Deploying contribution tools to boost Health Savings Account balances
By William G. (Bill) Stuart
As defined-contribution retirement accounts have become the norm during the past four decades, companies have adopted two distinct strategies to boost employee balances. The first is matching contributions, which create a partnership between company and worker to save for retirement. The second is negative (default) elections, a tool that employers often use to nudge employees to begin to fund their accounts.
Both strategies are credited with boosting employee engagement and retirement financial readiness. These same two approaches can boost Health Savings Account (HSA) participation and contributions as well. Yet, whereas matching and default contributions are generally accepted as effective tools to help workers increase retirement savings, few employers use the same strategies to help the same workers build a medical emergency fund to pay for qualified medical, dental, vision, and certain premium expenses in the near- or long-term future.
Let’s explore how adopting one or both of these approaches can create the same balance-multiplying results with HSAs as they do with employer-sponsored retirement accounts.
Matching contributions and HSAs
Companies that offer employees a robust HSA program can make employer contributions to each participating worker’s account. This is especially true in the early years when companies can fund the accounts with visible premium savings on the lower-price HSA-qualified plan and when employers want to drive enrollment by reducing the net deductible that employees face. For example, workers perceive (correctly) that a $4,000 family deductible is easier to manage when the employee pays, say, $1,000 less in payroll premium deductions and the employer seeds an HSA with a $2,000 contribution.
A typical employer contribution with no strings attached helps employees manage their medical cost-sharing, but it doesn’t fundamentally change HSA owners’ behavior. On the other hand, a matching contribution may encourage the same workers to make pre-tax payroll contributions high enough to capture the full company match. An employer who funds half the deductible in the form of a matching contribution nudges employees to contribute at least an equal amount through payroll deductions, thus doubling the total deposits and accumulating enough savings to cover the full deductible.
How does the employer gain? The company may see a slight reduction in its total contributions as some employees (particularly those with lower incomes and few out-of-pocket expenses) fail to contribute enough to receive the full match. More important, total contributions – employer and employee combined – increase. That leaves workers with higher balances to reimburse qualified medical, dental, vision, and over-the-counter expenses now and in the future. That growing medical emergency fund increases employee satisfaction with their medical benefits, since it reduces the fear of an expensive financial obligation without funds to pay a provider.
The most tangible benefit to employers is that neither the workers’ nor the company’s federal payroll taxes, (7.65% for incomes below $142,800 and 1.45% on income above that figure in 2021) are applied to employees’ contributions through the company Cafeteria Plan. On $500,000 of incremental employee contributions, the company saves $38,250 (assuming all employees have incomes below $142,800). That level of savings may fund other business opportunities such as additional staff, additional employee benefits (including perhaps a more generous employer matching-contribution program), or a marketing campaign to boost sales (and thus opportunities for employee growth and advancement).
There are two ways to implement matching contributions successfully
- Companies offering HSAs for the first time can pick a contribution level with which they’re comfortable and create a matching program. Employees have no history of employer contributions, so shifting from a no-strings-attached contribution to a matching program won’t appear to be a take-away.
- Companies that currently offer a contribution without requiring a matching employee deposit may need to increase their level of support, particularly during the first two years. Otherwise, participating employees may view the change as a takeaway, since they now need to sacrifice financially (match the contribution) to receive the employer’s financial commitment. For example, a company that formerly offered a $1,000 unmatched contribution may have to offer employees, say, a $1,500 match opportunity that includes two dollars of company money for every dollar of employee contribution. Over time, as participating employees build their account balances, the company may, if it chooses, alter the terms of the arrangement – perhaps to $1,000 with a 2:1 match, or keep it at $1,500 with a 1:1 match.
The degree to which a company changes the program over time and the alterations that it makes will depend on its financial resources and their benefits strategy. There are no right or wrong approaches. But the changes apply to all employees. A company can’t, for example, reduce the 2:1 match to 1:1 because employees have had three years to build balances, then retain the 2:1 match for new participants. All employees eligible for the contribution must receive it on the same terms within a year.
Negative (default) elections and HSA programs
A second approach that employers can take is to set a default contribution level for employees new to the HSA program who haven’t set a payroll deduction to fund their account. Again, it’s common for companies to adopt this approach for new employees who don’t choose a contribution level to their employer-sponsored retirement account.
A common default election in retirement accounts is 3%1. For HSAs, employers may want to determine the reduction in employee payroll deductions for medical premiums and use that figure as the default. For example, if an employee who enrolls in HSA-qualified coverage saves $40 per semi-monthly payroll period, the default election could be set at $960/year and the employee’s take-home pay wouldn’t be affected.
Employers must notify HSA participants that they’re setting default elections and explain how an employee can opt out of the program. Many employees don’t void default elections, however, whether out of inertia or satisfaction that their take-home pay doesn’t decrease. And in an era of electronic payrolls that employees rarely inspect, the effect on their paycheck is hidden. That’s not to say the program is sinister – it merely funnels a portion of employees’ income from taxable take-home pay to pre-tax contribution to a medical savings account that they own and manage.
When employers allow workers to make pre-tax payroll contributions, both employer and employee deposits flow through a Cafeteria Plan, the governing document that allows the deductions to be excludable from gross income. Employers must conduct a nondiscrimination test to ensure that the plan doesn’t disproportionately affect owners, key employees, or highly-compensated workers. In this test, both employer and employee funds are labeled as employer contributions. Matching contributions and negative elections are permitted under federal tax law only when contributions flow through a Cafeteria Plan. [When employees aren’t permitted to make pre-tax payroll contributions, nondiscrimination rules don’t apply. But employer contributions are subject to comparability rules, a different standard designed to ensure that employer contributions aren’t designed to favor one group of workers over another.]
A plan with a low match – say, an employer is contributing $1 for every $4 that an employee contributes – most likely fails this test. Why? With only a 25% instant return, low-income workers are not usually motivated to contribute beyond their immediate reimbursement needs. On the other hand, contributions from high-income employees, many of whom would deposit an amount closer to the annual limits anyway, would constitute most of the money flowing through the Cafeteria Plan. That’s a recipe for failing the nondiscrimination testing.
Employers can design their matching programs to minimize this risk. One approach is to create a rich match – at least 1:1. A 100% match of the first $1,500 of employee contributions would motivate employees to contribute, regardless of income (although perhaps not all low-income employees have the financial flexibility to fully participate).
Another approach is to offer part of the company contribution as a no-strings-attached deposit and the rest as a rich match – for example, a $500 deposit and then a 1:1 match for the other $1,000. This design reduces the likelihood that the plan fails the nondiscrimination test, since every employee is credited with at least a $500 contribution. On the other hand, eliminating the matching requirement on a portion of the contribution waters down the effect on employee deposits that subjecting every dollar of employer contribution to the match offers.
There are no compliance issues with negative elections, other than standard nondiscrimination testing. A default election helps employers’ plans pass this test, since every employee (except those who take the additional step of opting out of the default election) contributes at a rate at least equal to the default.
The bottom line
Employer contributions are an important element in a successful HSA program, especially during the first years after introduction (to help employees build account balances) and when the company offers multiple medical insurance options (to reduce employees’ net financial responsibility). For this reason, participants always welcome deposits from their company.
Employees naturally prefer no-strings-attached deposits, since they’re not required to make a similar commitment to funding their account, as they are with a matching-contribution program. But such an employer deposit doesn’t nudge otherwise-reluctant employees from directing a portion of their paycheck to their account to build an emergency medical fund for the short-term or long-term. A well-designed matching contribution strategy builds employees’ HSA balances faster, thereby increasing satisfaction with the program when a worker incurs and can cover a high claim, and reduces the amount that employers pay in federal payroll taxes.
Talk to your Voya representative for more information about Voya’s HSA offering.
William G. (Bill) Stuart is Manager, Planning and Business Analysis at Voya Financial. He has nearly three decades’ experience in employee benefits and has worked with Health Savings Accounts since their introduction in 2004. He chairs the American Bankers Association HSA Council’s compliance committee and is the author of HSAs: The Tax-Perfect Retirement Account.
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.
Health Savings Accounts offered by Voya Benefits Company, LLC (in New York, doing business as Voya BC, LLC). Custodial services provided by WEX Inc.
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