Small to mid-size employers are always looking for ways to offer their employees benefits while keeping costs under control. Health Savings Accounts (HSAs) are becoming an increasingly popular option for these employers. Why? They provide a flexible and cost-effective way to offer health insurance coverage. In this post, we’ll take a closer look at what HSAs are, who is eligible for an HSA plan, and the benefits of an HSA plan for both employers and employees.
What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged savings account that is paired with a high-deductible health insurance plan (HDHP). An HDHP plan is a health insurance plan with lower premiums and higher deductibles compared to a traditional health insurance plan. An HDHP plan puts more of the healthcare costs back on the employee. When enrolled in an HSA plan coupled with an HDHP plan, the HSA funds can be used to pay for eligible medical expenses and are not subject to federal taxes. The balance rolls over from year to year, so employees can use their funds in the future if they have not yet reached their plan’s deductible. Health savings accounts are also portable meaning that an employee can take their contribution balances with them if they were to leave their current company.
Health savings accounts have an annual contribution limit that is broken into individual and family contribution limits. The individual contribution limit for 2023 is $3,850 while the family contribution limit for 2023 is $7,750. Typically, these contribution limits increase year over year to keep pace with the rising costs of healthcare and inflation.
Employers can contribute to their employees’ HSA plans. The individual and family contribution limits do not change regardless of whether the employer contributes or not. Also, it is best practice to ensure that employers contribute the same amount to similar employees to avoid unintentional discrimination.
Who is eligible for an HSA plan?
To be eligible for an HSA plan, an individual must be enrolled in a high-deductible health plan (HDHP). This means that the HDHP must have a minimum deductible of $1,500 for individual coverage or $3,000 for family coverage. Additionally, the HDHP must limit the maximum out-of-pocket expenses to $7,500 for individual coverage or $15,000 for family coverage. Again, it is important to note that a health savings account cannot be opened without the plan participant first enrolling in the HDHP plan.
The benefits of an HSA plan for employees
Health savings accounts help employees in many ways. Below are a few examples of how contributing to an HSA can have extensive benefits to an employee:
- Cost Savings: Employees can save money on their healthcare expenses by using the HSA funds to pay for eligible medical expenses. Did you know that Amazon has an HSA store? See it for yourself!
- Flexibility: Employees can use their HSA funds for any eligible medical expense, regardless of whether it is covered by their insurance plan. A full list of HSA-eligible items have been published by the IRA in Publication 969.
- Tax Advantages: Contributions to an HSA are tax-deductible, and funds can be withdrawn tax-free for eligible medical expenses. Not only are the contributions to an HSA tax-deductible, but any growth in your HSA count is also tax exempt! Therefore, your overall take home pay used for Federal income tax will be lower!
The benefits of an HSA plan for employers
Health savings accounts are not just beneficial for employees. Employers can take advantage of health savings accounts as well. The below outlines just a few ways that offering a health savings account can benefit employers:
- Cost Savings: An HSA plan can save employers money on insurance premiums compared to other insurance plans by placing more of the overall medical costs back on the employee. This, of course, is if an employer is contributing to paying all or part of the monthly insurance premium for the HDHP plan.
- Increased Employee Benefits: Offering an HSA plan can provide a valuable benefit to employees, especially if they are able to save money on their healthcare expenses and overall taxable income. An HSA provides added richness to the overall benefits offerings of an organization.
- Tax Advantages: Employers can make tax-free contributions to employees’ HSAs, and employees can make pre-tax contributions through payroll deductions. It is important to note that employees cannot write off any contributions made by the employer and the employer cannot write off any contributions made by an employee.
Concerns an employer may have about HSA — and what to do
Health savings plans are an amazing tool if used correctly. The below are a few of the top concerns that employers have for offering health savings accounts to their workforce:
- Confusion for Employees: Some employees may find the HSA concept confusing, which can lead to lower participation rates. Many employers do not have the knowledge to train employees on the benefits of utilizing an HSA to help offset upfront costs found in an HDHP plan. Employers may feel that employees will just see more money taken from their paychecks if they must contribute to an HSA on top of paying the premiums for the HDHP plan.
- Administrative Costs: Employers may incur additional administrative costs to set up and maintain an HSA plan. Though these costs are only dollars per employee/per month, these costs can add up. Employers do have the ability to transfer the administrative fees to the employee.
- Lack of Awareness: Many employees may not be familiar with HSAs, which can lead to low participation rates. Training is critical to help piece the puzzle together for your employees after seeing the higher deductibles than what a traditional health plan may offer. Most HSA account owners only use an HSA to help offset medical expenses. Though HSA accounts can be a great investment tool, most employers and employees do not know that this option exists or how to go about utilizing a health savings account for investment purposes.
HSAs offer valuable benefits to employers and employees
Health Savings Accounts (HSAs) offer a cost-effective and flexible option for small to mid-size employers to provide their employees with a method to help offset medical expenses. They provide benefits for both employers and employees, including cost savings, increased flexibility, and tax advantages. However, employers may have concerns about administrative costs, confusion among employees, and lack of awareness of the HSA concept. Overall, HSAs can be a valuable benefit for both employers and employees, and it’s important to carefully consider the pros and cons before implementing an HSA plan.
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