Your Guide To Navigating Employee Benefits: Health Insurance Plans and Health Savings Accounts (HSAs)

March 29th, 2024 by Blake Pinyan

When it comes to selecting employee benefits, timing and thorough consideration for each decision you make are very important. Once you’ve made your selections, changes are typically locked in until the next open-enrollment period (usually in October-November), unless there’s a qualifying event such as marriage, divorce, birth, death, or new employment.

Understanding which benefits are covered by the company at no cost to you, versus those for which are deducted from your paycheck—is essential.

Regularly reviewing your benefit elections during open-enrollment periods is advisable. Circumstances can change over time, warranting adjustments to your selections. Conducting a cost-benefit analysis for each option can help determine if the value and peace of mind provided by a benefit justifies its cost for another year.

Among the array of benefits offered to employees, health insurance typically stands out as the first and most significant.

Health Insurance

When considering Health Insurance options, determine whether the plans offered are HMO or PPO.

HMO (Health Maintenance Organization):

An HMO plan necessitates the use of a Primary Care Physician (PCP) within the provider’s specified network of physicians.

Key characteristics:

• Typically features lower premiums and reduced out-of-pocket costs.
• Services and specialist referrals are coordinated through the PCP.
• Out-of-network care is generally not covered, except in emergencies.
• Claims are usually unnecessary.
• The PCP serves as the primary coordinator and facilitator.
• Switching plans may require changing doctors if the current one is not part of the network.

PPO (Preferred Provider Organization):

A PPO plan offers flexibility in choosing a PCP, whether inside or outside the provider’s physician group.

Key characteristics:

• Typically involves higher premiums and increased out-of-pocket costs.
• No referrals are needed for services.
• Offers the flexibility to see providers both inside and outside the network.
• Reimbursement claims may be necessary for out-of-network services.
• In-network care generally entails lower costs and more comprehensive coverage, while out-of-network care may be more costly.
• Requires more responsibility for coordinating care since there is no designated PCP.

Considerations

There are distinct advantages and disadvantages to consider when comparing PPOs and HMOs. While some individuals value the freedom to select their preferred providers, others prioritize cost-effectiveness and having a primary care physician (PCP) overseeing their healthcare needs. Additionally, existing relationships with trusted doctors can heavily influence the choice between HMOs and PPOs. Switching doctors requires significant energy and effort, particularly when previous physicians are familiar with your health history and prescriptions, making this decision a pivotal factor in selecting the most suitable plan.

Your copay, as a refresher, represents the cost at the time of service or goods delivery, while the deductible signifies your out-of-pocket expense before insurance coverage begins, unless waived.

Generally, in health plans, higher deductibles and out-of-pocket maximums correspond to lower monthly premiums, and vice versa. This relationship underscores the principle that the more you’re responsible for paying toward medical costs, the lower your monthly premium will be.

For individuals or families with minimal health expenses, opting for a high-deductible plan could prove to be a sound financial decision. Lower monthly premiums offer potential cost savings, particularly when health expenses remain low. Additionally, high-deductible health plans often allow contributions to a Health Savings Account (HSA), which provides further financial flexibility—more details on this will be provided later.

On the other hand, a low-deductible health plan may be highly advisable for those who frequently require medical attention and strongly prefer to minimize out-of-pocket costs. This option could be particularly attractive for individuals who cannot afford high out-of-pocket expenses.

Moreover, the choice between high and low deductible plans may also hinge on the insured’s stage of life. Young, healthy individuals with no dependents might find a higher deductible plan suitable, while older, less healthy individuals, or those with dependents (or soon to be dependents), may lean towards low deductible plans.

Before selecting a Medical Plan, it’s advisable to consider the following questions:

• What is the current health status of myself or my family, particularly if purchasing a family plan?
• Do I foresee frequent utilization of health services or medications for myself or my family, especially based upon age?
• Are there significant medical treatments expected in the near future?
• Am I committed to a specific Primary Care Provider?
• Can I comfortably afford the annual deductible in the event of an unforeseen medical issue affecting myself or my family?
• Do the activities of myself or my family pose higher risks that may necessitate increased coverage?

The responses to these inquiries can help guide the decision-making process regarding whether a PPO or HMO is the most suitable option, as well as whether to opt for a low or high deductible health plan.

As you deliberate on this decision, remember to factor in the cost-per-paycheck. You can calculate the annual figure by multiplying the quoted number by 24 (or 26 if paid biweekly), and then compare it to the associated plan’s maximum out-of-pocket cost.

It’s important to note that smaller co-pays don’t necessarily equate to a superior policy. While smaller co-pays may seem attractive, they often come with higher premiums, which may not be practical for a family that seldom uses their plan.

Take the time to thoroughly evaluate each plan. Don’t rush into a decision simply because it appears favorable at first glance.

One advantage of opting for the High Deductible Health Plan is the opportunity to contribute to a Health Savings Account (HSA).

Health Savings Account (HSA)

A Health Savings Account (HSA) is a specialized financial tool designed for saving and covering medical expenses. These accounts are exclusively available to individuals enrolled in High Deductible Health Plans (HDHPs). HDHPs are health insurance plans with higher annual deductibles and maximum out-of-pocket limits compared to standard health plans.

To qualify as a HDHP in 2024, individual plans must have a minimum deductible of $1,600, while family plans require a deductible of $3,200—twice the individual amount. Additionally, HDHPs set maximum out-of-pocket limits, which are $8,050 for individual plans and $16,100 for family plans in 2024, subject to yearly adjustments based on inflation.

There are typically two types of HSA plans: individual and family. Contributions, minimum deductibles, and out-of-pocket maximums for family plans are typically twice those of individual plans.

To contribute to an HSA, certain eligibility criteria must be met:

• You must be covered under a HDHP.
• You generally cannot have any other health coverage.
• You cannot be enrolled in Medicare.
• You cannot be claimed as a dependent on someone else’s tax return.

One of the key benefits of an HSA is its triple tax advantage. Contributions are made on a pre-tax basis, the account grows tax-free, and withdrawals are tax-free if used for qualified medical expenses.

Pre-tax contributions:

Contributions made to an HSA serve as deductions when calculating an individual or family’s adjusted gross income. In 2024, the maximum contribution limit for an HSA plan is $4,150 for individuals and $8,300 for families. Individuals aged 55 and older can make an additional catch-up contribution of $1,000. Therefore, those who max out their HSAs in 2024 can reduce their taxable income by up to $4,150 for individuals and $8,300 for families. Individuals over age 55 can further decrease their taxable income by an additional $1,000.

Tax-free growth:

Similar to a tax-deferred retirement account, growth in an HSA is tax-free. This feature makes the HSA an attractive vehicle for investing at least part of the account with the goal of increasing its balance over time. Given that retirees are likely to have significant health expenses, investing the HSA with a long-term growth focus during the working years can be a prudent strategy. There’s an argument to be made that preserving the accumulated balance for retirement rather than spending contributions and growth each year could be a wise financial move.

Regarding investment strategies, a conservative approach we recommend to our clients is to keep enough cash in the HSA to cover the deductible and invest the remainder. This ensures that if the account needs to be drawn upon for medical expenses and cash reserves are not readily available outside the HSA, the cost of the deductible remains unaffected by market risk and fluctuations. For instance, if a family’s health insurance plan has a $4,000 deductible and they have $10,000 accumulated in their HSA, they could allocate $4,000 in cash and invest the remaining $6,000 for long-term growth.

An even more conservative approach would involve keeping enough cash to cover the out-of-pocket maximum. This ensures that in a worst-case scenario, where liquid reserves outside the HSA are insufficient, the account will have enough safe money free from market risk to cover the highest out-of-pocket amount.

Tax-free withdrawals:

Withdrawals used for qualified medical expenses are tax-free. Qualified medical expenses include most medical and dental expenses, excluding those related to alterations to one’s personal appearance or body. Withdrawals for non-qualified medical expenses are subject to taxation by the IRS, along with a steep penalty of 20%. However, this penalty applies only to those under age 65. Individuals aged 65 and older are exempt from the 20% penalty but must still pay taxes on the withdrawal as ordinary income.

Considerations

Before enrolling in a HDHP plan, it’s important to recognize that it’s not suitable for everyone. Individuals with predictable and ongoing medical expenses may find the high deductible financially burdensome. Therefore, when making the decision about HDHP, it’s advisable to consider it on a year-to-year basis. A year with expected major medical expenses may warrant a low deductible plan, while a year with minor medical costs may support opting for a high deductible plan. It’s worth noting that you can change plans annually during open enrollment.

To avoid penalties, remember to withdraw money from the HSA only for qualified medical expenses, adhere to the maximum plan limit for contributions, and remain on the HDHP plan for the entire year. Additionally, it’s worthwhile to consider investing at least part of an HSA for long-term growth. The larger your HSA balance in retirement, the better equipped you’ll be to cover medical expenses at a time you may incur more.

Conclusion

When it’s time to choose your Health Insurance and determine whether a High Deductible plan is the right fit for you, it’s important to remember that there are various factors to consider, and the decision should be approached thoughtfully. At Anchor Bay, we guide our clients through these decisions, helping them select the health plan that best suits their needs and those of their families. There’s no one-size-fits-all solution, and each benefit should be carefully evaluated in light of an individual’s financial situation. The key is to be deliberate and intentional in your employee benefit decision-making process.