Mingling HSA and VEBA to Maximize Tax Benefits and Keep Health Insurance Costs Lower

By Marlo Peterson

When managing employee benefits, a common challenge is striking a balance between the annual increase in medical insurance premiums and the city’s capacity to absorb and pass on additional costs to employees. Employers often acknowledge the inevitability of annual renewal cost hikes for medical insurance benefits. To address this, employers can provide options and tools encouraging behavior change and supporting medical consumerism among employees, ultimately mitigating the impact of cost increases during plan renewals.

Promoting cost-effective care

Medical consumerism attempts to get consumers actively engaged and accountable for their health care decisions by showing them the true costs of care and giving them individual tools to reduce costs.

For instance, some employees may misuse emergency rooms for minor issues, driven by the belief that insurance covers any cost. Deductibles and coinsurance might not be sufficient incentives for behavior change. However, promoting the right care at the right price and time can help employees reduce out-of-pocket expenses. Encouraging the use of medical spending accounts can drive medical consumerism and behavior change.

Employees need to understand the importance of being informed medical consumers, seeking cost-effective care, and avoiding unnecessary expenses. Using generic prescriptions when appropriate and shopping for medical value are crucial strategies. For emergencies, cost reduction should not compromise necessary care. Utilizing nurse hotlines, online care, or consulting physicians can address many cases that would otherwise result in expensive emergency room visits. Empowering employees to communicate their deductible responsibilities with health care providers can lead to more cost-effective treatment plans.

Promoting wellness options and incentives provided by the medical carrier or the city can raise awareness about the importance of preventive care. Every effort, regardless of size, contributes to the overall reduction in employer health care costs.

HSA benefits

To foster medical consumerism and address out-of-pocket expenses, employers often offer high deductible health plans (HDHP). Typically, high deductible health plans are offered with either a health reimbursement arrangement (HRA) or a health savings account (HSA). While not a new concept, the key lies in aggressively promoting and supporting tax-advantaged accounts like health savings accounts that encourage employees to take an active role in their health care costs. HSAs allow employees to get $1 of care for 70 cents and provide tax benefits not available with regular savings accounts.

Employee communication is key — before, during, and after the HDHP is implemented. Employees aren’t likely to embrace a new plan option if they don’t know anything about it or how to use it effectively. Communicating with employees (and unions) is key to successfully offering a HDHP.

Employers and employees can contribute to HSAs, and the money is not use-it-or-lose-it — providing little risk to participants. Voluntary contributions through payroll deductions come with tax savings, allowing employees to purchase health care at a discounted rate. The triple tax advantages of HSAs — taxfree deposits, tax-free interest growth, and tax-free withdrawals for qualified expenses — make them an effective tool for reducing health care costs.

By having ownership in the HSA balance, employees are incentivized to find ways to reduce their care costs — benefiting both the employee and employer. Models comparing HDHPs to traditional plans show that even the least healthy employee in a city would spend less out-of-pocket by electing an HDHP. Factors like maximum out-of-pocket exposure, reduced insurance premiums, 30% tax savings, and potential employer contributions contribute to lower annual costs for employees.

VEBA benefits

In addition to HSAs, public employers often provide voluntary employee beneficiary association (VEBA) trust accounts. Unlike HSAs, VEBAs do not require an HDHP, and employees cannot make voluntary payroll contributions. VEBA balances are held in a trust, providing assurance to employees that their funds will not be returned to the employer, even after termination. A significant advantage of VEBAs is the ability to use funds post-employment to cover out-of-pocket medical insurance premiums.

While VEBAs provide indirect tax benefits, they promote consumerism by encouraging employees to preserve their balance by reducing care costs effectively. Some employers make both HSA and VEBA accounts available, promoting a hybrid approach. Employees can use HSAs for immediate tax savings and flexibility, while preserving VEBA balances for post-employment (pre-Medicare) medical insurance premiums.

Combining the tools

Managing employee benefits effectively involves promoting medical consumerism and providing tools like HSAs and VEBAs. Encouraging employees to be informed consumers, seek cost-effective care, and utilize tax-advantaged accounts can result in a win-win situation for both employees and employers. A hybrid approach, offering both HSA and VEBA options, can cater to diverse employee needs, fostering financial responsibility, and reducing overall health care costs.

Marlo Peterson is a consumer directed benefits consultant for the Minnesota Healthcare Consortium (mnhc.gov). The Minnesota Healthcare Consortium is a member of the League’s Business Leadership Council (lmc.org/sponsors).