Health and Wellness Considerations for 2021
While the pandemic has impacted the world in many different ways, a recent survey found that 88% Americans said that the COVID-19 crisis has caused stress on their personal finances. Considering that financial worries were top concerns for many employees even before the pandemic, the challenges of 2020 have brought many employees to a tipping point.
With jobs lost, full recovery uncertain, children home from schools, and the safety net help expiring, families were hit hard, and some of the protections designed to help people stay financially afloat are now threatening to sink their financial future. One strategy that can help employees cope with ongoing financial pressures and plan for future needs is the Health Savings Account (HSA). The number of American workers who are taking advantage has been growing steadily ever since the benefit was first introduced with federal legislation in 2003. In 2017, total HSA account assets were approximately $45B and are expected to double by the end of 2021 to over $90B.
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 $1400 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 2021, contributions are limited to $3,600 for individuals and $7,200 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.
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 $550 for 2021).
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.
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