Health and Wellness Considerations for 2022
How to relieve stress and give some financial peace of mind through health savings
In today’s busy and ever-changing world, we are faced with constant disruption from global events, economic instability, price volatility, and supply-chain uncertainty. All of these disruptions have financial ramifications and trickle down to affect us on a very personal level. As prices increase, it forces us to spend more of our income on our daily living expenses and that means saving less for emergencies. In a recent survey of 1,004 US adults, only about 44% have the means to cover an unexpected $1,000 expense.1
An HSA is a great tool to plan for health expenses and financially gives us one less thing to worry about – peace of mind for unexpected medical costs.
What are the benefits of an HSA for employees?
An HSA is a way for employees to save and pay for their share of healthcare, dental, vision, and alternative care expenses while enjoying substantial tax savings. Because HSAs are owned by the employee, are portable from job to job and never expire, they are a great way for employees to build a personal safety net to cover the high deductible on their health plan or pay for future expenses. Then if something unexpected happens, employees don’t face the financial strain (which also impacts their work productivity) of scrambling to cover their share of medical expenses. Those who built up balances in HSAs before the pandemic have had less to worry about in the downturn.
Typically, employers offer the HSA qualified health plan as an option for employees – or the only option – and contract with a third-party service, like BenefitWallet, to provide HSA administration. Employees determine how much to contribute, and the funds are transferred into their account through payroll deductions – giving employees and employers substantial payroll tax savings when maximizing their contributions. Employers can also contribute to employee HSAs, offering an additional incentive for enrollment and a great way to seed employee HSAs.
Employees who participate in an HSA enjoy a triple tax benefit.
- Contributions to the HSA are free of federal tax
- Any interest or investment income earned in the account is exempt from federal tax
- When funds are used to pay for qualified medical expenses, they are not subject to tax
Employees have a choice of saving the money in an interest-bearing account or choosing investments that may pay higher returns if their balance exceeds a certain threshold (for BenefitWallet it’s $1,000). For employees who have maxed out their company’s 401(k) match, financial advisors typically recommend directing additional savings to an HSA. Once employees reach the limit on HSA contributions, advisors recommend maxing out the allowable contribution (beyond match level) on the employer-sponsored 401(k). From there, if employees have additional discretionary income and qualify, they can consider saving it in a Roth or Traditional IRA.
The flexibility to use HSA funds anytime – from today through retirement – does not exist with 401(k)s. Further, the Cares Act expanded tax-free spending option by adding over the counter medications and feminine hygiene products to the qualified list. Also, at age 65, the penalty for using HSA funds for non-qualified expenses goes away – meaning those funds are only taxed at a person’s income tax rate, just like a 401(k) or IRA. Any assets in an HSA can be rolled over from one employer to another — a huge benefit, especially at a time when job transitions are seeing a major spike.
There are a few considerations for an HSA
- An HSA can be used only by workers who participate in a High Deductible Health Plan (HDHP) meaning the health insurance plan has an annual deductible of at least $1,400 for an individual or $2,800 for a family with no expenses paid under this deductible except qualified preventive care. There are a few other qualification requirements such as having no other insurance coverage and not being a dependent on someone else’s tax return.
- The IRS sets maximum contribution levels. For 2022, contributions are going up $50 for self-only coverage and $100 for family coverage from 2021, limited to $3,650 for individuals and $7,300 for a family. Those amounts have risen slightly each year, and they will probably continue to rise in years to come. Employees over 55 can contribute an additional $1,000 every year to their accounts. While most states follow the example of the IRS and exempt HSA contributions from state taxes, some do not.
- It's important to note that an HSA is not the only type of account that can be offered to help employees cope with medical costs.
It's important to note that an HSA is not the only type of account that can be offered to help employees cope with medical costs.
Other types of spending accounts
The Flexible Spending Account (FSA) was one of the original tax-advantaged offerings and it is still popular. Like an HSA, payroll deductions are set aside in a tax-free account which can be used only for qualified health expenses. One consideration with FSAs: if funds are not used within a calendar year, they are forfeited (unless you choose a rollover option, which is limited to $570 for 2022).
The new FSA legislation (Consolidated Appropriations Act 2021) gives employers the option of waiving the FSA deadline for 2021. There is an option of allowing the rollover of ALL unspent FSA dollars into the next plan year. So, the full contribution amount for 2022 can be made and the remaining 2021 FSA funds are left to spend. It is important to note that the carryover from the 2022 plan year will once again be limited to $570 (or an inflation-adjusted amount).
Another option offered by some companies is the Health Reimbursement Arrangement (HRA). These accounts are funded entirely by the employer to compensate employees when they incur out-of-pocket medical expenses. Companies offering an HRA must also provide workers with a high-deductible health plan. The employer's reimbursements are tax-deductible, and the company can roll over funds at year-end. But the plans are subject to a variety of federal regulations since they are treated as group health plans.
As you can see, these benefits require a fair amount of education. We've only scratched the surface on the options available and the benefits and limitations of each.
Fortunately, HR professionals can take advantage of the industry expertise and educational programs that are included by health account administrators like BenefitWallet. They provide a comprehensive service that simplifies the administration of HSAs, FSAs and HRAs — and it’s easy to get started.
For more information, download the eBook: Unlocking the full power of the HSA. Or contact us if you'd like to discuss solutions for your current or future needs. (Is there a better or more current download?)
1In a survey according to Bankrate.
About the AuthorMore Content by Arjun Sandhu