The transition from standard healthcare plans to high-deductible health plans and their health savings accounts may look like a wide, unfamiliar chasm that employees are unwilling to cross – but we’ve been here before. In fact, the terrain looks strikingly familiar to another transition from employer plan to employee choice.
That’s not to imply that HSAs haven’t been popular. Employers have embraced high-deductible health plans and HSAs. The number of people with such group coverage rose to 4.6 million in January 2008, up from 3.2 million in January 2007.
However, HSAs are still underfunded. In 2007, the average balance of HSAs was just $1,380, despite contribution allowances of $2,850 for individuals and $5,650 for families.
Apparently, employees haven’t shared their employers’ enthusiasm for HSAs as a health savings vehicle. Are employees truly unwilling to enter this space, or are they just uninformed?
Flash back with me to the 1980s. Employees faced a similar shift, from employer-directed pension plans to employee-funded 401(k)s. The logic behind those retirement savings vehicles, like that underlying HSAs, was clear – employees could make higher yearly pre-tax contributions to their 401(k)s than they could make to their IRAs, and 401(k)s usually were accompanied by a company match.
By 1983, almost half of large firms offered, or were planning to offer, 401(k)s. Even so, employee adoption lagged until Congress passed legislation that allowed employers to automatically enroll newly eligible employees.
Like the steady adoption of 401(k)s, employees are beginning to recognize HSAs as a viable alternative. In many ways, the core lessons learned in the move to 401(k)s should encourage employees to take control of their HSAs and their healthcare.
Play up the tax advantage – and the long-term value. Like 401(k) plans, HSAs are an investment opportunity that travel with serious tax advantages. In 2008, for example, individuals or their employers can contribute $2,900 for self and $5,800 for family, all in pre-tax dollars.
The funds in HSAs grow tax-deferred and, as long as they’re used for qualified medical expenses, can be withdrawn tax-free. Some account holders are even choosing to pay for health expenses out-of-pocket rather than tap the tax-free growth of their HSAs.
That makes HSAs more than an insurance policy or a savings account for today’s health expenses. They can be a long-term investment vehicle for real-world retirement planning and, along with 401(k)s, should be part of many workers’ overall investment strategy.
Help employees get started. The benefits of pre-tax contributions alone, however, didn’t help boost 401(k) enrollments. When faced with change and choice, employees often need a nudge. For 401(k)s, the first nudge came when some employers offered to match a percentage of 401(k) contributions.
Like 401(k)s, companies can’t force employees to dump cash in their HSAs, but they can help them get started.
HSAs start at $0, and because employees can only spend what is in their account, they could find themselves confronting large medical expenses that their HSAs can’t cover. Some employers have decided to ease the transition by prefunding each employee’s account, which they find still saves them money over their previous healthcare costs.
Employers also can offer employees a line of credit to their HSAs that’s limited to medical expenses, capped at the employee’s deductible. The line of credit can be automatically activated when medical expenses exceed the funds available in the employee’s account. A line of credit is a solution that’s available through select financial partners.
Education is key. The enrollment in 401(k)s received their biggest nudge from the Pension Protection Act of 2006, which allows employers to automatically enroll their employees in 401(k) plans with diversified portfolios. This “negative election” overcomes investment inertia by forcing employees to opt out of 401(k) plans rather than asking them to opt in.
Because of the passions that surround healthcare, this isn’t a likely solution for HSAs in the near future. Instead, education is key. If the lessons learned from 401(k)s are leveraged – the benefits, the options and the control – and employees are educated about how to make those choices, employers may be able to inform, ease and encourage enrollment in health savings accounts, especially to audiences that have already “bought in” to the value of 401(k)s.
Dennis Triplett is president of UMB Health Care Services.