Understanding Consumer-Driven Health Plans (CDHPs)
The availability of health insurance benefits at a prospective employer is a huge draw for individuals, but offering traditional group and individual health insurance can be expensive and unwieldy. If you don't know what you're doing or what you're looking for, you could be leaving money on the table for coverage that doesn't quite fit your employees' needs. Offering a consumer-driven health plan (CDHP) can be a cost-effective way to provide your employees with competitive health benefits.
What is a consumer-driven health plan (CDHP)?
A consumer-driven health plan is a health insurance plan that allows employers, employees, or both to set aside pretax money to help pay for qualified medical expenses not covered by their health plan. CDHPs are linked to health savings accounts (HSAs) and integrated health reimbursement arrangements (HRAs), which allow participants to save money to help pay for medical expenses like co-pays. Premiums for a CDHP health plan typically cost less per paycheck, but participants will pay more out-of-pocket than with a traditional health plan.
To help shoulder the out-of-pocket costs, participants in a CDHP may use pretax funds that have been diverted to their HSAs. CDHPs can provide employers with a more cost-effective healthcare option, as the costs of these plans are typically lower. These types of plans can be added to traditional healthcare plan benefits as a way to provide more personalized options for employees.
How does a consumer-driven health plan work?
For plan participants who typically don't visit doctors frequently but still wish to have healthcare coverage in the event of an illness, CDHPs may be a preferred option. To set up a CDHP, the employer must offer a high-deductible health plan (HDHP), where higher coverages don't kick in until a larger deductible is paid by the participant, as compared with traditional health plan offerings that may have a lower deductible. If a qualifying HDHP is offered, participants may also be given the option to save a part of their income in a tax-advantaged savings account, such as an HSA or HRA (explained in more detail below). Offering a high-deductible health plan with an HSA is a common healthcare strategy for small businesses.
Tax-advantaged savings accounts you can choose from
There are three different types of tax-advantaged savings accounts available for a CDHP that may be offered by employers. Each has its own unique funding characteristics, funding limits, and mix of employer/employee contributions.
- HSA — A health savings account (HSA) is an employee-owned account designed to work specifically with a qualified HDHP to allow tax-free payments of current and future qualified medical expenses. Employees, the employer, or both may contribute an amount which is dictated by limits set by the IRS annually.
- FSA — A flexible spending account (FSA) is an employee account in which pretax income is saved for qualifying healthcare expenditures, such as prescriptions or co-pays. At the end of each plan year, employers have the option to allow a two-and-a-half-month grace period or permit up to $500 to be rolled over to the next year. The employee will lose any remaining unused balances that haven't been spent on qualified medical expenses by the end of the plan year or grace period.
- HRA — A health reimbursement arrangement (HRA) is an employer-owned account that works with integrated employer-provided healthcare plans, and is solely funded by the employer with tax-free contributions. Employees benefit from tax-free reimbursements of qualified expenses up to a limit determined by the employer.
The benefits of CDHPs for your business
Overall, CDHPs offer alternatives to traditional health insurance, and they're an excellent way for employers to offer health benefits to employees at an affordable cost. Paychex senior HR generalist Shannon Anderson believes that CDHPs can be particularly beneficial for employers that have never offered a health plan before due to the high cost of premiums. Most health insurance carriers require employers to cover at least 50 percent of the premium for employee-only coverage of the lowest-cost plan that they are offering, and a CDHP is typically one of those. There are a number of cost-saving benefits and other important features. You can:
- Save on premium costs. Premium costs of CDHPs tend to be lower than other types of healthcare plans such as preferred provider organization (PPO) plans. According to the Kaiser Foundation's 2018 Employer Health Benefits Survey, the average premium for high-deductible plans was $5,386, compared to an average of all health plan premiums of $5,711. Employers may also make contributions to health savings accounts that can offset part of the out-of-pocket costs for participants.
- Reduce medical costs. CDHPs tend to reduce overall medical costs, compared with traditional plans, because when participants share in more of the out-of-pocket costs, they learn more about the cost of their health care. This may encourage participants to make more economical decisions than when they're charged flat co-pays for doctor's visits or prescription drugs.
- Increase employee satisfaction. CDHPs can increase employee satisfaction by offering them more choices in how their healthcare dollars are spent. Workers who don't utilize a high level of care may pay less for health care in a CDHP than in other plans with higher premiums. When a well-designed platform is integrated, employees can track their expenses and other health plan information to help them make better-informed decisions about their care.
The benefits of CDHPs for your employees
Employees also benefit from CDHPs. In particular, Anderson believes that CDHPs work well for employees without a lot of medical expenses and simply want a plan in place for the couple of times a year they go to the doctor or for an emergency. Some of the advantages are:
- Contributions are made pretax. Not only are the employees' portion of healthcare premiums paid with pretax dollars, but funds saved through an HSA or FSA are also pretax. The money in these accounts covers additional healthcare costs like co-pays and deductibles. Because contributions are made before taxes, employees' gross income is lower, resulting in tax savings for the employer and/or employees, depending on the CDHP.
- Unused contributions can carry over. Estimating annual healthcare costs can be difficult, and in any given year, some health savings accounts may be overfunded. Rather than lose their savings, employees' unused HSA contributions are carried over to future plan years to pay for medical costs. In terms of HRAs, carryovers are left up to the employer's discretion.
- Distributions are tax-free for qualified medical expenses. As long as a distribution meets the definition of a qualified medical expense, the money taken out of an HSA, FSA, or HRA is tax-free. Qualified expenses include the cost of medical and dental care, as outlined by the IRS. This allows employees to recognize additional tax savings that are unavailable in health plans where an HSA is not an option.
- Any interest or earnings from account assets are also tax-free. If contributions to an HSA are not used immediately, they earn interest as long as they remain in the account. This interest, when used to pay for qualified medical expenses, is also a tax-free distribution. This unique feature is beneficial because the money accumulates in the account and can be invested through the HSA into mutual funds, Anderson notes. She further recommends consulting a CPA or tax professional to find out more about these tax advantages.
- Certain CDHPs may become more valuable with rollovers. Certain accounts linked to CDHPs may be transferred between employers, making the ability to roll funds over from year to year even more valuable. Many employees are wary of contributing the maximum amount to an HSA because they're uncertain about their career progression and may want to switch jobs at some point in the future. Knowing they will not lose their contributions makes an HSA a more valuable investment tool and, in turn, may encourage higher participation in a CDHP.
Having a solid understanding of how consumer-driven, high-deductible health plans work is the first step to ensuring your company is offering the best insurance for your employees and your budget. Anderson recommends that employers pair a CDHP with at least a traditional HMO plan, and stresses the importance of employee education to help participants choose the best plan for their situation. If you have questions about how to set up a CDHP with an HSA, contact a dedicated licensed insurance representative to help you navigate the evolving healthcare offerings.
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