How can HSAs benefit my company?
From 1996 to 2013, spending on healthcare in the United States increased by $933.5 billion, according to a 2017 study published in the Journal of the American Medical Association. And in 2019, medical costs are expected to increase another 6 percent.1
As healthcare costs continue to rise, health savings accounts (HSAs) can help employees better manage their health costs, prepare for retirement, and boost financial wellness. Not only are HSAs important employee benefits, but they can benefit employers as well by helping them reduce payroll taxes and enhance their benefits offerings.
How HSAs Benefit Employees
HSAs are tax-advantaged accounts that can be used to pay for current or future healthcare expenses. For your employees, this means they can contribute pre-tax dollars to their health savings account. The contributions are exempt from federal income taxes, Social Security (FICA) taxes and, in most cases, state income taxes. When HSA funds are used for qualified healthcare expenses, employees never pay taxes on their HSA contributions, earnings or withdrawals.
The ability to pay for healthcare expenses through an HSA using tax-free dollars is a tremendous benefit for employees. To qualify for an HSA, an employee must participate in a high-deductible health plan with a deductible of at least $1,350 for an individual or $2,700 for a family in 2019 (increasing in 2020 to $1,400 for individuals and $2,800 for family coverage). Fortunately, more than 43 percent of Americans now have high-deductible health plans.2
An employee can contribute to his or her own HSA, usually through payroll deduction. As an added benefit, the employer can contribute as well. Together, they can contribute up to $3,500 for individuals in 2019, and up to $7,000 for families (increasing in 2020 to $3,550 for individuals and $7,100 for families). For employees age 55 and older, an extra catch-up contribution of up to $1,000 is allowed.
For employees who contribute the maximum allowed amount each year, an HSA can represent significant tax savings over time. Before age 65, the money in an HSA can be used tax-free for qualified medical expenses. However, if you withdraw your HSA funds for anything else, the money will not only be taxed, but you will also pay a 20 percent penalty fee.
After age 65, the rules regarding use of your HSA funds become more flexible:
- Health insurance premiums – In addition to qualified healthcare expenses, you can use your HSA funds tax-free and penalty-free to pay premiums for employer-sponsored health coverage or for Medicare.
- Non-medical retirement expenses – Although money used for non-medical expenses will be subject to federal—and usually state—income taxes, after age 65 you will not be subject to the 20 percent penalty fee.
HSAs aren’t just important benefits for covering healthcare expenses: They’re also valuable tools for helping employees increase retirement savings. If employees can sock away pre-tax dollars in their HSAs but avoid using the funds to cover healthcare expenses, those HSA funds can be invested and allowed to grow. When the employee reaches age 65, those funds can be used for healthcare or any other needed expense.
HSAs can help your employees boost their overall financial wellness by decreasing their taxable income through contributions, planning ahead for medical expenses, and supplementing their retirement savings.
How HSAs Benefit Employers
The value of HSAs extends beyond the employee and to employers, as well. Pre-tax contributions mean employees don’t have to pay FICA (Medicare and Social Security taxes) on those funds, and neither do employers. Because employers are required to contribute 6.2 percent of each employee’s salary3 to Social Security and 1.45 percent to Medicare, you can save 7.65 percent of every dollar contributed to an employee’s HSA.
Employers are only responsible for minimal administrative work with HSAs. And although no employer contribution is required, you can choose to contribute to employees’ plans as an extra employee benefit.
By offering HSAs, you have the opportunity to show employees you care about them. Thirty-five percent of loans from retirement plans are a result of emergency medical expenses.4 With HSAs, employees are less likely to need to borrow from their retirement accounts to cover healthcare expenses. And when employees have healthy HSAs, they may be less worried about medical expenses—and likely to be more engaged and productive at work. Having an HSA can help with employees’ overall financial wellness: HSAs offer employees flexibility in accessing their savings, so it’s not all tied up in their retirement accounts.
How to Boost Usage of HSAs
Despite the benefits offered by HSAs, employers that offer these plans often struggle to get employees enrolled. A 2017 report showed that companies with the highest percentage of HSA enrollment only had 19.1 percent of employees enrolled.5
To encourage more employees to use these plans, it’s important for employers to clearly communicate the benefits and dispel myths. For instance, employees should know that HSAs are not only tax-advantaged but also portable, meaning they don’t have to give up the account if they move to a new job—a huge benefit for employees.
Employees should also know that HSA funds roll over from year to year: A recent survey showed that 39 percent of respondents erroneously believed they would lose unspent contributions at the end of the year.6 Because HSA funds are never lost at the end of the year, they can accumulate and are investable, which makes these accounts ideal complements to employees’ other retirement plans. You can educate employees on this through email announcements, company-wide presentations, 1:1 meetings or educational literature throughout the office.
Finally, employers can encourage more usage of HSAs by incorporating them as a part of an overall wellness program, including both finances and health. For instance, employers may consider offering increased HSA contributions based on employee participation in health screenings or other healthy behaviors.
Explore more about Health Savings and Spending Accounts.
1 “Medical cost trend: Behind the numbers 2019,” June 2018. https://www.pwc.com/us/en/health-industries/health-research-institute/as...
2 Haefner, Morgan. “CDC finds 43.2% of Americans have high-deductible health plans,” Becker’s Hospital Review, Feb. 23, 2018. https://www.beckershospitalreview.com/payer-issues/cdc-finds-43-2-of-ame...
3 Subject to the Social Security Wage Base of $132,900 in 2019
4 Based on aggregated Voya Retirement account data, 2017.
5 Society for Human Resource Management. May 31, 2017
6 Society for Human Resource Management. May 31, 2017