High-deductible health plans can be cheaper for employers to offer, but employees don't always like them.
Offering health insurance to your employees essentially isn't optional anymore. Fifty-six percent of Americans said that their employer-sponsored healthcare plan hugely influences whether they stay in their current job. Similarly, 46% of those surveyed said that employer-sponsored healthcare was a positive or deciding factor during their job hunt.
However, while providing employees with great health insurance options is important, it is not cheap. With high-deductible health plans (HDHPs), you can offer health insurance to your employees without breaking the bank. That said, even if HDHPs save you money, they aren't always right for your employees, so it is important to understand what they are, their ties to other types of health benefits, and their pros and cons.
What is a high-deductible health plan (HDHP)?
An HDHP is a health insurance plan with an annual deductible of at least $1,400 for an individual or $2,800 for a family in 2021. Additionally, all non-premium out-of-pocket costs for an HDHP must not exceed $7,000 for an individual or $14,000 for a family.
These values are set not by insurers, but by the IRS. The IRS has the flexibility to change the minimum deductibles and maximum out-of-pocket expenses each year.
HDHPs typically have lower premiums (the amount employees pay each month) than other health insurance plans. Premium payments, however, do not count toward the $7,000 or $14,000 out-of-pocket limit.
How does an HDHP work?
The deductibles set by the IRS are minimum amounts; the plans offered to employees may include significantly higher costs. In some cases, HDHP deductibles can be just as high as the out-of-pocket limits.
HDHP out-of-pocket expenses may include copays and coinsurance. However, neither premiums nor out-of-network expenses fall under the out-of-pocket limit.
As you explore the possibility of offering HDHP plans for your employees, you may see that HDHPs available to individuals from the Affordable Cart Act's healthcare marketplace require the insurer to fully cover certain preventive services. This rule often applies to non-marketplace plans as well.
This means that with most HDHPs, your employees won't have to pay out-of-pocket for certain services, even if they have yet to reach their deductible. The healthcare marketplace specifies preventive services for women, children and all adults that HDHPs must cover pre-deductible. Examples include diabetes screening, cholesterol screening and diet counseling.
What qualifies as a high-deductible health plan for an HSA?
Employers who offer HDHPs to employees often offer health savings accounts (HSAs) as well. While you're not required to offer HSAs alongside HDHPs, doing so can increase employee retention and make recruiting easier. Since only employees with HDHPs qualify for HSAs, pairing the two is logical.
However, not every HDHP can be paired with an HSA. For the HDHP you offer your employees to qualify for HSAs, it must:
- Have a higher deductible than most healthcare plans
- Cap annual deductibles and out-of-pocket costs
- Not cover any healthcare costs until the employee meets their deductible, except for the preventive care described above
In theory, these conditions cover every type of HDHP, though some may just miss the mark. You will know for sure that your HDHP can be paired with an HSA if, when comparing HDHP options for your employees, you see an HDHP labeled as HSA eligible.
Contributing to employee HSAs
If you pair HSAs with your HDHPs, you and your employees face shared contribution limits set by the IRS, just as with employer-sponsored retirement plans. For 2021, the maximum that can be contributed to an HSA for an individual employee's HDHP is $3,600. This limit doubles to $7,200 for family HDHPs.
How do employees benefit from HSAs?
Employees can use money from their HSA to pay for their healthcare costs before they reach their HDHP deductible. An employee's HSA money can also cover their spouse, even if their spouse isn't on their HDHP. Neither you nor your employees pay taxes on any money deposited into HSAs, though using this money for nonmedical expenses incurs taxes and penalties.
Pros and cons of HDHPs
Like most health care plans, there are both benefits and disadvantages to HDHPs.
- Lower premiums. Since you're paying for most, if not all, of each employee's premium, lower premiums are better for your bottom line. HDHPs typically have lower premiums than other plans precisely because insurance providers can't reasonably justify high premiums alongside high deductibles.
- HSAs. If you want to funnel money directly to your employees to help cover their medical expenses, HSAs are among the fastest ways to do so, and you can offer them alongside HDHPs.
- Thorough preventive care coverage. Other types of health insurance may lack the 100% preventive care coverage required of HDHPs. Employees may appreciate having this added coverage, rather than having plans with higher premiums but lower deductibles.
- High out-of-pocket costs. For anything that's not covered under the HDHP's preventive care provisions, your employees will almost certainly pay far more than with standard healthcare plans. While employee spending doesn't directly impact your bottom line, undue financial stress for your employees could lead to stress that carries over to their work.
- HSAs and HDHPs are dual costs. Although you don't have to offer HSAs alongside HDHPs, employees may demand HSAs to help them fill in the huge gap that their high deductible leaves. If you offer HSAs, you'll pay for both HSAs and HDHPs, the combined costs of which can approach what you'd likely pay for standard insurance plans – and that's before factoring in administrative costs and the like.
- Employees may dislike them. Perhaps the biggest con of HDHPs is that employees often don't like them. Unions have often spoken out against HDHPs, and their efforts have proven so successful that major corporations such as JPMorgan and CVS have stopped offering HDHPs entirely. Given how expensive HDHPs can prove for employees, other options might make your team happier.
If you're still undecided about HDHPs versus other types of employee health insurance, consult our employer and employee healthcare cost guide for more insight.