Individuals with a High Deductible Health Plan (HDHP) have low premiums but high deductibles. As a result, they may need a little extra money to fill in the missing gaps in their health coverage. One solution that effectively fills in those gaps is a health savings account (HSA).
What’s an HSA?
According to Investopedia, “It’s a tax-advantaged account created for individuals who are covered under HDHPs to save for medical expenses that HDHPs do not cover.” An HSA provides an effective way for employees to save extra money to meet their healthcare needs.
This is beneficial because of the high deductibles that come along with an HDHP. While this type of healthcare plan usually has low premiums, it can potentially lead to an economic hardship if a person incurs extensive medical costs from surgery, frequent doctor visits or expensive medications. In a true HDHP, all healthcare expenses (sometimes with the exception of preventive services) are paid out of pocket until the deductible is met. An HSA offsets many of these costs and adds some wiggle room to health coverage.
To open an HSA, employees must be enrolled in an HDHP that meets certain criteria. Employees can contribute to their HSA account each year up to the government-mandated maximums. For 2018, the maximum HSA contribution is $3,450 in self-only coverage and $6,850 for family coverage. Participants over age 55, can make an additional annual $1,000 catch up contribution. If an employee has an HSA set up through their employer, they can streamline the process with automatic payroll contributions.
The money saved each year can certainly help with the costs of medical expenses. One reason employees enjoy this type of account is the flexibility they have when spending the money. For instance, they can use it on things like dentist visits, prescription medications, eyeglasses and even psychological counseling.
Funds Roll Over
Another perk of an HSA is the funds roll over at the end of each year. Unlike a flexible spending account (FSA), the money isn’t lost if not spent by a certain deadline, so employees don’t have to worry about losing their money. Over time, the money saved in an HSA can really add up. As both an HSA and an FSA are tax-advantaged accounts, participants generally can’t contribute to both an HSA and a Health Care FSA in the same year.
This type of account is also beneficial from a tax standpoint. Matt Irvine, vice president of sales and marketing at Health Savings Administrators, points out, “HSA contributions are pre-tax/tax-deductible, so the money grows tax-free and the money can come out tax-free.”, if it’s used for qualified medical expenses. It’s also portable, meaning that the funds a person has accumulated remain with them even if they change employers or leave the workforce.
In other words, the money stays in an HSA until it’s spent. If the funds are used for reasons other than qualified medical expenses and you are under age 65, the money will be taxed as ordinary income and the IRS will impose a 20% penalty.
If you’re currently offering your employees HDHPs, you will definitely want to consider contributing to HSAs as well. This can be advantageous from a recruiting standpoint and add to the overall health and wellbeing of your workforce.
A study by Willis Towers Watson found that 62 percent of employers that offered HSAs contributed “seed money” to their employees’ accounts. The median seed amounts ranged from $300 to $750 for employee-only coverage and $700 to $1,400 for family coverage in 2017.
HDHPs have grown in popularity mainly because of the rising cost of healthcare. If some or all of your workforce is covered by an HDHP, a health savings account can be a nice addition to provide more robust health coverage.