More and more employers are offering Health Savings Accounts (HSAs) – either as a less expensive alternative to a traditional group health plan or, more rarely, as the only coverage option. But while HSAs can be a good alternative for employers and employees alike, they can also be hard for employees to understand, much less appreciate.
If your company offers an HSA or is considering one, the HR department is likely to get LOTS of questions from employees. Let’s take a look at the core characteristics they need to understand in order to use an HSA to their fullest advantage.
An HSA is a Part of a High Deductible Health Plan
The first prerequisite for contributing to an HSA is having health coverage under a “high deductible health plan” (HDHP). For individual coverage, that means the deductible has to be at least $1,300. For anything other than individual coverage, the deductible has to be at least $2,600. (For Miller clients, the deductibles tend to be a bit higher than that.)
However, not every plan with a high deductible will qualify your employees to set up an HSA. In general, HSA-eligible plans require participants to pay all of their medical expenses until the deductible is met. So for example, if you offer coverage with a $40 office copay, then employees on that plan can’t contribute to an HSA – no matter how high the deductible is.
Having to pay the entire deductible out of pocket might deter some employees from choosing an HSA, but there are ways to make it more appealing. Many employers choose to set the deductible and out-of-pocket maximum as the same amount. This means 100 percent of an employee’s covered medical expenses are paid by insurance once the deductible has been met. This could be a huge incentive for employees to choose the HSA – particularly if they are expecting substantial medical costs in the coming year.
You could also help employees by paying into their HSAs each year (tax-free) to help them cover the deductible.
An HSA has Tax Benefits
An HSA is the only type of savings vehicle that lets you put money aside for future use and never pay taxes on it. Here’s why:
- First, HSA contributions are deductible, which reduces most people’s tax liability in the year they are made.
- Second, there are no taxes or penalties for withdrawals from an HSA as long as they are used to pay qualified medical expenses.
- Third, unlike an FSA, HSA funds can be rolled over and grow indefinitely. There is no requirement to spend HSA contributions by the end of the year in which they are made.
- Finally, the money in an HSA is invested and can earn income just like a retirement account. Unlike a 401(k) or IRA, however, earnings are tax-free (as long as they are used to pay for qualified medical expenses). In fact, many financial planners recommend maxing out HSA contributions every year and using the HSA as a supplemental retirement plan.
Which begs the question, how much can you put into an HSA? For an individual, the maximum annual contribution for 2017 is $3,400, while for family coverage it is $6,750. For each individual on the plan who is 55 or older, an additional $1,000 can be contributed each year.
HSAs Pros and Cons
Employees deciding whether to choose coverage under an HSA need to be educated on – and make their decision after careful consideration of – all the pros and cons. Some key considerations will be how high the deductible is (it can get pretty high), the age and health of individuals to be covered, and whether the employee can afford to put aside extra money each month.
Finally, Health Savings Accounts are designed to encourage people to be informed consumers of health care, rather than simply agreeing to every test or treatment a doctor recommends without regard to cost. The down side is that some HSA participants may delay seeking treatment out of concern over the cost.
If HSAs are a new option for employees, you can take steps to help them make the best choice. Educate them about how they work, promote the free preventive services provided under your plan and consider making some annual contribution to their Health Savings Accounts. After all, your goal is to have your employees benefit from their employee benefits.
by Julie Athey, Director of Compliance