What is an HSA and What You Should Know About It
HSAs, also known as a Health Savings Account, are a benefit that employers can offer to employees to help with employee health care costs. They offer flexibility to employees while containing costs for employers. This is an interesting option when considering employee incentives, particularly health insurance.
What is an HSA?
An HSA is a benefit offered to employees, often with a high deductible health care plan. With the cost of insurance rising, companies have looked for more cost-effective solutions to make their employee incentives attractive.
An HSA has two basic elements:
- A savings account where the money is invested by the employee, employer, or both. This savings account can be used to pay for eligible expenses, which will be discussed more below, and
- A high-deductible health plan (HDHP). This is a requirement for an HSA. The IRS sets individual and family deductible minimums for plans that qualify as an HDHP. Individuals with other comprehensive plans (such as through a spouse’s employer) or Medicare cannot contribute to an HSA plan.
Employees benefit from these plans because they are able to contribute pre-tax money to the plan, up to the yearly limit set forth by the IRS.
These contributions can earn interest, which is also tax-free, and employees can make withdrawals from the HSA without paying taxes for qualified expenses. In addition, the balance of the account can be invested in mutual funds and the growth is tax-free.
Finally, the money belongs to the employee, so they do not lose it if they leave the company or if the insurance plan changes.
Why companies should offer an HSA
HSA plans have risen in popularity in recent years because of the rise in health care premiums. The Society of Human Resource Management reports that there is high satisfaction among employees with an HDHP, with 80% of participants happy with the plan and 77% saying the HSA helps them manage health care costs.
Advocates for this type of plan say that employees have the opportunity to take charge of their healthcare needs.
Due to the fact that these plans allow self-management of the funds, it is argued that employees become more informed as healthcare consumers and therefore manage costs more effectively. Since there are many options for how employees actually use the money, there is increased flexibility over other types of savings plans.
The drawback of an HSA plan is that it is tied to HDHPs. For those who are considered low income or those with chronic conditions may struggle to afford to pay the high deductible associated with these plans.
While employees can contribute pre-tax money to the HSA to cover some of these expenses, the reality for some is that they do not have the budget to do so. HR solutions should consider your employee population and other benefits offered. VantagePoint can help you navigate different benefit solutions.
How to encourage the use of HSAs
One of the biggest challenges with HSA plans is that they can be confusing. With the support of benefits solutions like VantagePoint, we can help manage this process for you. When employees understand the benefits offered to them, you are more likely to see increased employee engagement and satisfaction.
With so many different health insurance options out there, it is important that employees understand what an HSA is and how they can maximize it. Here are some examples of how employees can use their account:
- Pay for qualified medical expenses, which also includes dental and vision care. Employees can also use their HSA for reimbursement of past medical expenses, as long as the plan was established before the expense was incurred. Some people have used the account as an emergency fund where they only claim eligible expenses when they need extra cash.
- The balance of the fund can be invested in mutual funds and grow tax-free.
- If an employee is eligible for COBRA, the HSA can be used to pay for COBRA premiums. It can also be used to pay for Medicare Part B, Part D, and Medicare Advantage premiums as long as the employee 65 or older.
- It can be used to save for retirement. If an employee does not have enough eligible medical expenses to reimburse at retirement, this plan allows participants to make a distribution from the plan in a way that is similar to an IRA. However, this is only available to participants that are 65 or older.
Employee engagement can be increased by making employees aware of the ways they can use their HSA plan to maximize their benefit based on their individual family needs.
Facts about HSAs
Unlike other employer-sponsored health savings plans, HSA plans allow employees to carry over unused money at the end of the year. The money in an HSA remains in the account until you use it.
Not only do employees keep the money invested year-over-year, but they also keep the money if the health insurance plan changes.
HSAs are individually-owned accounts, but you can use your HSA for your spouse’s qualified expenses and there is a family maximum contribution to the account if you have family coverage under the HDHP.
The flexibility of the plan and the tax savings to employees combined with the cost containment for the employer makes this an attractive option for health insurance coverage.
A Note on California
Employers who offer this benefit in California should be aware of the tax implications in this state. In California, interest earned must be added to the adjustable gross income on tax returns and employer contributions on behalf of an employee must be added to the W-2. Employers in California should see advice from their CPA.
Choosing an employee health benefit plan is complicated, but there are several HR solutions that can help your company understand the choices and choose a plan that increases employee engagement while controlling costs. VantagePoint can help you find the perfect solution for you and your employees.
Call us. We are here to help.
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