Options for Bridging the Funding Gap in a High Deductible Health Plan

Rising costs have motivated many employers to adopt High Deductible Health Plans (HDHP) increasing the amount paid by employees for health care coverage. The Towers Perrin 2008 Health Care Cost Survey notes that employees are responsible for 22% of the cost of coverage or about $2000 per employee plus the cost of deductibles and co-pays. The average out of pocket expense for an employee is has doubled in the last 5 years.

Employers face employee relations challenges when attempting to pass along the out of pocket increases to employees without offering some funding assistance on either a transitional or ongoing basis. There is a significant learning curve for many of the accounts both in terms of evaluating the amount of employee/employer contributions and navigating the claims/reimbursement process.

Several options exist for employers to bridge the funding gap created by migrating to a HDHP from a more traditional indemnity arrangement including the following:

Health Savings Accounts (HSA) HSAs can be funded by both voluntary tax deductible employee contributions and/or tax exempt employer contributions allowing the combination of employer employee contributions to fully fund the deductible (up to the IRS limit). The contributions remain in the HSA and accumulate interest on a tax free basis. Distributions are tax free as long as the funds are used for Qualified Medical Expenses. An HSA may be moved to successive employers or used in retirement. The advantages or an HSA are portability; tax-free contributions, accumulations, and distributions; ownership of the account by the employee. The disadvantages of HSAs are that they can only be used with a HDHP; must be uniformly funded by employers; may discourage employees from seeking medical treatment; and are limited in their use with other types of accounts like FSAs and HRAs. Other problems have been identified in a previous post.

Medical Savings Accounts (MSA) MSAs may be established by self-employed individuals or employees of small employers (less than 50). The MSA is a tax exempt trust held by a financial institution and operates like an HSA.  Employers may contribute to an Archer MSA, but if they do, the employee may not contribute for that year. Contributions are limited to 75% of the annual HDHP deductible. Employers must make uniform contributions to their employees if they choose to contribute. The additional advantage of an MSA is that it may be established by an employee without employer sponsorship.

Flexible Spending Accounts (FSA)  Employees may contribute to an FSA on a pre-tax basis as part of an employer sponsored cafeteria plan. Both employers and employees can contribute to an FSA.      FSAs fund Qualified Medical Expenses, except health insurance premiums and long term care expenses. The big disadvantage of an FSA is that any money remaining in the account that is not used to reimburse expenses is forfeited. There is no accumulation of money in the account from one year to the next.

Health Reimbursement Arrangements (HRA) HRAs may only be funded by employers on a uniform basis for all participating employees. Employees may not contribute. There are no limits on the amount of employer contributions, but HRA funds may only be used for Qualified Medical Expenses which include health insurance premiums. HRA contributions are tax free and unused amounts may be carried over to subsequent years. HRAs are not portable and do not accumulate earnings on account balances. They compare favorably with FSA because there is no use it or lose it. An employer may offer both an HRA and FSA, but there are complex ordering rules coordinating the interaction of FSA and HRA payments and prohibitions on funding the HRA with FSA contributions.

Combined Accounts (MSA, HRA and FSA)   It is possible, but complex, to offer multiple arrangements in an attempt to bridge the funding gap. There is IRS guidance on the interaction of HSAs and other Health Arrangements.

Obviously, legal advise is paramount in plan design and drafting.