A health savings account (HSA) is a supplementary account for people who have high deductible health plans (HDHP) as their form of health insurance. Only people who have an HDHP can have an HSA. The HSA serves as a way for people to save up using pre-tax dollars in case they do use their HDHP and want to ease the burden of high out-of-pocket costs.
What is a High Deductible Health Plan? And How Does It Work with an HSA?
First, let’s get our acronyms and definitions sorted out with a quick overview of the type of medical insurance plan a health savings account can pair with.
HDHP: High Deductible Health Plan. This plan can be a PPO or POS plan of health insurance; what matters is the deductible amount.
Deductible: This is the amount of spending required before health insurance “kicks in”. A high deductible in 2016 was considered to be $1,300 for an individual and $2,600 for a family health care plan. This means an individual would need to spend $1,300 out of their own pocket before their insurance kicks in and starts to cover medical expenses.
So essentially, an HSA is a way to save money tax free (up to its contribution limit) to pay your high deductible and any out of pocket medical expenses.
If you are an employer who provides an HSA to your employees, it reduces the taxable income you’re paying employees, which lowers your annual payroll tax. However, in order to provide an HSA, you must also be providing the high deductible health plan (HDHP). Otherwise, employees can get an HSA on their own in the marketplace (assuming they have a qualifying HDHP.)
The Rules Around Having an HSA
The major rule around an HSA is that you have to have a high deductible health plan (HDHP) in order to have one at all. In addition to that, the following rules apply to HSAs:
1. Contribution limits
According to SHRM, the 2017 contribution limits for an HSA are $3,400 for an individual and $6,750 for a family. These are an increase from 2016 and with healthcare continually changing, they predict that this amount will continue to go up in small increments.
2. Employee owned
Your employees can take their HSA with them when they leave your company, regardless of if they quit or were fired. They own this account and you cannot take back any contributions. This is distinct from an FSA, which is employer-owned.
3. Employers can contribute
You as the employer can contribute to an HSA, but it comes with some distinct rules. Basically, if you do NOT have a cafeteria plan for benefits, you as the employer can contribute any amount per month. However, it needs to be fair to every employee (i.e. same dollar amount or percentage for employees with the same type of coverage).
If you do have a cafeteria plan for benefits, you can contribute based on less strict factors than if you only have an HSA, but you still cannot discriminate against certain groups of people or be biased to only your top employees. Our friends at Zane Benefits sum up the rules on employer contributions here.
All the contributions are tax free and owned by the employee. In other words, you can’t get them back, even if the employee quits or gets fired.
4. Savings rollover & increase in value
In an HSA account, the money acts almost like a medical savings account- like your normal savings account that accumulates interest, so will the money in an HSA! Interest is provided by the insurance company or investing company that holds the HSA account, just like your bank provides interest on your savings account.
If you ever needed the money from your HSA, say for buying a house, you can draw it out but you will need to then pay taxes on it. If you never draw it out and you have a balance when you retire, you can then take money out of it tax-free after turning 65.
Because of the rules around an HSA, you’ll want to only look at well-known and recommended providers to make sure you stay compliant, which we discuss next.
There are 4 primary ways to provide health insurance to your employees:
- A Professional Employer Organization (PEO) – Our recommended PEO is Justworks and they can provide both health insurance and HSAs. You can read more about how PEOs work here.
- An HR benefits provider – There are a lot of players now in the online employee benefits providers, like Gusto. They can provide access to HDHPs and HSAs for your employees.
- A private insurance broker – If you already have a broker, s/he should be able to provide you with an HSA for your employees.
- The SHOP Exchange – This is the government-run healthcare arm. We explain it in detail here for small businesses. While the SHOP Exchange offers some HDHPs, they do not offer HSAs, so you’ll need to set it up thru a separate provider like an insurance company or credit union.
If you are working with one of the first 3 options, the PEO, HR benefits company, or the private insurance broker, providing your employees with an HSA should be readily available through their services and you should be able to easily expand your offerings by working with them.
If you are using the SHOP Exchange, they do not provide an HSA product option at this time. However, you can easily set up an additional account with an HSA provider. HSA providers include insurance companies, like Aetna and Blue Cross, or even individual banks, brokers, and credit unions.
We also recommend looking at HR benefits companies, like Gusto, to see if they can save you time and money by “killing two birds with one stone”- like also taking over your payroll or paid time off tracking.
Benefits of Having An HSA Available
HSAs are growing in popularity and for good reason. With rising healthcare costs and more companies moving to HDHPs, employees need a way to save for that rainy day when a medical emergency hits. Providing an HSA as a business owner is a good way to help your employees do this.
Here are the top 7 benefits to providing a health savings account with your HDHP:
- They are made up of tax-free (pre-tax) contributions and withdrawals for qualified medical expenses.
- HSAs roll over from year-to-year, so you don’t have to remind your employees to use it or lose it like an FSA.
- A health savings account is actually invested and can even grow over time, like a savings account. Your bank or provider will control the amount of interest you receive on the balance (you can’t invest it yourself).
- An HSA is portable, meaning your employees can take them if they are fired or leave – which is less hassle on your end. If they no longer have a HDHP though, they will have to stop contributing to it (they can use it for valid medical expenses, or the money can sit there and accumulate interest.)
- Use the money anytime – even if you switch to a non HDHP plan, you can keep using your HSA tax-free (you just can’t put into it)
- If your employees don’t use the funds, they can even withdraw funds from HSA accounts in retirement like an IRA, without penalty and for any reason, starting at age 65. So they almost become like a backup 401K plan.
Drawbacks of an HSA
There are downsides to offering an HSA, although, in my opinion, they pale in comparison to the benefits. The top 2 drawbacks of a health savings account are:
1. They can be confusing to employees
Employees might need some explanation about a health savings account and how to use it properly. This can be a little annoying for a business owner if they have a lot of questions.
2. Employees might put off health appointments
If employees view these in a certain way, they might not make doctors appointments when they are sick in fear of “using up” their HSA, which defeats its purpose. Then, you also have sick employees wandering around your office or calling out.
These 2 drawbacks are why we recommend using a PEO like Justworks or HR benefits providers like Gusto. They can take over the tasks of being there for employees’ questions and can encourage them to use the health savings account appropriately.
The Bottom Line
If you provide a HDHP, especially if it is your employees’ only insurance option, we highly recommend providing an HSA to supplement their costs. The benefits of a health savings account far outweigh the negatives, both for you as the employer and them as the employees, and at little cost.