Magazine

UpFront | Published in May 2017

How to Encourage HSA Use

By Judy Faust Hartnett | May 2017

Increasingly, employers and retirement plan providers are touting health savings accounts (HSAs) as a way to plan for health care costs in retirement, but why are employees not using them more?
 
According to Alex Tolbert, founder and team member of Bernard Health, a health care advisory group in Nashville, Tennessee, people misunderstand these plans, often because employers present them less than optimally during open enrollment. He says this leads to savings account underutilization by employees who may be unclear on the full benefit HSAs provide.
 
A first-tier issue, according to Tolbert, is that when employers compare the various health plan options employees may elect, instead of describing the HSA in terms of a health plan, they discuss it as a saving account with related tax incentives.
 
“They are comparing apples to oranges,” Tolbert says. “They’ll talk about the health merits of non-HSA eligible health plans and emphasize the savings account for the HSA eligible plan. The bank account really ought to be treated like the cherry on top.”
 
Similarly, Bernard Health recommends avoiding discussion of “high-deductible health plans” (HDHPs), which HSAs accompany. “Mention high deductibles, and many of those same employees tune you out right away,” Tolbert says.
 
The HDHP and the HSA are two separate components with separate laws, according to Steven Mindy, a senior associate at Alston & Bird LLP, who focuses on employee benefits, the Employee Retirement Income Security Act (ERISA) and the Affordable Care Act (ACA). “In order to have an HSA, the employer must have a plan that meets certain requirements, including deductibles at or higher than $1,300 for an individual or $2,600 for families,” Mindy says.
 
According to Mindy, an HSA is a consumer-directed account that is individually owned, similar to an individual retirement account (IRA). An employee may sign up for an HSA, and he and/or his employer may contribute to it. Either way, the employee owns it and takes it with him when he terminates; it cannot revert back to the employer.
 
From Tolbert’s perspective, a second error that employers can make, and that interrupts the full implementation of an HSA health plan, is failing to integrate the savings account piece into the enrollment process.
 
The best practice would be for an HSA administrator, which could be a bank, insurance company or an Internal Revenue Service (IRS)-approved bank trustee, to enter into an agreement on the back end with the plan sponsor before open enrollment, says Mindy.
 
Worst case, according to Tolbert, is that the employee elects his monthly contributions to fund his account, the payroll department deducts the contributions, and the savings account was never opened. Some employees bow out of the HSA due to the inconvenience of setting it up and then just stay in the HDHP.
 
Tolbert says another issue is that employees may not be maximizing the value of these accounts and are, therefore, not funding them as they might.
 
He educates his clients by emphasizing that an HSA is the only way for an employee, and an employer, to avoid FICA [Federal Insurance Contribution Act] taxes. If employers allow it, employees may fund their HSA with payroll deductions, in that way avoiding FICA taxes of 7.65%, plus income taxes.

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