A health savings account (HSA) is a pre-tax savings vehicle for people who have high deductible health insurance plans (HDHP) and want to set aside pre-tax dollars to pay for medical expenses. An HSA reduces employees’ out-of-pocket costs and lowers their year end tax liability. It also reduces employer payroll taxes.
In this article, we will describe how an HSA and HDHP work and how to offer an HSA to your employees.
Health Savings Accounts & High Deductible Health Plans
A health savings account can only be set up in conjunction with a high-deductible health plan (HDHP). An HDHP, can be a PPO or POS type of health insurance plan; what matters is the deductible amount. In 2018, a HDHP is one that has a deductible of at least $1,350 for an individual and $2,750 for a family.
A deductible is the amount an employee is required to pay for medical services before health insurance ‘kicks in’. For HDHPs, this means that an individual needs to spend $1,350 of their own money before the insurance company starts to cover medical expenses. A family of 2, 3, 4 or more would have to come up with $2,750 in the 2018 calendar year before the HDHP insurance policy starts paying for covered medical expenses.
How Does a Health Savings Account Work?
A health savings account is helpful to employees because most people don’t have that much money saved up in case of an unplanned medical need. In fact, more than 60 percent of people don’t have $500 to deal with an unexpected medical emergency. An HSA is a way for them to save money to pay their health insurance deductible or health expenses tax free — up to the contribution limits shown below.
If you’d like to offer an HSA to your employees, here are six rules you need to know:
To Provide an HSA to Your Employees, they Must Have an HDHP
An HDHP is required before an HSA can be set up as part of your benefits program. Individuals with a qualifying HDHP can also get an HSA on their own in the marketplace.
Annual HSA Contributions are Limited
The 2018 contribution limits for an HSA are $3,450 for an individual and $6,900 for a family. This is an increase of $50 and $150 respectively since 2017. Those over 55-years old can increase these amounts by $1,000 per year. With healthcare continually changing, we predict that these limits will continue to go up in small increments each year.
HSA Accounts are Employee Owned
Your employees can take their HSA with them when they leave your company, regardless of whether they quit or were fired. If they no longer have an HDHP, though, they will have to stop contributing to their HSA. However, they can continue to use that savings account to pay for valid medical expenses or accumulate interest.
Like a 401k retirement account, employees own their HSA account. You cannot take back any contributions. Also, like a 401k, monies in the health savings account can earn interest and increase over time. While designated for health expenses only, they may use funds from an HSA for non-medical expenses but they’ll be taxed on that. If they’re under 65-years old, they’ll also pay an early withdrawal penalty for using HSA money for non-healthcare related expenses.
An HSA is distinct from a flexible spending account (FSA), which is employer-owned and where contributions must be used by the employee or forfeited each year.
HSAs Can Be Rolled Over & Invested
In an HSA account, the money acts like a long-term investment account that accumulates interest. Whatever amount the employee has in the account at year-end remains. In addition, they can rollover an HSA from another employer into their current HSA so they don’t have to maintain multiple accounts. What they can’t do is rollover their HSA into an IRA or other non-health-related investment account.
In addition, interest is typically provided by the insurance or investing company that holds the HSA account, just like a bank provides interest on a savings account. Many accounts allow the money in an HSA to be invested by the employee into specific funds, similar to a 401k retirement savings plan. Of course, they can’t take the funds out and invest them on their own. The money set aside for health care has to remain within their HSA.
HSA Savings Can Be Used for Non-Medical Expenses
Employees can use their HSA for reasons other than medical expenses. However, as mentioned above, if the account holder needs money from their HSA — say, for buying a house — they will have to pay taxes and a 20 percent penalty on the amount withdrawn, unless they’re over 65.
Here are three examples to help clarify how taxes or penalties are handled:
- Under 65-years old — non-health related withdrawals will be subject to income taxes and a tax penalty
- Over 65-years old — non-health related withdrawals will be subject to income taxes only
- All ages — health-related withdrawals always remain tax-free
Employers Can Contribute to an HSA
Employers can contribute to an HSA, subject to these conditions:
- You can contribute any amount up to the contribution limit (unless you use a cafeteria plan for benefits). If you have a cafeteria plan, you may not need to offer matching contributions to all employees — but you can’t discriminate. Anti-discrimination rules for cafeteria plans are explained in more detail by our friends at Zane Benefits.
- Your business needs to be fair to every employee — for example, you need to provide the same dollar amount or percentage contribution for employees with the same type of coverage.
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. Let’s look at those options next.
4 Ways to Offer a Health Savings Account to Your Employees
Since a health savings account can’t be offered unless your employees have a HDHP, there are only so many ways to set one up. Consider providing an HDHP using one of these four options below. You can then add an HSA to let employees use pre-tax dollars for medical expenses.
Of course, if you can afford to, a less expensive PPO or HMO plan may be more economical for your employees than an HDHP. You can offer a Flexible Savings Account (FSA), but not an HSA, with these other types of health insurance plans. An FSA, like an HSA, allows employees to use pre-tax dollars for medical and other eligible expenses.
Here are four ways to set up HDHP health insurance for your employees:
- Professional Employer Organization (PEO) – a PEO is a co-employer that handles HR tasks and benefits administration for you. Our recommended PEO is Justworks. PEOs can provide regular health insurance and an HDHP with an HSA option. Read more about how to offer benefits to your employees using a PEO.
- HR/Benefits Provider – there are a lot of players in the online employee benefits market, such as Gusto, that offer employee benefits in multiple states. These include HDHPs that come with the option to add an HSA.
- Private Insurance Broker – if you already have an insurance broker, they should be able to provide you with HSA-eligible HDHP medical insurance for your employees.
- SHOP Exchange – SHOP is the government-run healthcare arm. While the SHOP exchange offers some HDHPs, they do not offer HSAs. If you are using this option, you will need to set up an HSA account for employees on your own.
In addition to these four options, some individual banks such as Optum, as well as some credit unions, can also set up HSA accounts for your employees who have HDHPs. However, we recommend looking at HR benefits companies like Gusto that can manage your payroll or simplify how you track employee time off in addition to managing benefits
If you’re already using one of the first three options above then getting employees set up with an HSA should be easy. Just call and ask your existing provider to help you set up an HSA along with your existing HDHP.
More Great Reasons to Offer a Health Savings Account
Health savings accounts 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 benefits to providing a health savings account along with your HDHP:
- They are made up of tax-free (pre-tax) contributions and withdrawals for qualified medical expenses, which saves your employees on year end taxes
- 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
- An HSA is actually invested by the provider, earning interest, so the balance can grow over time like a savings account
- An HSA is portable, meaning your employee can take it with them if they are fired or choose to leave your company
- HSA money can be used for medical expenses forever, even if the employee switches to a non HDHP plan (they just can’t add to it)
- HSA non-qualified withdrawal penalties end at age 65 — however, HSA funds are taxable if used for non-medical costs
- Offering HSAs saves your business money by lowering your annual payroll tax liability, since your payroll is reduced by the pre-tax dollars that employees contribute to their HSAs
Potential Drawbacks of a Health Savings Account
There are potential downsides to offering a health savings account, but they pale in comparison to the benefits. The top two drawbacks of an HSA are:
HSAs Can Be Confusing To Employees
Employees might need some explanation about an HSA and how to use it properly. This can be a little annoying for a business owner if employees have a lot of questions. They may also confuse an HSA with a health reimbursement account. You may want to print this entire document as a reference before explaining HSA benefits and HSA rules to your staff. In addition, some benefits providers may help you as you roll out your plan; attending a meeting or answering employee questions.
Employees Might Put Off Health Appointments
If employees view their HSA as savings account, they might not make doctors appointments when they are sick for fear of ‘using up’ their HSA funds. This defeats its purpose. Encourage employees to stay well by using their HSA to cover doctor visits at the first sign of illness, which may also minimize their sick time.
These two potential drawbacks are why we recommend using a PEO like Justworks or an HR/benefits provider like Gusto. They can answer employee questions and encourage your team members to use their health savings account appropriately.
The Bottom Line on Health Savings Accounts
If you are thinking about or are ready to provide an HDHP, we highly recommend adding an HSA to help employees pay for their deductible and other out-of-pocket medical costs using pre-tax dollars. The benefits of a health savings account far outweigh any potential negatives, both for you and your employees.