An HSA is only available with an HDHP -- any plan with a deductible of at
least $1,350 for an individual or $2,700 for a family.1 HSAs enable employees to
use pre-tax dollars to pay for their out-of-pocket medical expenses now and save
for retirement.2 Here’s some information on how they work and why they’re worth
considering as you compare health plans.
Employers often switch to HDHPs to save money on the premium – the amount
paid to the insurance company each month for coverage. However this lower
upfront cost means employees pay for medical services until they meet the (high)
deductible and insurance kicks in.
By contributing to employees’ HSAs small
business owners can make it easier for workers to afford care and shows them the
company values their health. Also, every dollar an employer contributes to an
HSA is deductible as a business expense.
All the money an employee contributes to an HSA is pre-tax, meaning it
reduces his taxable income.
Every dollar an employee contributes to an HSA is
one less dollar on which he pays taxes—so a worker in the 22% tax bracket would
pay $220 less in taxes for every $1,000 he invests in his HSA.3 (In 2018,
individuals can contribute up to $3,450 to an HSA.4)
HSA funds grow tax-free and
belong to the employee for life, rolling over year to year – even if he changes
jobs. If a worker doesn't use the funds now, they're available next year and
even in retirement to cover healthcare expenses. HSA money can be used to cover
deductibles, co-pays, coinsurance and out-of-pocket medical expenses.
Employees may earn a simple interest rate within an HSA funds, or they may have the choice to invest their money in a selection of mutual funds. There’s often a minimum balance required with the latter option, such as $1000.5
While HSAs can carry account fees, the tax-free nature of withdrawals (for medical expenses) still gives them a leg up. How? For instance, an employee could invest $200 a month in a 401(k) or an HSA, both pre-tax. Investing $200 a month in an HSA earning 4% a year would give an employee about $32,000 in ten years. But unlike a 401(k), the money won't be taxed when the employee withdraws it, if it's used for eligible medical costs.
One thing to keep in mind, if you’re not using an HSA as an investment account and plan to spend the funds this year, look for a fee-free account. The interest may be lower, but the account fees won’t eat into your contributions.
HSAs can be a valuable financial vehicle whether employees use them for reimbursement of out-of-pocket healthcare expenses or as a retirement investment account, but only if employees are familiar with them.6
Employers offering HDHPs can help workers get the most from an HSA by hosting a Q&A session during open enrollment and providing take-home literature. Another other option is asking the company’s benefits provider (or an advisor) for a “lunch and learn” tutorial.