How deploying contribution tools has the potential to help boost employee HSA balances

Companies can adopt two distinct strategies to boost employee balances in their defined-contribution retirement accounts. The first is matching contributions, which create a partnership between company and employee intended to help employees save for retirement. The second is negative (default) elections, a tool that employers often use to nudge employees to begin to fund their accounts.

Employers can consider these same two approaches to boost Health Savings Account (HSA) participation and contributions as well — to support their employees’ efforts to save money they can use to pay for qualified medical, dental, vision, and certain premium expenses in the near- or long-term future.

Here’s how adopting one or both of these approaches have the potential to help build HSA balances for use towards eligible medical expenses both now and into the future.

Matching contributions and HSAs

Companies that offer eligible employees access to Health Savings Accounts can make employer contributions to each participating employee’s account. This can be especially meaningful in the early years when companies can likely fund the accounts using visible premium savings on the lower-price HSA-qualified high-deductible health plan offering and when employers want to drive enrollment by reducing the net deductible that employees face.

How does the employer gain? The company may see a slight reduction in its total contributions as some employees (particularly those with lower incomes and few out-of-pocket expenses) fail to contribute enough to receive the full match. More important, total contributions — employer and employee combined — increase. That leaves employees with higher balances to reimburse qualified medical, dental, vision, and over-the-counter expenses now and in the future.

The most tangible benefit to employers is that neither the employees’ nor the company’s federal payroll taxes are applied to employees’ contributions through the company Cafeteria Plan.

Two ways to implement matching contributions successfully

1. Companies offering HSAs for the first time can pick a contribution level they’re comfortable with and create a matching program. Employees have no history of employer contributions, so shifting from a no-strings-attached contribution to a matching program won’t appear to be a take-away.
2. Companies that currently offer a contribution without requiring a matching employee deposit may wish to increase their level of support, particularly during the first two years. Otherwise, participating employees may view the change as a takeaway, since they now need to participate financially (match the contribution) to receive the employer’s financial commitment.

The degree to which a company changes the program over time and the alterations it makes will depend on its financial resources and benefits strategy. There are no right or wrong approaches. But the changes apply to all employees. A company can’t, for example, reduce the 2:1 match to 1:1 because employees have had three years to build balances, then retain the 2:1 match for new participants. All employees eligible for the contribution must receive it on the same terms within a year.

Negative (default) elections and HSA programs

A second approach employers can take is to set a default contribution level for employees new to the HSA program who haven’t set a payroll deduction to fund their account. It’s common for companies to adopt this approach for new employees who don’t choose a contribution level to their employer-sponsored retirement account.

Employers may want to determine the reduction in employee payroll deductions for medical premiums and use that figure as the default. For example, if an employee who enrolls in HSA-qualified coverage saves $40 per semi-monthly payroll period, the default election could be set at $960/year and the employee’s take-home pay wouldn’t be affected.

Employers must notify HSA participants they’re setting default elections and explain how to opt out of the program. Many employees don’t void default elections, whether out of inertia or satisfaction that their take-home pay doesn’t decrease. In an era of electronic payrolls that employees rarely inspect, the effect on their paycheck is hidden. That’s not to say the program is sinister – it merely funnels a portion of employees’ income from taxable take-home pay to pre-tax contribution to a medical savings account that they own and manage.

Non-discrimination issues

When employers allow workers to make pre-tax payroll contributions, both employer and employee deposits flow through a Cafeteria Plan, the governing document allowing the deductions to be excludable from gross income.

Employers must conduct a nondiscrimination test to ensure the plan doesn’t disproportionately affect owners, key employees or highly compensated workers. In this test, both employer and employee funds are labeled as employer contributions. Matching contributions and negative elections are permitted under federal tax law only when contributions flow through a Cafeteria Plan. (When employees aren’t permitted to make pre-tax payroll contributions, nondiscrimination rules don’t apply. But employer contributions are subject to comparability rules, a different standard designed to ensure employer contributions aren’t designed to favor one group of workers over another.)

The bottom line

Employer contributions can be an important element in a successful HSA program, especially during the first years after introduction to help employees build account balances — and when the company offers multiple medical insurance options intended to reduce employees’ net financial responsibility.

A well-designed matching contribution strategy offers the potential to help build employees’ HSA balances, thereby increasing satisfaction with the program when a worker incurs and can cover eligible medical expenses and even beyond this, reduce the amount employers pay in federal payroll taxes.

Talk to your Voya representative for more information about Voya’s HSA offering.