Health Savings Account (HSA)
Table of Contents
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Table of Contents
What Is a Health Savings Account (HSA)?
A health savings account is a pretax savings account that allows employees to pay for qualified medical expenses such as coinsurance, copayments, deductibles and other permitted IRS-defined medical expenses. Funds cannot be used to pay for health plan premiums but can be used to pay for eligible medical expenses of covered dependents on a plan. An HSA can only be used by employees if they enroll in a high-deductible health plan (HDHP).
What Are the Benefits of Offering a Health Savings Account (HSA) to Employees?
There are several benefits to offering an HSA to employees. A few include the ability of funds to rollover each year, which differs from a flexible spending account, as well as various tax savings and retirement savings.
- Rollover. Although there are annual contribution limits that employees can make to an HSA, the amounts they contribute rolls over each year. The ability to use funds for future expenses makes the HSA an attractive option in comparison to a flexible spending account (FSA) which does not allow employees to carry over funds.
- Tax savings. Contributions made to an HSA are not subject to federal income tax, which allows employees to lower their healthcare costs and save for the future. HSA contributions grow tax free. If the expenses paid by an HSA are defined as medical eligible, the capital gains, contributions and withdrawals are 100% tax free. Earned interest is tax-deferred and employees may also have the option to invest.
- Tool for retirement. Aside from the short-term benefit of paying for healthcare expenses through pre-tax money, an HSA can be an excellent tool for retirement. An HSA also offers tax savings. This means that earnings from contributed pre-tax money can be withdrawn to cover eligible medical expenses now and after the age of 65. Contributions can be used for non-medical expenses after the age of 65.
Who Is Eligible for a Health Savings Account?
If an employer offers a high deductible health plan and employees enroll in it, they should be able to take advantage of enrolling in an HSA. Those who are enrolled in Medicare or Medicaid are not able to enroll in an HSA.
High Deductible Health Plan (HDHP)
An employee that is enrolled in an HDHP is able to open up an account and contribute to an HSA. However, a few factors may result in an employee becoming ineligible. The following examples provide more detail on this subject, such as the ineligibility of those enrolled in Medicare or Medicaid.
Those Not Enrolled in Medicare or Medicaid
If an employee enrolls in Social Security, this automatically enrolls them in Medicare, making them ineligible for an HSA account or making contributions to an HSA. If an employee has an existing HSA and enrolls in Medicare, they can no longer make contributions. Those about to enroll in Medicare may face tax penalties if they contributed to an HSA in the six months before enrolling in Medicare. As Kevin Robertson said, you might consider educating employees over the “age of 65 and encouraging them to plan to stop payments six months before they enroll in Medicare, and to remind them that enrolling in Social Security, which some employees do while still working, automatically causes enrollment in Medicare Part A.”
How Can HR Choose the Right Health Savings Account Options for Employees?
A few of the methods HR can use to choose the right HSA for employees include checking with your current provider or a broker, verifying available investment options and reviewing/comparing associated fees.
Tip 1: Check With Your Current Provider
An HSA plan may already exist with your current health insurance provider. This can save you time in the long run as opposed to reviewing options with independent vendors. Having an option with an existing provider can also eliminate integration issues that could arise from choosing an independent vendor. If your company works with a benefits broker or a licensed insurance professional, they may be a good place to begin.
Tip 2: Are There Investment Options?
Depending on the interests of your company, you may choose to investigate whether the vendors you are considering offer investment options. Investment options typically become available for employees after their balance reaches a certain threshold and could potentially allow workers to invest in mutual funds, stocks and bonds.
Tip 3: Be Aware of Fees
There are several fees you need to be aware of, such as stop payment fees, transfer fees, account fees, etc. By figuring these details out beforehand, you can choose the options that are low impact in regards to cost and ease of use.
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James has worked in the HR field going on 5+ years and has held various positions of leadership. His areas of expertise are in benefits, recruiting, onboarding, HR analytics, engagement, employee relations, and workforce development. He has earned a masters degree in HR, along with a nationally recognized SHRM-SCP certification.