Employers and employees alike are looking for ways to make health care more affordable. Some are turning to Health Savings Accounts (HSAs). Although HSAs won’t work for everyone, the benefits of an HSA account make this an appealing option for some individuals.
What is a Health Savings Account (HSA)?
An HSA is a special type of savings account. The owner of the account can use it to pay for qualified medical expenses. It can be funded on a pre-tax basis, and the owner can use the untaxed funds for qualified medical expenses.
Who can own an HSA?
Unlike Flexible Spending Accounts (FSAs), which are owned by employers, individuals own HSAs. However, there are restrictions on who can fund an HSA.
To contribute to an HSA, you must enroll in a high-deductible health plan. If you switch to a different type of health plan, you can keep your HSA and continue to use the funds, but you cannot make any more HSA contributions.
If you have a high-deductible health plan, you must pay the deductible out-of-pocket before the plan starts covering its share of care costs – although the plan may cover certain preventative care costs before you meet the deductible. In 2022, Healthcare.gov says a high-deductible plan has a deductible of at least $1,400 for individual coverage and $2,800 for family coverage. The total annual out-of-pocket expenses (not including out-of-network costs) can’t be more than $7,050 for individual coverage and $14,100 for family coverage.
How do HSA accounts work?
If you own an HSA, you can contribute funds up to the contribution limit each year. CMS says the contribution limit in 2023 is $3,850 for self-only coverage and $7,750 for family coverage. People aged 55 or older can also make $1,000 catchup contributions. To make contributions, account holders can set up payroll deductions through their employer or deposit funds into the account. Employers can also choose to contribute to the HSA as an employee benefit.
You can use the funds in your HSA on qualified medical expenses. HSA account holders can access funds in multiple ways, but using a debit card is often the most convenient.
CMS warns that you need to keep the receipts for the medical expenses you pay for using HSA withdrawals. If you are audited by the IRS, you will need these receipts to prove you used your HSA money for qualified expenses.
What are qualified medical expenses?
Healthcare.gov says qualified expenses typically include health plan deductibles, copayments and coinsurance, but not premiums. Certain other health care-related expenses may also qualify.
According to CMS, qualified medical expenses can include acupuncture, hearing aids, prescription drugs, ambulance costs, psychiatric and psychological care and qualified long-term care services. You may also be able to use HSA money for qualified medical expenses for your spouse or dependents.
If you use HSA money for non-qualified expenses before you turn 65, you will have to pay federal income tax plus a 20 percent penalty. If you use you HSA money on non-qualified expenses when you’re 65 or older, you don’t have to pay the 20 percent penalty, but you do have to pay income tax.
What are the benefits of having an HSA?
HSAs can be appealing for several reasons.
- There are significant tax advantages. The account is funded using pre-tax dollars, the balance grows tax-free and (as long as you use the funds on qualified medical expenses) you do not pay taxes when using the funds.
- HSAs are portable. The individual owns the HSA and can keep it when switching jobs or retiring.
- HSA funds never expire, unlike FSA funds. This “use it or lose it” framework means some people lose their funds. HSA funds never expire – you can even use them during retirement.
- The tax advantages can make health care more affordable. Even when you have health insurance, out-of-pocket expenses can be significant. HSAs provide a tax-advantaged way to cover these costs.
- You may be able to use the funds to pay for qualified medical expenses for your spouse or children.
- Due to the tax benefits and the fact that the funds never expire, some people also use HSAs as a retirement savings tool. After age 65, the 20 percent penalty for non-qualified expenses no longer applies.
Are there any drawbacks to Health Savings Accounts?
HSAs can be great for people enrolled in high-deductible health plans. However, you can’t contribute to the HSA if you enroll in another plan, including Medicare. This can be a drawback.
Many people enroll in Medicare Part A when they turn 65, even if they are still working. Some of these workers would like to continue contributing to their HSA after they enroll in Medicare Part A but are unable to do so.
Furthermore, high-deductible health plans may not be the best option for some workers. These plans tend to have lower premiums, which can make them attractive to people who want an inexpensive health insurance plan and don’t expect to have many health care expenses. However, as these plans also have higher out-of-pocket costs, they may not be a good option for people with higher health care expenses.
Offering Health Savings Accounts
HSAs are available through insurance companies, banks and financial institutions.
For employers, offering the right health benefits is a critical part of employee recruitment and retention strategies. If your workers want a low-cost plan and a tax-advantaged way to save money for health expenses or retirement, a high-deductible health plan paired with an HSA may be appealing. You can decide whether you want to make employer contributions to the HSA as an added benefit.
If this arrangement does not work for all your employees, you may consider offering two or more plan options. For example, you could offer a Preferred Provider Organization (PPO) plan that employees can select if they’re willing to pay higher premiums for lower out-of-pocket costs and a high-deductible health plan with an HSA for employees who want lower premiums.
During your company’s open enrollment period, provide resources to educate employees on their health plan options. A high-deductible health plan with an HSA can be beneficial when employees use it correctly. However, a study published in JAMA Network found that one in three adults with a high-deductible health plan did not have an HSA, and most adults who did have an HSA had not made any contributions in the last year. The study attributed this to a lack of education and health insurance literacy.
Custom Benefits Packages
Due to the benefits of an HSA account, a high-deductible health plan with an HSA might be a good option for your workers. Higginbotham can help you build custom benefits packages that match your needs. Learn more.