looks something like this:

HSA                        HRA                    Insurer

Self-only coverage            First $1,500       Next $1,500      After $3,000

Family coverage                 First $3,000       Next $3,000       After $6,000

Splitting deductible reimbursement between HSA contributions and HRA makes sense for the employer. Today, the employer contributes $3,000 cash into the HSAs of employees with self-only coverage. One New England medical insurer’s statistics show that fewer than 25% of individuals enrolled in an HSA-qualified medical plan with a $3,000 deductible incur expenses above $1,500. Rather than giving employees the second $1,500, the employer promises to pay any deductible expenses that the employee incurs in the second half of the deductible. That figure will average no more than about $500 per employee, rather than the $1,500 cash.

This program makes these employees better off than nearly all other companies’ workers. Very, very few employers offer to eliminate employees’ deductible responsibility through a reimbursement program. In this case, employees will stop receiving that employer gift of additional HSA contributions that they’re saving or spending on non-deductible expenses (such as glasses, contact lenses, vision-correction surgery and dental services). They can elect to fund a Limited-Purpose Health FSA, which can reimburse these expenses and reduces their taxable income.

Impact on HSA contributions

How does the introduction of the Post-Deductible HRA or the Limited Purpose Health FSA impact employees’ HSA contribution limits? It doesn’t. Accountholders who are HSA-eligible can contribute up to the statutory maximum annual contribution (less employer contributions, which count toward the limit). That’s right – the employer-funded Post-Deductible HRA reduces their net financial responsibility for deductible expenses, but it doesn’t offset their maximum HSA contribution. Also, elections to a Limited-Purpose Health FSA are in addition to, not in place of, HSA contributions.

As a refresher, the statutory annual contribution limits for 2017 are:

  • Self-only contract: $3,400 (in this case, $1,500 employer and $1,900 personal)
  • Family contract: $6,750 (in this case, $3,000 employer and $3,750 personal)
  • Catch-up: $1,000 additional if age 55 or older

Does this plan make sense?

A logical question to ask is whether the addition of two moving parts (Post-Deductible HRA and Limited-Purpose Health FSA) makes sense. After all, the employer can offer employees the same out-of-pocket exposure by offering a medical plan without any deductible or an HSA-qualified plan with a $1,500/$3,000 deductible and the same HSA contribution policy. In that case, why buy a medical plan with a higher deductible and reimburse the higher deductible with an HRA?

For groups in the regulated market (50 and under), this strategy may make a lot of sense. These groups are community rated. That means that the insurer sets their rates based on the claims experience of all similar-size groups that it insures, rather than that group’s claims. In this case, if the group’s experience is better than the community average, the group benefits when it “self-insures” as much of the claims costs as possible through a higher deductible. Increasing the deductible is the only way that these groups can benefit from their superior claims experience. Making employer HSA contributions and funding an HRA help employees manage those costs.

Note: It’s often difficult for employers and their advisors to know whether a small group’s experience is better than the community, since insurers don’t provide utilization reports in the small-group market. Employers may see healthy employees every day, but typically an employer doesn’t see more than half the lives covered on its insurance (medical dependents).

For fully-insured large groups, this approach may or may not make sense. The larger the group, the more its claims experience drives the rates. This approach may save money under one of two conditions:

  • The insurer blends a combination of the group’s utilization and the overall population utilization to factor rates. The smaller the group (say, 75 employees, vs. 500), the more likely this blending will come into play.
  • The insurers’ price relativities don’t reflect actuarial differences. In other words, the difference between claims on a $3,000/$6,000 and a $1,500/$3,000 plan is, say, 15% and the insurer sets the premium factor at 20%. In that case, the employer who chooses the higher plan and combines it with an HRA can come out ahead financially.

For self-insured groups, this approach may not make much sense. The employer pays all deductible claims, whether in the form of employer HSA contributions covering the first half of the deductible, reimbursements through a Post-Deductible HRA (that by law is funded by employer only) or the medical plan (which is funded directly by the employer.) The money is coming out of different employer accounts, but the source is the same.

This plan probably creates more confusion without offering a financial advantage to employer or employees. The one difference between a first-dollar plan and this approach is that employees have an incentive to become better consumers in the first half of the deductible. They can keep the employer contribution for future eligible expenses or for current dental, vision and certain over-the-counter items when they keep their deductible expenses low.

Tips

Think creatively. Don’t assume the role of a victim of higher premiums. You have tools at your disposal that may help you craft a more cost-effective strategy, whether you’re an employer or a benefits advisor.

Understand your options. The more you understand the reimbursement programs available, the more creative you can be in your approach to benefits. Don’t get too creative, though, as your possibilities are realistically limited to your benefits department employees’ ability to communicate the program and employees’ ability to comprehend the program in open-enrollment meetings and again when they begin to incur claims.

Engage Benefit Strategies. We have a great deal of experience helping benefits advisors and employers craft carrier-agnostic programs to pair with medical insurance to deliver the most bang for the buck. We’re eager to work with you to explore these possibilities.

What we’re reading

Ever wonder how your medical insurance premiums and plan design compare to other employers’ benefits programs? You can learn more by reading the Kaiser Family Foundation 2016 Employer Health Benefits Survey.

The Healthcare Trends Institute also conducts an annual survey which will provide you with additional benchmarking information. you can access the HTI 2016 employer survey here.

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