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Educating employees about the many advantages of using health savings accounts is key
Some employers might not realize it. And certainly, many employees aren’t aware. But health savings accounts (HSAs) come with attractive tax benefits.
HSAs are designed to help individuals save for future health care costs. But only half of all employers offered HSAs in 2016, according to the 2016 Employee Benefits research report from the Society for Human Resource Management (SHRM). At the same time, take-up rates among employees are low. (Organizations with 10 to 24 employees had the highest HSA enrollment rate—16.3 percent, according to a 2016 report from United Benefit Advisors.)
“There’s a lot of confusion out there” about HSAs, said David Lindgren, compliance officer with Flexible Benefit Service Corp. in Rosemont, Ill. Lindgren, who led a concurrent session on June 21 called “HSAs: The Basics and Beyond” at the SHRM 2016 Annual Conference & Exposition in Washington, D.C., said that’s why it’s incumbent on employers to educate employees about all the advantages of HSAs. “Education is key,” he said.
HSAs, which were introduced in 2004, are savings accounts—“medical 401(k)s,” Lindgren said. They’re used to pay for medical costs with pretax dollars and can be funded by employers, individuals (including family members and friends on someone’s behalf) or both. To encourage participation, employers can match employee contributions.
Triples Tax Advantages
“I personally believe the best way to make contributions is through payroll deductions,” said Lindgren, citing the resulting tax advantages. Under that approach, contributions are tax-free, avoiding federal and state income taxes and FICA taxes in most states. Additionally, money earned through HSA investments is not taxed and there is no tax on funds withdrawn to pay for qualified medical expenses.
That triple-tax advantage is “one of the most powerful things about HSAs,” Lindgren said.
To use an HSA, a person must:
HSAs are subject to annual contribution limits of $3,350 for individuals and $6,750 for families in 2016. These limits are adjusted yearly. People over the age of 55 can make an additional $1,000 catch-up contribution every year.
HSA funds can be invested in typical vehicles, such as stocks, bonds and mutual funds. There is no cap on account balances. “The sky’s the limit,” Lindgren remarked. Additionally, HSAs are portable—employees take the money in their accounts with them when they leave. Funds can be used to pay for qualified medical expenses for spouses and dependent children, too; that’s the case even after individuals become ineligible to contribute to HSAs because, for example, they’re no longer enrolled in an HDHP.
Qualified expenses include things such as:
HSAs cannot, however, be used to pay for health plan premiums.
If HSA funds are used to pay for nonqualified expenses, income taxes apply and a 20 percent penalty is imposed. Nonqualified expenses include items like:
As health insurance costs rise, employers have been shifting the burden to employees through consumer-driven plans, higher deductibles and co-pays. That leaves them on the hook for more out-of-pocket costs. So, Lindgren asked, why not give employees the option to pay for these expenses in a tax-free, cost-efficient way—with HSAs?
John Scorza is associate editor of HR Magazine.
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