Nongroup Buyer? Why Choose Anything but an HSA Plan?

by William G. (Bill) Stuart | Originally posted on LinkedIn

Millions of Americans buy their medical coverage from a source other than an employer. Most are missing an important option to reduce their net financial responsibility.

About 17 million Americans are covered by medical plans bought in the nongroup (sometimes called individual) market, either through federal- or state-facilitated marketplaces (often called public exchanges), private marketplaces, or directly from insurers. Sadly, many aren't aware of one type of coverage that can save them money on both their premiums and out-of-pocket financial responsibility. They are either unaware of these plans or don't understand how to evaluate their options. That's unfortunate. They may be losing several thousand dollars annually because they just don't know.

Who Buys Nongroup Coverage?

The universe of people who purchase nongroup coverage is composed of four primary groups:

Temporarily unemployed. Workers between jobs often can exercise COBRA rights to continue their group coverage by paying 102% of the group premium. This option may make sense for older workers (group premiums are blended, so younger workers subsidize older ones) and those who've met most or all of their deductible (and are receiving reimbursements from the insurer). But for others, particularly the young (who can find lower premiums in the nongroup market) with few claims incurred that plan year, buying nongroup coverage as a bridge between employer-sponsored plans often makes sense.

Early retirees. These people need a bridge between the end of their group coverage (including their period of COBRA coverage, which usually is no more than 18 months) and their eligibility to enroll in Medicare. Nongroup coverage may be their only option if they're not covered on a spouse's plan (or, in California, an adult child's nongroup plan) or Medicaid (the federal program primarily for low-income Americans).

Nontraditional workers. With the advent of new technology and apps, more workers than ever are opting to become contract workers, consultants, and gig workers. They may work as structural engineers consulting on a project, free-lance writers, Uber drivers, office cleaners, paralegals, photographers, and a number of other roles, trading the security and benefits of traditional employment for the power to determine when and how they work. If they're not eligible for group benefits (most aren't), they must find coverage on a spouse's plan or through the nongroup market.

ICHRA recipients. Some employers don't sponsor group medical coverage but instead offer employees an Individual-Coverage Health Reimbursement Arrangement through which the company delivers a tax-free stipend. The company can adjust the amount that it gives to each employee based on age and family size - the two variables that determine nongroup premium differences.

Reimbursement Accounts

The federal tax code includes three common medical reimbursement accounts:

Integrated Health Reimbursement Arrangement. An HRA is an employer-sponsored, -designed, and -funded account that is integrated with a group medical plan with high cost-sharing. The HRA reimburses a portion of out-of-pocket expenses - for example, the first half or second half of the deductible. Because it's owned by the employer and works with a specific medical plan that the employer chooses, an HRA isn't available to nongroup buyers.

Health FSA. This account allows employees to receive a portion of their compensation in the form of pre-tax payroll deductions that they can then spend on qualified medical, dental, vision, and over-the-counter expenses. It too is an employer-sponsored plan in which only benefits-eligible employees can participate.

Health Savings Account. Although most of the 34.5 million accounts were established through employers, Health Savings Accounts are not a group plan. Rather, anyone who meets eligibility requirements - which don't include traditional employment or earned income - can open and fund an account. The IRS - not the employer - designs the account. And the account is owned by the individual - not by the employer, as in the case of HRAs and Health FSAs.

Among the reimbursement accounts listed above, only the Health Savings Account is an option for individuals covered by nongroup plans. The exception is ICHRA recipients, who maintain the employer-employee relationship. If their employer offers a Health FSA to benefits-eligible workers, they can participate in that account.

Why Consider an HSA-qualified Nongroup Plan?

Only a small portion - single digits as a percentage of all buyers - of nongroup enrollees choose an HSA-qualified plan. That's unfortunate, because many can save money by buying this form of coverage. How?