As an employer, offering access to health insurance for employees can be pricey. One way that companies can lower their costs is by offering high deductible health plans, or HDHPs. These low-premium plans may be a great fit for many teams, but they do come with a catch.
The high deductible means that individuals who use a lot of medical services will have to pay more out-of-pocket for their health care costs than they would with other types of plans. To offset this, the government created what is known as a Health Savings Account (HSA).
The ABCs of Health Insurance
Can't keep up with all the health insurance terms out there?
What is an HSA?
An HSA is an account employees can use specifically for their health savings that is nonforfeitable and portable. Unlike a flexible spending account (FSA), where the employer actually owns the account and the money in it, with an HSA, the account belongs to the employee.
That money can be used for many health-related expenses, but this normally doesn’t include health insurance premiums. It may, 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, a health insurance plan may not cover glasses, but the member could still use their HSA funds to cover the cost of glasses.
Related Article: When Should a Growing or Small Business Offer Employee Benefits?
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 annual IRS limit. Individuals can put away up to $3,500 in 2019, while families can put away $7,000.
- If you’re over 55 years old, you may make an additional catch-up contribution of $1,000. That’s all tax deductible.
- The funds carry over from year to year.
- Since the employee owns their HSA account, it can also be used to make investments, similar to a 401(k) or an IRA.
Paying for qualified medical expenses are tax-free, but you should keep records of your expenses.
If employees have a cost related to healthcare, they can use their HSA, even if insurance doesn’t cover it.
As an additional benefit, after an employee turns 65, they 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 that’s HSA compatible
- Cannot be enrolled in health coverage other than an HDHP; General purpose health FSA or HRA coverage can prevent HSA 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 criteria are met, employees are qualified to set up an HSA. HSAs must be controlled and administered by a bank or credit union that is IRS-approved. Many banks are IRS-approved institutions, and you can always check with your bank to see if they offer HSA services. Employers can also provide access to HSAs for their employees as part of their benefits offering.
Once an employee has a financial institution to administer the account, the employee can then elect their monthly HSA contribution. For example, in 2019, if an employee receives 26 paychecks in a year and wants to maximize their contribution, they would elect to allocate $134.61 from each paycheck to their HSA.
Because this is a bank account, it has many of the same perks as any other bank account. Employees can make payments for health related costs directly from the account using either a check or a debit card. It’s important to note that unlike an FSA, only the funds you’ve contributed to the HSA so far are available for use.
Looking to Offer HSAs?
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 your options. If you’re offering your team access to an HDHP, offering HSAs is a helpful addition. If you're an employer considering any of these benefits, Justworks can 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.