Understanding health savings accounts (HSAs) can help employers decide whether offering them would be beneficial to employees.
Likened to flexible savings accounts (FSAs), HSAs allow participants to pay for medical expenses tax-free in the present or in the future. But unlike FSAs, these accounts are not bound to the use-it-or-lose-it rule, so balances can be rolled year-over-year.
“It’s this combination account where you have some advantages for the now and for retirement,” says Phillip Mason, executive vice president, chief operating officer (COO) and director of health care services at UMB Bank. “It’s something that gives you a lot of flexibility, and the dollars are yours to spend forever.”
HSAs were originally built to offset the pricey costs of high-deductible health plans (HDHPs), notes Begonya Klumb, head of HSA at Fidelity Investments. Because qualified HDHP deductibles can cost at least $1,400 for an individual or $2,800 for a family, HSAs were created to help participants manage the elevated price points. “It’s an account that was defined at the time to pair with HDHPs in order to help individuals cope with the higher out-of-pocket cost,” Klumb says.
Offering an HDHP is the main requirement for HSA eligibility. “Employers put more health benefit costs in a participant’s hands and the employer saves money,” Mason says. “But they have to offer an HDHP. You cannot have an HSA with a traditional health care plan.”
To be eligible for an HSA, employees cannot be a dependent or listed on another person’s tax returns and cannot have any other health care coverage including Medicare of Tricare, Klumb adds.
Both Mason and Klumb highlight the triple-tax advantage of HSAs as their clearest and biggest benefit. Contributions go into the account tax-free; participants will see their contributions deducted from their paycheck and will not have to pay taxes on that income. HSA accounts also grow tax-free, meaning interest on HSA deposits or any returns earned from investing HSA assets in a mutual fund are never taxed, adds Mason. “The third advantage is that they are spent tax-free—you won’t ever have to pay taxes on HSA dollars as long as you buy HSA-eligible procedures and prescriptions with the money,” he continues.
Generally, HSA funds can be spent on health plan deductibles, copays, dental and vision care expenses, prescription drugs, counseling and more, Klumb says. Participants can also pay COBRA [Consolidated Omnibus Budget Reconciliation Act] premiums with HSAs, long-term insurance premiums and health care coverage premiums if they are receiving unemployment compensation, she adds.
Mason cautions employers and participants to consult IRS tax guidelines, as not every service may be covered by HSAs. For example, elective or voluntary treatments that are not prescribed or ordered by a physician may not be eligible to pay with an HSA. It’s always better to refer to tax rules before using HSA funds to check if specific services or products are HSA-eligible or not, he says.
But, Klumb notes, over-the-counter drugs without a doctor’s prescription, feminine care products and telehealth appointments were recently added as eligible HDHP expenses, so HSA assets can be used to pay for these items as well.
After age 65, participants can also use HSA funds to pay for Medicare premiums, including Part A, B, C and D. Given that health care costs for the average couple at age 65 were estimated at $285,000 in 2019, accrued HSA funds may be beneficial for those in retirement, says Klumb. “Those premiums are a significant part of what people have to pay in retirement,” she says. “It can help you with health care costs for today, but also for the future in retirement.” HSA accounts can be invested just as retirement savings can, so employees can potentially grow their accounts to cover health care costs in retirement.
Klumb says participants older than 65 can spend their HSA funds on nonmedical expenses without paying taxes on the assets used.
It’s important to reiterate that HSAs are tied to the individual for the rest of their working career and in retirement, Mason adds. If a participant leaves an employer, the HSA goes with them to a new employer. If a participant retires, the HSA follows along as well. “The big benefit is that it’s yours. It’s 100% the consumer’s as opposed to having that tie to working someplace,” he says.
Furthermore, the effects of COVID-19 highlighted a demand for medical and health security, among other needs. Offering an HSA can provide that peace of mind, Mason says. “If I’m an employer, I want my employees to feel more secure about their medical future,” he adds. “And so, having the HSA, where they can have some control on their health, is now more important than ever.”
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