5 HSA funding strategies companies can employ to help boost employee saving
Written by William G. (Bill Stuart)
A central feature of successful Health Savings Account (HSA) programs is the understanding among employers and employees that the cost of medical coverage (premiums) and care (out-of-pocket expenses) is a partnership. Coverage is a part of total employee compensation, and every dollar of premium that the company pays is a dollar that it can’t devote to other forms of employee compensation, including higher pay and other benefits. The lower premium is generally inversely proportional to out-of-pocket costs, so the lower premium means that workers and their covered family members pay more of the total cost of care when they receive services.
Many companies respond in part by helping employees fund their HSAs. Not every company is in the financial position to make this commitment, and some further reduce payroll deductions for the HSA-qualified plan to encourage employees to enroll and allow them to make personal pre-tax payroll deductions without reducing their take-home pay. Companies also do offer employer contributions to employees as an incentive to enroll in the HSA program and to help them manage what is often higher out-of-pocket responsibility (deductibles, coinsurance, and copays) than the workers experienced in their former plan.
Two common funding methods are providing annual lump sum deposits or making deposits with each paycheck. Employers can also consider three other approaches that, depending on their situation, may make their HSA offering more attractive.
1. Annual lump sum
Under this approach, the company deposits a lump sum into each eligible employee’s HSA at the beginning of the plan year. This money vests immediately, so the employee has funds to reimburse expenses incurred early in the deductible year. As an example of how this could be beneficial, employees and their dependents may be able to negotiate repayment terms with hospitals and physicians when they don’t have funds to pay a bill immediately, but they must pay up-front for prescription drugs. A front-loaded annual contribution places funds in employees’ accounts and may offer options for such out of pocket eligible expenses if they occur.
This can be a useful funding strategy for employees since they gain control of the contribution immediately and don’t have to do anything themselves (like make employee contributions to earn their company’s matching deposit).
This funding method may create two issues for employers. First, they may not have the cash to deposit the full annual employer contribution into every employee’s account. After all, they accumulate their premium savings over the course of the year, not up front. Second, the deposit vests immediately, so an employee who leaves during the year retains the full contribution.
2. Periodic payments
Another funding strategy is to divide the annual employer contribution into equal semi-annual, quarterly, monthly, or per-pay period installments throughout the year. This approach can help relieve the concerns of companies who fear that employees who are given their full contribution up front will leave the company before they’ve “earned” the full annual deposit.
This strategy may be less attractive to employees than the up-front lump-sum contribution in the event they incur a large bill early in the year and must then wait to accumulate sufficient balances to reimburse the provider. This concern is a function of cash flow, not a lost reimbursement opportunity. HSA owners never lose their ability to reimburse a qualified expense tax-free (including paying the bill with personal funds and reimbursing themselves from future employer or employee contributions to their HSA).
Employers without cash on hand to make an annual lump-sum payment or with a more transient work force may find this funding method more attractive than one annual deposit.
3. Smaller lump sum and periodic deposits
A compromise between the annual lump sum and periodic deposits works like this: The employer provides some money up front and the remaining balance in periodic equal installments. For example, a company that contributes $1,500 annually may offer a $600 lump sum at the beginning of the year and then $75 monthly, or $540 up front and then $40 per semi-monthly pay period. This approach provides employees with some seed money but requires them to earn the balance by remaining employed during the year.
New vs. established account owners
The longer an employee has owned and funded an HSA, the less important the timing of the contribution becomes for many owners. While averages don’t reflect personal experience, owners’ contributions to HSAs exceed distributions by an average of more than $400 annually, according to a recent industry survey.1 Thus, many owners naturally build balances over time, easing the cash-flow concerns about high out-of-pocket expenses early in the following plan year.
2 other funding strategies to consider
The approaches listed above focus on the timing of employer contributions, not the actual structure or anticipated employer behavior. But companies should encourage eligible employees to fund their accounts as well. It’s important that employees acknowledge their role in paying for medical care. And the presence of a medical emergency fund — an HSA funded systematically by employees with an assist from their company — can help lower workers’ financial stress. In addition, the capacity to pay provider invoices may help to enhance their satisfaction with their employer-sponsored medical plan.
Here are two approaches, both borrowed from companies’ retirement-plan playbooks, to consider:
4. Matching contributions
Many companies help employees fund their retirement plans by offering to match workers’ contributions, up to a limit. This approach is designed to nudge employees to stretch their retirement savings beyond the amount that they otherwise might contribute. The lure of “free money”— a dollar-for-dollar employer match generates the equivalent of an instant 100% return on investment — and can encourage employees to contribute up to the company’s matching contribution, lest they “leave money on the table.”
Employers whose HSA contributions flow through a Cafeteria Plan can establish a matching program. Employees may be more inclined to respond and increase their deposits to an HSA than to a retirement account because they may incur the expenses that the savings cover next week or next month, rather than see the value of the account farther into the future.
There is no downside for employers to adopt this strategy when introducing an HSA program. A company that has been providing no-string-attached contributions may need to address employee concerns that they now must make a financial commitment to receive the employer funds. The company may want to move to a traditional matching program over several years. One option is to retain the current employer contribution program for half the employer funding and require employees to set up pre-tax payroll deposits to claim the other half. Another option is to provide a “super match” (perhaps $2 or $1.50 for every dollar an employee contributes) initially before tapering to a 100% match.
5. Default (negative) elections
Some companies enroll a new worker automatically in the workplace retirement plan and set a default election, such as starting at 3% of the employee’s pay. With each raise that the employee receives, the company may increase that election by 1%. Employers must disclose this practice to employees and provide instructions on how to adjust their contributions — including opting out.
The idea behind default elections is that new employees don’t have a reference point for their net income. Thus, they won’t see a reduction in their net pay due to a retirement-plan contribution. And even if they do notice, they may still not opt out.
But this inaction is a two-edged sword. Employees may assume that the company’s default figure is the appropriate savings level for retirement savings. That figure may not be appropriate for everyone as they plan for a comfortable retirement. But it may be as high as a typical company feels comfortable setting the default, fearing that a higher figure will prompt employees to notice and reduce the deduction or opt out.
The same may hold true for Health Savings Accounts. A 3% figure for someone earning $50,000 annually is $1,500. That may prove to be insufficient over the long to cover current and future qualified medical expenses. Employees focused on their immediate expenses only may be more likely to resist a default figure higher than 3%.
Matching and default contribution strategies aren’t mutually exclusive. An employer can adopt both. A company can set an employee default and match those payroll deductions up to a certain level. Doing so helps even employees who don’t fully understand the HSA program to enjoy the benefit of building their account balance and reducing their taxable income.
HSA programs are designed to increase employees’ understanding of and involvement in the cost of their medical coverage and care. HSAs are a powerful tool to reinforce that engagement, as every dollar saved in premiums and out-of-pocket costs is a dollar that remains available to contribute to an HSA or to preserve in the account for future medical expenses. Companies can encourage employees to be active savers by adopting an employer contribution strategy that engages them and nudges them to set aside more income to cover current or future qualified health-related expenses.
1. Devenir Research 2021 Year-End HSA Market Statistics & Trends, pp. 6, March 23, 2022.
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