What to do if your group health plan doesn't qualify for an HSA

Health savings accounts (HSAs) are powerful savings vehicles for employees looking to save on medical expenses or even prepare for retirement. However, HSA eligibility depends on an individual having a qualifying high-deductible health plan (HDHP) that meets specific requirements.

Employers who choose to offer an HDHP can make their employees’ healthcare more affordable by contributing toward their HSAs, but not all group health plans meet the requirements for HSAs.

In this blog, we’ll cover why your group plan may not qualify for an HSA and three options available to you if that’s the case.

Learn how an integrated HRA can supplement your group health plan in our guide

What is a health savings account?

HSAs are savings accounts where both an employer and an employee can contribute pre-tax money for the employee to pay for medical services and other eligible out-of-pocket expenses. Covered expenses include ambulance services, vision expenses, cosmetic surgery, feminine hygiene products, dental expenses, and much more.

An individual or employer can open the account if the individual has an HSA-qualified HDHP. However, the individual always owns the account, and any employer money contributed to the account will stay in the account even if the individual leaves the organization.

HSAs have annual contribution limits set by the IRS each year. The combined total of employee and employer contributions can’t exceed the limit, and unused money remains in the HSA indefinitely, rolling over annually until used. HSA contributions are 100% tax deductible

Lastly, account holders can withdraw HSA money tax-free to pay for healthcare expenses anytime. But if they purchase items outside of medical care, they face a penalty. However, individuals with an HSA that are aged 65 and older can buy other items, in addition to eligible medical services, without facing a penalty.

Why your group health plan may not qualify for a health savings account

If your group plan has a high-deductible but still doesn't qualify for an HSA, you may be wondering why.

Many employers believe that if their health insurance plan’s annual deductible and out-of-pocket limits meet certain IRS requirements, their employees are eligible to contribute to an HSA. However, an insurance plan must meet more than these limits to make it HSA-qualified.

According to the IRS, HSA-qualified HDHPs must have the following:

1. A higher annual deductible than typical individual health insurance plans
2. A maximum limit on the annual deductible and medical expense costs, including copays and other items
3. No insurance coverage until the annual deductible is met, except for preventative medical care and the following qualified expenses:
1. Health insurance premiums
2. Long-term care premiums
3. Dental care expenses
4. Vision care expenses

You can confirm your HDHP's eligibility for an HSA by reading the policy’s coverage details or contacting your insurance company. If it turns out that your organization’s HDHP doesn’t meet these guidelines, your employees won’t be able to use it with an HSA.

Thankfully, you can use the other health benefit options we’ll discuss below in addition to your group plan to help you cover your employees’ out-of-pocket medical expenses.

Option 1: Switch to an HSA-qualified group health plan

If you want to allow your employees to open an HSA, your first option is to switch your organization’s group policy to an HSA-qualified plan. For employers interested in shopping for an HSA-compatible plan, meeting with your insurance broker can help you find one that meets your needs and answer your questions.

If you want to drop your group plan altogether and encourage your employees to get an HSA-qualified individual health plan, they can start by getting familiar with the federal marketplace or their state-based exchange. Most insurers label their plans as HSA-eligible, so your employees can guarantee they’re selecting the right plan before they purchase.

To enroll in an individual health insurance plan that’s HSA-eligible and opt out of your group plan, they’ll need to wait until open enrollment or experience a qualifying life event.

Sorting through the marketplaces and working with a broker can be time-consuming. Still, it could be worthwhile if you’re determined to have an HSA for your organization.

Option 2: Supplement your health plan with an integrated HRA

If you decide it’s too much trouble to switch your HDHP, another option is to supplement your organization’s current health plan with an integrated HRA, also called a group coverage HRA (GCHRA).

A GCHRA is a tax-free reimbursement benefit designed to help employees pay for the out-of-pocket expenses that their group health coverage doesn't fully pay for, such as annual deductibles, copays, and other medical services. If your organization has an HDHP, a GCHRA can help ease the pressure of a high-deductible while minimizing employees’ health insurance premiums.

The great thing about a GCHRA is that it will work with any group health plan, whether it’s a low-deductible health plan (LDHP) or an HDHP. And whatever plan type your employees have, whether self-only coverage or family coverage, is eligible to participate.

Unlike an HSA, employers aren’t restricted to specific plans through any individual provider, and if you offer a GCHRA, you can keep your GCHRA even if you change insurance providers. This makes a GCHRA a good substitute if you were contributing to employees’ HSAs in the past but are no longer able to because of a change in your group health insurance plan.

Additionally, there are no contribution limits, so employers can set an allowance that works for their budget and their employees’ needs. However, you can limit the covered expenses under the benefit for extra flexibility and customization.

Best of all, the benefit is employer-owned, so the unused funds stay with the employer when an employee leaves the company.

Option 3: Implement a stipend

If you want a flexible solution to amplify your group plan, consider a stipend. With a stipend, employees receive a fixed amount of money to help pay for their health expenses, like over-the-counter drugs, pain relievers, vision care, and more.

The employer's contributions are typically added to an employee’s paycheck as extra wages, making stipends simpler to administer with fewer compliance issues. There are also no minimum or maximum limits, making stipends a flexible and budget-friendly option for employers.

It’s important to note that stipends are not without taxes. Employers are subject to payroll taxes, and employees are prone to income taxes. If you or your employees need help determining your taxable income amount, reach out to a tax advisor for assistance.

Health stipends also don’t replace HRAs or group health insurance for organizations with 50 or more full-time equivalent employees (FTEs), as it isn’t a formal health benefit.

However, income taxes aside, stipends are still a major perk. Nowadays, employers can even offer a stipend for various eligible expenses, such as transportation, wellness, communication, remote work expenses, and more. Because of this, stipends are becoming an attractive addition to benefit packages to increase overall employee retention.

Conclusion

While an HSA offers excellent benefits, many employers may wrongly assume their HDHP group plan is eligible for one. Luckily, there are other options employers can consider if their group health plan isn’t HSA-qualified.

With an integrated HRA or stipend, you can supplement your group health plan with reimbursements for your employees. That way, your employees can better control their medical decisions and be more financially able to pay for eligible expenses. If you think one of these healthcare coverage solutions is right for you, contact our team, and we’ll get you started!

This article was originally published on February 9, 2022. It was last updated on April 25, 2023.