HSAs Explained: How a Health Savings Account Can Lower Your Costs (and Your Employees')

If you've never heard of an HSA, here's the short version: it's a health savings account, and it works a lot like a 401(k). Money goes in tax-deferred, or tax-free, and you can spend it on medical costs large and small. Band-Aids, cough syrup, MRIs, X-rays, surgeries, labor and delivery. Anything medically related.

Here's the thing. An HSA doesn't stand alone. It's paired with a high deductible health plan, and that pairing is where the savings come from.

How A High Deductible Health Plan Actually Works

A traditional plan has a deductible, coinsurance, and copays, all stacked together, with an out-of-pocket maximum somewhere above all of it. A high deductible health plan simplifies that. Usually, though not always, the deductible and the out-of-pocket max are set to the same number. Until you hit it, you pay the full contract price for everything: doctor visits, specialists, prescriptions, MRIs, X-rays. After you hit it, care is typically free.

That structure is exactly why the premium comes down. Medical plans typically run 20 to 25% cheaper on a high deductible plan than a traditional PPO for the same group, sometimes more.

The Triple Tax Advantage

An HSA gives you three things a traditional account can't:

Money goes in tax-deferred. It can be invested in mutual funds and grow tax-deferred. And it comes out tax-free, as long as you're spending it on qualified medical expenses. That's the triple tax advantage, and it's the reason HSAs are worth the conversation even before you get to the premium savings.

And unlike a flexible spending account, an HSA rolls over. Year after year after year. FSAs are typically use-it-or-lose-it, and they're usually built around things like child care. An HSA is money you keep, whether you spend it this year or twenty years from now.

Should Employers Contribute?

Typically, yes. Employers will seed the account with a little bit of money to help offset the switch. A lump sum of 500 dollars a year is common. More often, it's around 600 dollars a year, paid out monthly at 50 dollars a month, starting the first of the year.

Here's why that matters. A high deductible plan is usually a little cheaper on premium, but employees pay full contract price for visits and prescriptions until they hit the deductible. Giving them some money toward the HSA, on top of what they can contribute themselves, goes a long way toward winning them over. It smooths out the disruption of switching from a traditional plan to a high deductible plan with an HSA.

Who's A Good Fit, And Who Isn't

A high deductible plan with an HSA works best for employees who are plan-savvy or educated about how it works, and generally healthy. If you're not using a lot of medical care, you get to keep the lower premium and fully fund the HSA, where it rolls over and grows tax-deferred year after year.

It's a tougher fit for less plan-savvy workers. Nobody wants to go from December to January, roll into a new plan year, and suddenly find out their prescription that used to cost 25 dollars now costs 120 dollars. That takes education, and if someone's going to use the plan heavily, it's probably not the right fit for them either.

There's one exception worth knowing: the high user who knows they're going to hit their out-of-pocket maximum anyway. For that person, signing up for the lower premium, hitting the max early in the year, and putting away money tax-deferred can actually work better than a traditional plan, where every dollar out of pocket is after-tax money.

What This Looks Like In Real Numbers

We recently quoted a small company moving from a Blue Cross plan to one of our level funded carriers. The two owners were already on a Blue Cross PPO paired with a high deductible plan and an HSA, and we moved two more employees onto the same setup.

Result: the company's overall cost came down by around 1,100 dollars a month, roughly a 30% savings. To soften the transition for the employees who were newer to it, the company is contributing 600 dollars a year to each employee's HSA, or 50 dollars a month, to help cover early doctor visits and prescription costs right off the bat.

Is An HSA Right For Your Group?

The right answer depends on who's on your team and how they use their coverage. That's exactly the kind of thing we walk through with every group before we recommend a plan design.

Not sure if a high deductible plan with an HSA makes sense for your company? Call McIlroy Insurance Group at 1-303-681-7785 or email info@migbenefits.com, and we'll walk through your numbers with you.

CPA disclaimer: HSA tax treatment depends on your specific situation. Talk to your CPA about how HSA contributions apply to your business.