HSAs: A Best Kept Financial Secret
Those with high deductible health plans (HDHPs)—or employers offering them—may be missing out on a useful financial tool: the health savings account, or HSA.
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. Here’s some information on how they work and why they’re worth considering as you compare health plans.2
HSA benefits for small businesses
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.
HSA benefits for employees
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.
HSA facts and fine print
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.
How to get started
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.2
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.
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