There are now more than 15 million Americans covered by HSA-eligible health plans[i] through their employers. Although, HSAs have been available for more than ten years, it has only been in recent years that employers have begun to fully realize the many advantages they offer.
One reason why HSAs are gaining in popularity is health care costs continue to take a large bite out of the benefits spend apple—despite the slowing pace of medical inflation in recent years. Since the Patient Protection and Affordable Care Act (ACA) was upheld by the Supreme Court in June 2012, employers have been worried about the impending “Cadillac Tax” and how to address it.
In response, Fidelity is working with many employers to add HSA-eligible health plans to their plan design to help control health care costs and avoid potential exposure to the “Cadillac Tax” in 2018. But there are additional benefits both to the employer and employee than meets the eye.
Short- and Long-term Benefits for Employees
Beyond employer savings, there are three key benefits for employees. First, HDHP premiums are generally lower compared to other types of health plans.
Second, the HSA can be a more attractive savings vehicle for many employees, as those with family or employee +1 coverage in an HDHP can set aside up to $6,550 in 2014 tax-free* (plus a $1,000 catch up contribution if they are 55 or older during the taxable year). This is because employees pay no tax on the earnings or on the distributions if the money is used for qualified medical expenses now, to, and through retirement.
Third, lower premiums and tax-free options can provide employees with greater control over health care and savings decisions—making them more conscientious health care consumers.
[i] Nearly 15.5 million Americans are now covered by HSA-eligible health plans, an increase of nearly 15% since 2012, according to America’s Health Insurance Plans* (AHIP)
HSA Saving vs. HSA Spending
Given the costly health care hit to most families’ pocketbooks over the past several years, many employees may opt to use the HSA as both a spending and a savings vehicle.
In our hypothetical example below, we show how the “average HSA account” might grow over time. The good news is, even for those who spend approximately 50% of their HSA dollars on current qualified medical expenses—then save the rest over a ten year period—their HSAs can potentially grow to more than $21,000. And, for someone who manages to save 90% of their HSA dollars, their HSA could potentially grow to more than $37,000 over ten years.
To help employees understand how HDHPs/HSAs work, education and communication is important. According to our research, confusion between an HSA and a health flexible spending account (FSA) is prevalent. A full 73% of respondents said an HSA is pretty much the same thing as a health FSA or were unsure, and the “use it or lose it” provision of FSAs was one of the most commonly misunderstood differences between the account types.
Also, simple and targeted messaging is essential so employees can not only see and compare pricing in order to make an informed decision on their health care options, but overcome inertia. It may be helpful to reinforce the positive features of HSAs (carryover, tax advantages, portability, and use in retirement) while dispelling common myths and misconceptions about HDHP coverage and potential total costs.
Remember: Your employees must be covered by an HDHP in order to open and contribute to an HSA, so it’s important to educate them about the process of opening the HSA account so they can qualify for any employer contribution.
A Longer-Term Horizon
Many HSAs now offer an array of investment choices so longer-term HSA savings can be invested as part of the individual’s retirement savings strategy. Fidelity research has shown most HSA dollars are held in cash. However, for the 16% of account holders** who are invested in options such as mutual funds, stocks, or bonds, they have the ability to think of HSAs as a “savings, not spending” vehicle that is aligned with their 401(k) retirement savings strategy.
Overall, as more organizations look for ways to save on health care expenses, HDHPs with HSAs have an important position on the health care playlist and can be embraced and appreciated by employers and employees alike.
Jeff Munn, vice president of Benefits Policy Development at Fidelity Investments in Boston
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Any opinions of the author(s) do not necessarily reflect the stance of Asset International or its affiliates.
* Contributions, investment earnings, and distributions are tax free for federal tax purposes if used to pay for qualified medical expenses and may or may not be subject to state taxation. For additional information see IRS Publication 969. The administration of an HSA is an individual responsibility; see a tax professional for more information.
** Fidelity HSA/DC Savings Report, November 2013
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments.