Todd Berkley is Vice President of Conduent's BenefitWallet® business unit.
Retaining highly skilled employees is an ongoing challenge for growing companies. And as the job market continues to move toward specialized skills, offering an attractive benefits package will only become more important for recruiting.
One benefit that is gaining in popularity 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. Twenty-two million Americans were enrolled in an HSA coupled with a qualified health plan in 2017, according to research by AHIP (America's Health Insurance Plans). Among both large and small firms, 29% of all workers were enrolled in an HSA in 2018 (a 6% increase from 2017 for firms defined as “small” in the 2018 Kaiser Employer Health Benefits Survey). HR professionals should keep this trend in mind.
As more workers actively manage their HSA and realize the importance of the account to their personal finances, they’ll be asking prospective employers about this benefit when they consider a job change. An HSA can be rolled over from one employer to another. Many people actively manage their HSA as they plan for upcoming expenses like childbirth, braces and vision care – as well as retirement.
Some workers are saving substantial amounts in their HSA. The Employee Benefit Research Institute found that HSAs that have been open for more than 10 years had an average account balance of $27,903. So it makes sense that HR professionals looking for a relatively inexpensive value-added benefit for employees may want to consider an HSA offering.
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 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.
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. On average, employers contribute $603 to HSAs for employees with single coverage, and $1,073 for those with family coverage.
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 withdrawn 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. 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.
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 $1,350 for an individual or $2,700 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. In 2018, contributions are limited to $3,450 for individuals and $6,900 for a family. Those amounts are going up in 2019 to $3,500/$7,000 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.
- And while many states follow the example of the IRS and exempt HSA contributions from state taxes, some do not.
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 $500).
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.
BenefitWallet offers all of the most popular and advanced features, such as investment choices for HSA contributions, roll-over support and educational programs. And it also supports FSA and HRA benefit packages on one administrative portal and lets you work with any health plan, helping employers streamline benefits administration and get efficiencies with fewer vendors. For more information, click here.
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