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Health savings accounts often confused with flexible spending accounts
As more American employers turn to high-deductible health plans to reign in escalating health care expenses, many are offering health savings accounts (HSAs) in an effort to encourage workers to make cost-conscious health care decisions. But according to a recent survey by financial services firm Fidelity Investments, two-thirds (65 percent) of Americans who make household health-benefit decisions simply do not understand how an HSA works.
Growth in HSA-eligible high-deductible health plans has continued at a brisk pace in recent years. However, many employees may be missing out on the short- and long-term savings opportunities of HSAs because they don’t know enough about them. With an eye on the annual open-enrollment period, "the time to educate employees who are offered HSAs on their features is now, prior to their making a yearlong commitment that precludes them from taking advantage of the accounts’ many benefits," said Fidelity Investments Vice President William Applegate.
Confusion between an HSA and a flexible spending account (FSA) remains high. A full 73 percent of respondents said an HSA is pretty much the same thing as a health FSA or were unsure, and the “use it or lose it” provision of FSAs was one of the most commonly misunderstood differences between the account types.
Unlike an FSA, all HSA balances carry over from year to year, allowing account holders to accumulate their savings for qualified health care needs. Yet, 69 percent of respondents incorrectly believed they would lose unspent money in an HSA at the end of the year (see the box below for more about these accounts).
HSAs vs. FSAs: Key Differences
Health savings accounts (HSAs), which help individuals save for future qualified medical expenses, must be linked to high-deductible health insurance plans (in 2013 and 2014, deductible minimums are $1,250 for individuals and $2,500 for families). HSA accounts are employee-owned, and contributions can be made by the employer, the worker or both, using pretax dollars. Funds employees withdraw to pay for health care services are not taxed. Amounts saved in an HSA accumulate over time (there is no use-it-or-lose-it rule). The Society for Human Resource Management’s 2013 Employee Benefits survey of SHRM members showed that 42 percent of organizations provided HSAs as a health care benefit in 2013, up from 32 percent in 2009. Twenty-six percent of companies contributed funds to their employees' HSAs.
HSAs differ from health reimbursement arrangements (HRAs), which employers own and fund. Unlike money in HSAs, HRA funds revert to the organization when a worker leaves (to learn more, see the SHRM Online article "Consumer-Driven Decision: Weighing HSAs vs. HRAs").
Flexible spending accounts (FSAs), like HSAs, also allow employees to deduct pretax dollars from their paychecks to pay for eligible out-of-pocket health care expenses. FSAs do not need to be coupled with high-deductible plans, however. But participants have had to spend annual contributions by the end of the year (extended by a 2½-month grace period if the plan allows) or they forfeited the remaining funds. As of new IRS guidance, employers that offer FSA programs that do not include a grace period now have the option of allowing workers to roll over up to $500 of unused funds at the end of the plan year.
According to SHRM's survey, 70 percent of organizations offered health FSAs in 2013.
Financial considerations were the top factors in the decision of the Fidelity survey respondents who chose their employer’s HSA-eligible health plan and opened an HSA. When asked the reasons behind their choice, 48 percent said HSAs allow account holders to carry over remaining funds year to year, 45 percent cited lower premiums, 38 percent mentioned the tax savings, and 25 percent said an HSA is an attractive savings vehicle for their anticipated health care expenses in retirement.
One point that has concerned employers is that employees might save in their HSAs at the expense of retirement accounts. But Fidelity's data found this is not so. "People do not cannibalize their 401(k)s to save in HSAs. At year-end 2012, Fidelity’s average 401(k) deferral rate was 8.0 percent. But those 401(k) savers who also have an HSA with us deferred 9.1 percent in their 401(k)," according to the firm.
Nearly two-thirds (65 percent) of respondents who opened an HSA via their company’s health plan said they received the right amount of employer communication to help them make the decision. Of these respondents, the most influential source that helped guide their decision was their employer or spouse’s employer.
Contrasting these findings, of those respondents who were offered an HSA-linked coverage option but declined it, only 9 percent said their employer influenced that decision, and 55 percent spent less than a half-hour researching their health care benefit choices, a decision that may have a long-term financial impact.
“It’s clear more can be done to educate employees on the benefits of HSAs, from saving for current and long-term qualified medical expenses to factoring health care costs into retirement planning,” said Applegate.
His advice: “Employers that offer HSAs should deliver employees easy-to-understand communications and intuitive decision-support tools, along with onsite and online workshops that clearly explain how HSAs work and how employees can benefit.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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