Health savings accounts are hot, with nearly two-thirds of respondents to a Plan Sponsor Council of America survey saying they believe that even those without a high deductible health plan should qualify. A benefit often cited by employers and employees alike is that HSAs can be a valuable part of one’s retirement strategy, since healthcare expenses are viewed as one of the largest people face in retirement.
The article below was published on September 13, 2017 by Employee Benefit News, written by Robert Lawton.
With healthcare open enrollment season quickly approaching, 401(k) plan sponsors may want to spend some time educating participants on the use of health savings accounts. If you offer a high-deductible health plan to your employees, they probably have the ability to contribute to HSAs. I believe that nearly everyone eligible to contribute to an HSA should max out their HSA contributions each year. Here’s why.
HSAs are triple tax-free
HSA payroll contributions are made pre-tax and when balances are used to pay qualified healthcare expenses, they come out of HSA accounts tax-free. Earnings on HSA balances also accumulate tax-free. There are no other employee benefits that work this way.
HSA payroll contributions are truly tax-free
Unlike pre-tax 401(k) contributions, HSA contributions made from payroll deductions are truly pre-tax in that Medicare and Social Security taxes are not withheld. Both 401(k) pre-tax payroll contributions and HSA payroll contributions are made without deductions for state and federal taxes.
No use it or lose it
Employees may confuse HSAs with flexible spending accounts, where balances not used during a particular year may be forfeited. With HSAs, unused balances carry over to the next year. And so on, forever. Well at least until the employee passes away. HSA balances are never forfeited due to lack of use during a year.
Retiree healthcare expenses
Anyone fortunate enough to accumulate an HSA balance that is carried over into retirement may use it to pay for many routine and non-routine healthcare expenses. HSA balances can be used to pay for prescription drugs, medical premiums, COBRA premiums, dental expenses, Medicare premiums, long-term care insurance premiums and of course any co-pays, deductibles or co-insurance amounts. There are no age 70 1/2 minimum distribution requirements on HSA accounts like there are on 401(k) and IRA accounts. This makes HSA accounts a much more tax-efficient way of paying for healthcare expenses in retirement, especially if the alternative is taking a taxable 401(k) or IRA distribution. Continue reading
The article below was published on August 4, 2017 by Employee Benefit News, written by Eric Brewer.
High-deductible health plans with health savings accounts are becoming more popular as benefits consumerism increases throughout the country. Enrolling your employees in HDHPs is one way to educate them on the true cost of healthcare. And if they use an HSA correctly, it can help them better manage their healthcare costs, and yours.
But understanding how an HDHP works and ensuring your employees will get the most out of an HSA can be tricky. In fact, a recent survey by employee communication software company Jellyvision found that half of employees don’t understand their insurance benefits. And choosing a benefits plan is stressful for employees because it’s a decision that will impact them for a long time. This is further complicated by the trend toward rising employee contributions and the issue of escalating healthcare costs. Employees are taking on more cost share — and that means plan sponsors have a greater responsibility to do a better job of educating them to make the best decision at open enrollment.
HSAs benefit the employee in a number of ways:
- Just like a retirement plan, HSAs can be funded with pre-tax money.
- Employees can choose how much they want to contribute each pay period and it’s automatically deducted.
- Employers can contribute funds to an HSA until the limit is met.
These are important facts to tell employees. But there’s more to it than that. Here are some tips on how to best explain HSAs to your workforce.
The devil is in the details: discuss tax-time changes
Employees using HSAs will see an extra number or two on their W-2s and receive additional tax forms. Here’s what to know:
- The amount deposited into the HSA will appear in Box 12 of the W-2.
- Employees may also receive form 5498-SA if they deposited funds in addition to what has been deducted via payroll.
- Employees must submit form 8889 before deducting contributions to an HSA. On the form they’ll have to include their deductible contributions, calculate the deduction, note what you’ve spend on medical expenses, and figure the tax on non-medical expenses you may have also paid for using the HSA.
- Employees will receive a 1099SA that includes distributions from the HSA.
Importantly, most tax software walks employees through these steps.
A lot of confusion surrounds HSAs because they’re yet another acronym that employees have to remember when dealing with their insurance (more on that later). Here are a few myths you should work to dispel.
- Funds are “use it or lose it.” Unlike a flexible spending account, funds in an HSA never go away. In fact, they belong to an employee. So even if they go to another job, they can still use the HSA to pay for medical expenses tax-free.
- HDHPs with HSAs are risky. There are benefits to choosing an HDHP with an HSA for both healthy people and those with chronic illnesses. Healthy people benefit from low HDHP premiums and can contribute to an HSA at a level they’re comfortable with. On the other hand, people with chronic illnesses will likely hit their deductible each year; after that time, medical expenses are covered in most cases.
Help employees understand they’re in control
High-deductible plans with an HSA might seem intimidating, but they put employees firmly in control of their healthcare. This is increasingly important in today’s insurance landscape. When employees choose an HSA, healthcare becomes more transparent. They can shop around for services and find the best deal for services before they make a decision.
HSAs also give you control and flexibility over how and when employees spend the funds. Users can cover medical costs as they happen or collect receipts and get reimbursed later. Finally, employees don’t have to worry about sending in receipts to be reviewed. This means they must be responsible for using the funds the right way, or face tax penalties.
Resist ‘insurance speak’
As an HR professional, you may not realize how much benefits jargon you use every day. After all, you deal with benefits all the time, so using industry terms is second nature. But jargon, especially the alphabet soup of insurance acronyms that I mentioned earlier, is confusing to employees.
One tip is to spell out acronyms on the first reference. Second, simplify the explanation by shortening sentences so that anyone can understand it.
Here’s an example of a way to introduce an HSA:
A health savings account, also called an HSA, is a tax-free savings account. An HSA helps you cover healthcare expenses. You can use the money in your HSA to pay medical, dental and vision costs for yourself, spouse and dependents who are covered by your health plan. You can use HSA funds to pay for non-medical expenses, but you will have to pay taxes on them…
You get the idea.
As responsibility continues to shift to employees, they may need more education in small chunks over time to reinforce their knowledge. As the employer, it’s in your best interest to help employees choose the best plan and use it the right way.
The State of Benefits report from BenefitFocus shows that workers under the age of 26 are investing 20% more of their salary in HSAs than other generations. This is certainly due to the fact that nearly half have elected to enroll in high deductible health plans in 2017. While PPO plans remain very popular, especially among older adults, employee contributions to HSAs and FSAs are rising. A growing interest in savings among young people is another factor contributing to the increased popularity of HSAs.
The article below is from BenefitsPRO, titled “10 weird HSA FAQs,” by Whitney Richard Johnson.
Health savings accounts help employees sock away money for health care costs. They’re used along with a high deductible health insurance plan, and they offer some great tax benefits.
Contributions made to HSAs lower one’s taxable income, and payments made from an HSA aren’t taxed. Plus, the funds can be invested and interest can accrue in an HSA – tax free.
Used with care, HSAs can be a smart financial tool. But they’re also potentially complex.
For better or for worse, the responsibility is on the employee to make sure he or she stays within the rules of the game. For some this is empowering. For others, it’s intimidating.
Whether you’ve already got an HSA or are considering it, take a look at these 10 potentially weird, possibly little-known FAQs about HSAs.
#1: What is the HSA eligibility rule regarding not being a dependent on someone else’s income tax return? If you are a dependent on someone else’s tax return, are you eligible for an HSA?
A: No. This rule serves primarily to prevent children from opening and funding HSAs. The rule does create some interesting scenarios for adult children.
#2: Can HSA owners that enroll in Medicare use their HSA to pay for Medicare premiums even though they are no longer HSA-eligible?
A: Yes. The majority of Americans will start Medicare at age 65 and therefore lose eligibility for an HSA. Losing eligibility for an HSA means that the HSA owner cannot contribute new money but does not stop a person with an HSA balance from continuing to use that balance for medical expenses.
Someone age 65 or older has a special opportunity to use that money to pay for Medicare premiums. This is an incredible feature of HSAs: the ability to pay for Medicare premiums with pre-tax dollars.
However, this feature is only available to Americans that have built up a balance in their HSAs prior to losing eligibility. The Social Security Administration will directly deduct the Medicare premiums from Social Security payments, so an HSA owner can write a check from their HSA payable to his or her self to reimburse for the Medicare premium paid directly by Social Security. Continue reading