By Brent Bennett and Bruce Jensen
U.S. employers have done a fine job of making the case with employees for the value of high deductible health plans (HDHP) as a viable option in the health benefits lineup, especially when they sweeten the deal with health savings accounts (HSA) to help offset their qualified health expenses.
They can do even more to help, though, by educating their employees to understand the HSA’s and retirement, and its power as an investment. There’s no time like the present to start.
A 2019 study of workplace benefits showed that 40% of U.S. workers were enrolled in HDHPs; 90% of which offered an HSA. Three-fourths of those eligible had signed up for an HSA. While most – employees and employers alike – think they understand how HSAs work, the study found that only 11% of employees and 7% of employers knew that:
- HSAs provide a “triple tax advantage” in that pretax contributions, potential gains from investment, and withdrawals when used for qualified medical expenses are exempt from federal and most state taxes.
- Unused funds in the HSA are carried over to the next year.
- Funds never expire.
- The accounts are portable and accumulated funds can be passed on to beneficiaries after the owner’s death.
The “S” stands for “savings, not “spending”
With HSAs, the idea is to put money aside to pay for medical expenses not covered by the health plan. If possible, people should create and fund their HSAs with the total of their annual contribution limit of $7,100 for a family and $3,550 for an individual. They can get reimbursed for a doctor’s visit or their share of a procedure at any time.
It’s not like a Flexible Spending Account (FSA), which is somewhat similar but more limited. Among them is the “use it or lose it” rule for funds accrued (in most cases). Unfortunately, there’s been enough confusion over the differences that employees at one stage spent as much as 80% of their HSA contributions in the same year they were deposited.
That’s gotten down to 60% as they better grasp the triple-tax benefits of HSAs, and instead pay their share of health costs out of their personal cash flow. That way, the money’s there for a qualified, big ticket medical cost like kid’s braces, with no penalty for taking the reimbursement. If it’s needed for other purposes – like paying bills after a job loss, that’s fine, too. But that is not a qualified medical expense, so the funds would be taxable as income, with a 20% penalty.
The real power of HSA is found in saving these funds for future needs while allowing the assets to grow completely tax-free. Reimbursements do NOT need to occur in the year the expense was incurred, so keeping receipts for qualified medical expense to reimburse yourself later allow your HSA funds to grow significantly tax-free.
How Employers Can Help Employees Maximize the Value of a HSA:
Employers can help their employees get more out of their HSAs by acting on several fronts:
- One starting point is to begin treating the HSA more as a 401(k) than as an FSA. A growing number of employers have their HSAs administered alongside their retirement plans, for example. Contributions above the required cash balance are invested like 401(k) assets. Greater savings to HSAs can be encouraged, as well, by matching employee contributions.
- Employee education is key, too. Explaining how HSAs play a dual role as a short term payment strategy and long-term investment strategy is only part of it. Show how employees can make both aspects work to their advantage. The triple tax advantage can’t be emphasized enough, and makes a good case for encouraging employees to contribute the maximum amount to their accounts. Another point to underscore is the HSA’s value beyond just retirement savings: The funds can be used to cover Medicare Supplement premiums, and there’s no penalty on withdrawals after age 65.
The HSA might be one of the most versatile benefits that an employer can offer. It helps employees manage their share of often onerous healthcare costs on one hand, and on the other is an attractive savings vehicle with positive implications for retirement planning. The challenge is to help them take full advantage.
HUB International’s team of retirement plan specialists provides ongoing guidance on your plan’s setup and management to ensure it meets regulatory compliance guidelines and the interests of your employees