As an employer of course, you want to attract and retain the best talent possible while also being able to afford the best benefits possible. But how? In the current climate of 20+% health coverage premium rate hikes year over year, can a small employer offer or sustain cost-effective health coverage for employees?
Let's look at what the data says about employee needs:
Nearly 90% of large employers believe the cost of providing health benefits to employees will become unsustainable in the next five to ten years.** If the landscape is that bleak to large employers, how can small companies compete?
Sandra and Arjun have co-founded a small Fintech startup. They’ve got solid funding and a stable runway. They’re growing fast. And so are their benefits costs. Sandra and Arjun want to offer best in class benefits to attract and retain talent. They’re willing to pay for very generous benefits, help their employees save money, give employees opportunities to reduce their taxable income, and would like to save themselves some money—enough to either add more benefits or raise wages. Sounds impossible, right? It isn’t. Not with the right benefits strategy.
First things first: Sandra and Arjun should look at introducing a high-deductible health plan that works with a Health Savings Account. Then, they could layer on a post-deductible Health Reimbursement Arrangement (HRA). And finally, add a Limited Purpose FSA. The combination of all of this would fulfill their wish list.
Well, that’s a lot of alphabet soup. What does that even mean and how does it work?
Switching to a high-deductible health plan may seem counterproductive at first. Implementing higher deductibles help shift the cost burden to the employee. When employees have to use their own money first, they tend to seek out less care. That can combat unnecessary plan utilization and lower employer costs.
It’s clear how Sandra and Arjun benefit, because HDHPs are cheaper to employers than plans with lower deductibles, but how would that save employees money? No employee loves the idea of a huge deductible, especially if they’re covering a family.
There are a couple of ways an HSA-qualified plan can benefit employees:
So even that one step of implementing an HSA-qualified HDHP can move the needle for Sandra and Arjun and their employees.
Now that Sandra and Arjun have an HSA-qualified HDHP in place, what else can they do to lower both their costs and those of their employees?
One answer: Layer on a post-deductible Health Reimbursement Arrangement (HRA). Many employers are familiar with traditional HRAs: the employer allots employees a sum of money to use in a given plan year. The employer can impose a lot of restrictions on what this money can be used for (like disallowing usage for medical premiums, dental, and/or vision costs), as well as decide whether to allow the money to roll over after the plan year or forfeit any unused money back to the employer.
Many startup employees tend to be younger, and therefore often use fewer healthcare dollars, so a traditional HRA can make a lot of sense, as the odds tend to be lower that the full amount of the allotment will be used. But here’s the catch: the IRS has ruled that traditional HRAs, which kick in as soon as the plan year starts and can be used for eligible medical expenses immediately, can’t be used with plans associated with Health Savings Accounts (HSAs).
Instead, the IRS allows what’s called a post-deductible HRA, which is exactly what it sounds like: a sum of money, allotted by the employer, for employees to use once they meet their deductible. The employer is given the same relatively free rein with restrictions as with the traditional HRA. The employer is also able to set at which point the post-deductible HRA will kick in—either the IRS minimum amount for a HDHP ($1,400 in 2022; $1,500 in 2023) or at the actual deductible set by the employer.
Consider this: Sandra and Arjun have implemented an HSA-qualified plan and have passed on some of that cost savings by both lowering employee premiums and contributing to employees’ HSAs. So far, so good. But they could save even more money.
When Sandra and Arjun contributed to employees’ HSAs, that money became the property of the employee the minute it hit the employee’s account. It belongs to them regardless of whether the employee continues to work for Sandra and Arjun, and any interest on it or investment proceeds belongs to the individual employee.
So, in order to maximize their savings, Sandra and Arjun could lower—or eliminate—their contributions to employees’ HSAs and instead fund a post-deductible HRA. This would:
Let’s say that Sandra and Arjun, like many employers, face a large increase in their renewal premium. They could add a post-deductible HRA to mitigate the increase without increasing employee out-of-pocket costs.
Example: If Sandra and Arjun receive a 20% increase in their renewal premium, they could raise the employee deductible and choose to fund the difference between the old deductible and the new one by using a post-deductible HRA. Depending on the new deductible amount, this could lower their renewal premium, while still meeting their goal of paying for most of their employees’ deductibles.
This solution also allows for a more customized deductible. Most insurers offer deductibles in either $500 or $1000 increments, which makes increasing employee deductibles to achieve cost-savings for the employer a rather blunt instrument and doesn’t allow for smaller adjustments to account for medical inflation.
Example: Let’s say that Sandra and Arjun currently have a $3000 deductible for individual-only coverage. If medical inflation is 8%, they may want to raise the deductible to $3240, but insurers won’t allow that. However, if Sandra and Arjun raise the deductible to $5,000 for individual-only coverage, they could add a post-deductible HRA that kicks in once the employee hits $3240, effectively lowering the deductible to their originally desired amount, as well as possibly lowering the employer renewal premium.
Then, following inflation, they can slowly raise the amount at which the post-deductible HRA becomes available, without raising the actual deductible. This allows for budgetary flexibility on their part, while still offering best-in-class benefits.
So now Sandra and Arjun are pretty close to their goal of keeping their employee benefits generous and saving themselves some money.
There’s one last thing they could do to help their employees lower their taxable income: offer a Limited Purpose FSA. Unlike most healthcare Flexible Spending Accounts, which can’t be used in conjunction with HSAs, the IRS allows employers to offer a Limited Purpose FSA along with HSAs, and post-deductible HRAs. The Limited Purpose FSA can be used for eligible dental and vision expenses only.
The employee gets to reduce their taxable income by contributing pre-tax money into their Limited Purpose FSA. The employer can then decide to disallow the use of any post-deductible HRA money for dental and vision expenses.
Sandra and Arjun started out thinking they had an impossible task ahead of them. By taking advantage of their broker’s recommended benefits strategy, they met their goals. They not only helped their employees reduce their taxable income and save money for medical expenses (now or in the future) with an HSA-qualified plan, they helped mitigate higher deductibles with a post-deductible HRA, they facilitated employees saving even more taxable income with a Limited Purpose FSA, and they even saved money overall, allowing them to invest back in the business.
These kinds of benefits strategies are not as complex as you might think; Pebble Health can help find you a customized solution that meets your needs, not the insurance company’s. Talk to us today. We’ll help you get better benefits, at better prices.
*SHRM
**Kaiser Family Foundation, 2021
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Pebble is a Seattle-based startup making health benefits an easy and affordable option for small and medium-sized companies. Our goal is to deliver on the promise of delightful member care experiences that are humane, transparent, and result in positive outcomes for every person we serve.
