Which Voluntary Benefits Work Against Health Savings Accounts?
Understanding the Relationship Between Voluntary Benefits and HSAs
With the rise of high deductible health care plans across the US, health savings accounts (HSAs) are a useful, cost-saving employee benefits option that many employers offer. Employees have the opportunity to put aside pre-tax earnings into an account that they can use for a wide range of medical needs, including some alternative wellness services like massage therapy, chiropractic care, and nutritional support. As of 2017, SHRM reports that the Internal Revenue Service has raised the limits that individuals can put aside in their HSAs (by $50), which makes it an even more attractive benefit for employees.
The Use of Health Savings Accounts in the US
The Employee Benefits Research Institute advises that, “as of December 31, 2016, there are some 5.5 million HSA accounts with total assets valued at $11.4 billion.” The study also showed that most HSA account holders tend to use their accounts to cover cash expenses, including deductibles, co-insurance, co-pays, and prescription drug costs. Others are using them like checking accounts to pay for wellness related services or to plan for large medical expenses, despite the ability to invest these funds in other tax-savings opportunities. In 2016, EBRI reports around 63 percent of HSA plan users withdrew funds for various expenses.
Voluntary Benefits Can Provide Support for Controlling Health Care Costs
Other options that employers may offer to employees is the use of voluntary benefits that provide an added layer of protection to employees. These 100 percent employee self-funded plans can help to reduce the cost of standard medical insurance premiums when employees make use of voluntary plans. However, they are at fixed benefit amounts, which reduces their costs dramatically over other kinds of insurance.
Examples of the most common types of voluntary benefits include:
- Hospital indemnity plans
- Accident insurance
- Cancer and critical illness insurance
- Supplemental life insurance
- Dental insurance
- Vision discount benefits
- Short and long term disability insurance
- Identity theft insurance
- Pet insurance
- Student loan repayment
Voluntary Benefit Trends in the US
According to the 2016 Towers Watson Voluntary Benefits and Services Survey, “92 percent of U.S. employers believe voluntary benefits and services will be important to their employee value proposition over the next three to five years.” In 2015, this percentage was 73 percent. By 2018, many of the above voluntary benefits will be at near 80 percent offering with most organizations.
Where Are the Increases in Voluntary Benefits Coming From?
The growing number of employees who are requiring voluntary benefits is coming from younger generations who demand more control over their health care dollars. Many want customized health care plans that meet the unique needs of their lifestyles, and can be easily adjusted year to year as they change. For example, a single employee may want pet insurance. Then later this single employee gets married and requires additional insurance for a spouse who doesn't have enough from their employer.
At the same time, many people just aren't putting away money for emergencies like other generations did. A 2017 Bankrate survey of 1,003 adults indicated that 57 percent of Americans don't have enough money on hand to cover even a $500 unexpected expense. The biggest expenses to people are car and home repairs, and medical costs. While the economy has been slowly recovering, earnings have not kept up with cost of living since the end of the 90s. Therefore, the increase in both HSAs and voluntary benefit programs have given consumers more resources for paying for medical expenses.
Could Voluntary Benefits Actually Take Away From Health Savings Accounts?
It’s important to note that health care cannot and never should be a one-size-fits-all approach. In the case of health savings accounts as well as voluntary benefits, employees have the decision to either participate or not. They can also decide how much of their pre-tax earnings that they want to contribute to these plans. Some may decide to contribute the maximum amounts to their HSAs in order to fund a future health care need (like expensive surgery or pregnancy), while others may contribute the minimum to pay for medication and preventative care only.
Voluntary benefit plans may be a more cost effective way for some employees to plan for medical needs. They may be faced with a serious illness that puts them in the hospital frequently, and therefore a hospital indemnity plan that pays them so much per stay may be more reasonable given these circumstances. An employee who is undergoing chemotherapy treatment may choose to go with a critical illness plan that provides much needed financial support for unexpected costs that can otherwise deplete an HSA account in a matter of weeks.
HSA vs. Voluntary Insurance
The difference between HSAs and voluntary benefit plans are best illustrated by how they are used.
Health savings accounts are pre-tax dollars that are capped at a certain amount each year. They are 100 percent self-funded by employees who determine a percentage of their earnings be allocated to this special account each pay period. HSA funds accrue, but do not earn interest. Funds are available via a debit card to be paid directly to providers, or by submitting approved claims for reimbursement into a bank account. When an employee uses the funds to pay for an approved medical service or product, it is at their discretion when to do so. Some employees simply leave the funds alone and use them as a tax shelter.
Voluntary benefits are a ‘use or lose’ option, much like other types of employee benefit programs. Each month, employees pay a small premium via payroll deduction to participate in the voluntary plan(s) of their choice. They are 100 percent self-funded, but (unlike HSAs) plan premiums do not accrue over time. Employees must decide when to use them, must put in approved claims, and the money is paid directly to them (not providers). This happens for every qualifying event. At the end of the year, benefit members have claims paid for, and they may end up putting some of this money into another type of savings account. But they must still pay taxes on it.
The types of voluntary benefit plans that may replace health savings accounts is determined by the kind of financial needs and care that individual plan members have. For example, an employee may participate in an accident policy, a hospital indemnity plan, and a critical illness plan. This employee may experience a broken arm, with a trip to the emergency room and subsequent surgery that requires an in-hospital stay and therapy. The accident plan may pay the employee $750 for the broken bone, the hospital indemnity plan may pay $1,000 per day for the hospital stay, and the critical illness plan will pay $0. If the employee has an HSA, he or she may opt to use this to pay for the added deductibles incurred by using standard HDHP for medication and therapy.
The use of voluntary benefit plans give employees a great deal of flexibility in how they want to use their health care dollars, where they receive care, and to negotiate for lower rates. They can be purchased in tandem with other health care benefits and be dropped when they are no longer useful to employees. Voluntary plans are very inexpensive at group rates, as compared to other types of benefits. They can also be self-purchased if an employee is in between enrollment periods or has lost coverage.
It’s important to note that some medical clinics offer self-pay options only, which can provide cost savings for preventive and general wellness care. In this case, an HSA or a voluntary insurance plan may offer a better deal to employees depending on their needs. This is of course dependent on the type of care provided and the approval process.
Voluntary benefits can also be a suitable substitute for employees who are just starting out with a new career. They are likely to not be earning enough to afford more than the lowest-tier HDHP offered by their employer, and have not had the time to build up much money in an HSA fund or emergency savings account. In this case, a voluntary benefit plan can provide a safety net until such time as they can save up more in an HSA, or afford a lower deductible health insurance plan with an employer.
Why Employees Choose One Over the Other
When employers offer voluntary benefits like dental insurance, vision care, pet insurance and other options that are not included in traditional health insurance programs, it’s viewed as a bonus to employees. They don't generally look at this as a replacement to health care. They may choose not to use an HSA for a variety of reasons, including being healthy and not requiring much care. They may have other pressing expenses like student loan debt and household costs that prevent them from saving money in an HSA. Or they may not have been educated on the excellent tax shelter that an HSA provides.
It’s doubtful that voluntary insurance plans will ever take the place of health savings accounts, because of the above reasons. Voluntary benefits don't work against HSAs. When they are used in combination with other health insurance options and health savings accounts, this is when smart employees have the best success.
Understanding how and when to use voluntary benefit plans, when to use HSAs, and when to use traditional medical insurance comes down to education and awareness of each type of plan’s benefits. There are no 100 percent correct way to use health benefits, but there are many ways to save money on health care and staying well. Employees should try to learn as much as possible about all these options before making a selection.