Pros and cons of an HSA compatible healthcare plan

5 experts and advisers discuss the pros and cons of HSAs

September 17, 2021 9:00 AM

As the pandemic puts into sharp relief just how quickly an individual’s health can take a turn for the worst, enrolling in the right healthcare plan has never been more vital.

While many employees choose their healthcare plans based on which plan takes less money from their paycheck, there are good and bad consequences associated with these lower-cost options — namely, high deductible healthcare plans (HDHP) accompanied by a health savings account, or HSA.

HSAs have many financial benefits while helping employees tend to their well-being. The money accumulated in HSAs rolls over every year, regardless of an employee changing jobs. Contributions to an HSA are also tax-advantaged and tax-free, lowering an employee’s income tax and allowing them to pay for medical expenses tax-free. Additionally, when an employee turns 65, they can then use this money for anything while paying regular income tax rates on it.

HSAs do require enrollment in a high deductible health plan, which is any plan with a deductible of $1,400 or more for an individual and $2,800 or more for a family plan. According to the Kaiser Family Foundation, the average high deductible is $2,303 for a single plan, compared to $500 for a traditional PPO plan.

To maximize the benefits of both an HSA and HDHP and understand the costs, Employee Benefit News spoke with healthcare experts to share the top considerations employees should understand before enrolling.

HSAs are not for everyone

The first step to choosing the right plan is to do your research, says Paul Fronstin, the Health Research and Education Program director at the Employee Benefit Research Institute.

“My advice is to look at your options,” he says. “Some people would prefer to pay higher premiums and have more certainty over what their out-of-pocket expenses are going to be. Whether it makes sense to you depends upon your situation and preferences.”

Fronstin advises employees to pay attention to the deductible and know whether they can afford to put enough into their HSA to cover medical expenses in a given year. In some cases, especially for employees who regularly receive medical treatment, a higher premium will save users more money in the long term.

HSAs offer a lot of flexibility since, theoretically, the money could accumulate as an employee gets older and faces more health problems. When an employee turns 65, they can then use this money for anything while paying regular income tax rates on it. Even when an employee is on Medicare and can no longer contribute to their HSA, the money will remain available for current or past medical expenses, Fronstin explains.

HSAs can be a potential retirement savings tool

Richard Ward is the managing director of TIAA Health Solutions, and he views HSAs as an effective savings vehicle.

“You don't have to spend money from your HSA every year,” says Ward. “An HSA can actually allow the individual to add significantly to their retirement savings accumulation.”

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For younger employees, HSAs could prove to be a valuable opportunity for savings. While there is no guarantee younger employees will not encounter serious medical issues, Gen Z could use an HSA to put aside a substantial amount of money for medical challenges that may come in the future, in addition to growing their retirement savings with other accounts.

“The sooner you begin making contributions to either a retirement plan or something like an HSA, to accumulate savings, it's incredibly powerful,” Ward says. “That’s the gift of time.”

HSAs could cause more harm than good

HDHPs have lower-cost premiums than other plans, yet require additional cash to fund the HSA. If employees lack this cash flow, they could be facing financial disaster, says Ben Conner, CEO of Conner Insurance.

“If you're not putting money away into your HSA account and you're on a high deductible health plan, those two trends will really hurt you,” says Ben Conner, CEO of Conner Insurance. “If you don't have the cash to pay the bill, this can drive medical debt.”

Employers should question if the average income of their employees allows for them to contribute to their HSA, Conner advises. If an employer finds that most of their employees would struggle to afford doctor visits and medication, then HSAs are rendered useless. And with the rising costs of healthcare treatment and prescription drugs, there will likely not be anything left in these same employees’ HSAs by the time they retire.

“If your employees were in a high deductible health plan, would they be able to put money aside if their child is sick and needed a doctor's visit?” says Conner. “If employees are choosing that plan because it's cheapest, we've actually just encouraged them to enroll into something that harms them in the long-term.”

Read more:

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HSAs can be an investment opportunity

Michael LaVance, business development director for HSA provider, Lively, believes HSAs hold promise as an investment tool. Depending on the provider, employees could have relatively flexible investment opportunities. Lively, for example, does not require an access fee or cash minimum to begin investing with their self-directed brokerage account.

“In my opinion, there's nothing out there [like HSAs] that allows for you to take money that comes in tax-free and then proactively grow those funds through investing,” says LaVance. “We only anticipate that we'll see an increased HSA adoption as we move into open enrollment this year.”

As for younger employees, it may be beneficial to not pay for healthcare coverage they don’t need yet, considering many can defer to their parent’s plan until they are 26 years old, LaVance explains. In this case, HSAs can be thought of as convenient means of investing, if one has the ability to keep money in the account. Employees should also consider their employer’s contribution to their HSA accounts — on average an employer gives between $500 to $750 per year.

“You can max out your contributions and really get that nest egg started,” says LaVance. “Then you're setting yourself off on the right path even when you have a bad year.”

HSAs can be dangerous

If not properly understood, HSA-compatible health plans can become an expensive healthcare mistake, says David Contorno, founder and CEO of healthcare consultancy E Powered Benefits.

HSA-compatible plans were once the cheaper option for employers, allowing them to take the money they save on the plan itself and put it into employees’ HSA accounts. However, employers have cut back on these contributions as plan costs have increased. As it stands, an employer may pay around $6,000 for a low-deductible plan while paying $5,719 for a high-deductible plan, according to the Kaiser Family Foundation.

“Who is an HSA good for now? It's great for the 3-6% of the top income earners in America,” says Contorno. “HSAs have become this really expensive health plan that is completely useless until you have thousands of dollars that most people simply don't have.”

This can drive avoidance of care as well as a rise in bankruptcy due to medical debt. According to a 2020 survey by Bankrate, nearly one in four Americans have passed up medical care due to the cost. The American Journal of Public Health found that 66.5% of bankruptcies were tied to medical issues, be it the cost or the person taking time off of work.

“Health insurance has become the only thing that the average American will go bankrupt while using it,” Contorno says. “But they’re still having all this money coming out of their paycheck, plus all these resources coming out of the employer's pocket.”