HSA FAQs: Your employees’ top 5 questions answered

Health savings accounts (HSAs) continue to be one of the most powerful tools available to set your employees up for financial and healthcare security. Working alongside high-deductible health plans (HDHPs), HSAs allow employees to save for future medical expenses while reducing their tax burden. As a fully portable account owned by the employee, they also provide a safety net for employees who leave your organization.

Many employees may not be taking advantage of their HSA's full potential. We’ve identified five frequently asked questions to help you understand and explain HSAs to your employees, so they can take full advantage of this important benefit.

1. 01

   What is an HSA?

   An HSA is a triple tax-advantaged savings account attached to an HDHP. Employees with HDHPs who meet eligibility requirements can:

   • Contribute to their HSA on a pre-tax basis ($3,650 for individuals under 55 or $7,300 for a family in 2022; $3,850 for individuals under 55 or $7,750 for a family in 2023), lowering taxable income (note, catch-up contributions of an additional $1,000 are available for employees age 55 or older) 
   • Withdraw funds from their HSA to pay for eligible healthcare expenses tax-free, or save for future qualified medical and retiree health expenses
   • Invest the money that accrues in their HSA
   • Earn tax-free interest on their HSA’s cash balance and tax-free earnings on any HSA invested funds.

2. 02

   How are HSAs different from other health benefits?

   An HSA combines some of the best features of flexible spending accounts (FSAs) and 401(k) plans to provide flexibility for employees to meet their needs, depending on their current circumstances and plans for the future.

   • Unlike other benefits (including FSAs), employees own their HSA and retain all the money in their account, even if they leave your employment.
   • Employees can change the amount of their contribution at any time, without a corresponding life event, similar to a 401(k) retirement plan.
   • Employees make the decisions about which health expenses to cover with their balance, similar to an FSA. Employees with an HDHP often use the money in an HSA to help with out-of-pocket costs until their deductible is met, but others may choose to save their balance instead.
   • As with a 401(k) plan, employees can invest HSA balances, potentially growing their money toward future medical expenses, including in retirement.

3. 03

   What expenses are eligible for reimbursement?

   Employees can use their HSA to pay for many healthcare expenses, but only those that are qualified by the IRS (Publication 969). These include:

   • Medical, dental and vision deductibles and copays
   • Hearing aids, smoking cessation programs, wheelchairs, organ transplants and certain long-term care insurance premiums
   • COBRA continuation health coverage premiums and Medicare premiums for HSA holders age 65 or older (excluding supplemental plans)

4. 04

   Why invest HSA dollars?

   HSA holders who don’t invest their contributions are missing out on a chance to grow their balance significantly over time!

   • Employees can start investing every dollar over a threshold set by their plan’s administrator, similar to a 401(k) for retirement healthcare needs.
   • Employees can invest in a variety of funds and are in control of their investments with easy liquidity to cover health emergencies if needed.
   • Any earnings from investments are tax-free, so employees can spend the balance on medical expenses at any time, even after retirement.

5. 05

   How does an HSA fit into retirement planning?

   After employees retire, healthcare expenses will take up more of their budget. HSAs and 401(k)s can work together to cover these expenses.

   Consider that a 40-year-old male who plans to retire at age 65 could need $328,200 for Medicare Advantage coverage over his lifetime (WTW, 2020).

Dollar values are approximate and based on expenses with a Medicare Advantage plan. Assumes a 2% annual increase in contributions and average return on investment.

In this scenario, you'd have to contribute 42% more to your 401(k) to match your HSA's spending power.

A 401(k) has more restrictions than an HSA, including penalties on withdrawals before age 59 ½. Employees can use their HSA for health-related expenses tax and penalty-free.

Conclusion

HSAs have been around for a while, and there’s good reason for that. With the changing nature of health insurance, HSAs remain a powerful way to ease the financial burden being placed on employees. Communicate basic information on how HSAs work, how they differ from other savings accounts and ways to maximize their benefit to employees to help them feel informed and secure about all of their options for making the most of their hard-earned money.

Author

---

Stephen Durso

Director, Benefits Accounts at WTW

email Email

---