As health insurance costs continue to rise, companies have been looking for new ways to share the increased costs with their employees. One of those ways? Converting health insurance offered into a low premium, high deductible health plan, or HDHP.
Unlike a flexible spending account (FSA), which only allowed an annual maximum limit of $2,600 in 2017, an HDHP could result in an individual having to pay considerably more than $2,600 a year in health care costs. To offset this, the government created what is known as a Health Savings Account (HSA).
What is an HSA?
With an FSA, the company owns the money set aside and the employee pays the employer back over the duration of the year. Unlike an FSA, an HSA belongs to the employee. Employees set up an account that is specific for their health savings and it’s nonforfeitable and portable.
Learn the difference between an HSA and an FSA.
That money can be used for many health-related expenses, but this normally would not include health insurance premiums. It could, however, cover:
- Deductibles, copays, and coinsurance
- Prescription drugs
- Dental services
- Vision care
- COBRA payments
- Long-term care services
In other words, if employees have a cost related to healthcare, they can use their HSA, even if insurance doesn’t cover it. For example, my health insurance doesn’t cover glasses. My HSA can still be used to cover the cost of my glasses.
Benefits of an HSA
There are many benefits to using an HSA. For example:
- All contributions to an HSA are tax deductible up to the maximums. Individuals can put away up to $3,450 for 2018. Families can put away $6,900 in 2018.
- In 2019, these contribution limits will increase to $3,500 for individuals and $7,000 for families.
- If you’re over 55 years old, you may make an additional catch-up contribution of $1,000 in 2017. That’s all tax deductible.
- HSAs can be used to make investments, similar to a 401(k) and an IRA. These funds then grow in that person's account completely tax free.
- The funds carry over from year to year.
Paying for qualified medical expenses are tax-free, but you should keep records of your expenses.
As one final benefit, after an employee turns 65, he or she can begin to use the HSA for Medicare premiums. Additionally, HSA holders over the age of 65 can take distributions for non-qualified medical expenses tax-free, much like an IRA or a 401(k).
In other words, employees can use those saved funds for day-to-day life. This makes the HSA like an additional account that grows tax-free.
How to Set Up an HSA
There are requirements to meet before an individual can set up and contribute to an HSA. The account holder:
- Must be enrolled in a HDHP HSA compatible health plan
- Can’t be enrolled in health coverage other than an HDHP. General purpose health FSA or HRA coverage can prevent eligibility.
- Cannot be enrolled in Medicare Part A, B, C, or D
- Cannot be claimed as a dependent on any other person’s tax form
If all of those apply, employees are qualified to set up an HSA. HSAs must be controlled and administered by a bank or credit union that is IRS-approved. Chase Bank, for example, is an IRS-approved institution that offers HSA services.
Employees then need to fill out a series of forms that break down their monthly HSA contribution. For example, if an employee wants to maximize the contribution for himself or herself and receives 26 paychecks, he or she would fill out the form to contribute $132.69 from each paycheck.
Because this is a bank account, it has all the same perks as any other bank account. Employees can make payments directly from the account using either a check or a debit card.
Whether an HSA is a good choice for both the company and the employee depends on a variety of factors, and it's important to weigh both the pros and the cons. If you're an employer considering between an HSA or an FSA, Justworks offers both and may be able to help.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.