Advantages of Health Savings Accounts and HDHPs
If you offer one or more High Deductible Health Plan (HDHPs) to your employees, you may know that, while it lowers the monthly premium, it raises the deductible (i.e., you pay more for health services before an insurance plan pays). However, you may not know the advantages of pairing a HDHP with a Health Savings Account (HSA).
How It Works
For 2021, out-of-pockets costs on an HDHP cannot exceed $7,000 for self-only coverage or $14,000 and family health coverage. Still, that's a significant amount of money for the average person. This where a HSA can help. Individuals with an HDHP (and a plan deductible of $1,400 for individual coverage or $2,800 for family coverage) can use an HSA to pay for eligible out-of-pocket health care costs, including the deductible.
What's more, contributions made by employees to an HSA generally are not subject to federal income tax, nor state taxes in most cases. Earnings grow on contributions tax-free. And, withdraws are not taxed as long as funds are used to pay for qualified medical expenses. In addition, unspent HSA funds roll over at the end of the year, making them available for future qualified expenses.
That contrasts to a Flexible Spending Account (FSA), which is a “use it or lose it” account, although there is often a grace period of up to two and a half months during which an account holder can use unspent FSA money. This is separate and distinct from an FSA Run-Out Period, which allows employee claims for up to 90 days after the plan year ends – so long as expenses are incurred during the plan year, on or before December 31.
Retirement boost: After reaching age 65, account holders can use HSA funds to supplement retirement, although money is subject to income tax (at the federal and state level) if not used for medical-related expenses.
FSAs vs. HSAs
In addition to the roll over aspect of FSAs mentioned above, there are other differences between FSA and HSAs.
FSAs are only available through an employer, and an FSA cannot be established by a person who is self-employed or unemployed. If an employee leaves his or her employer, the FSA does not travel, too; funds are forfeited to the employer. Not so for an HSA.
An HSA can be set up through an employer, or independently through a qualifying financial institution. Bankrate.com published an article in 2020, How to choose the best health savings account, with other guidance on the topic.
Unlike with an FSA, if an employee leaves his or her employer, the HSA is portable. That means he or she can still take advantage of the accumulated funds saved after changing employers or retiring.
Qualifying HSA Expenses
Your employees can use HSA funds to cover a diverse array of medical, dental, and other health services. Under the 2020 COVID-19 relief program known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), over-the-counter medications and other expenses also qualify as HSA expenses. Visit the IRS Newsroom for more information.
HSA Contributions and Contributors
Employees can contribute to an HSA until age 65. However, contributions are not limited to just employees. An employee’s family members and employer can also contribute to an employees’ HSA, so long as the combined contributions don’t exceed the annual limits shown below:
|HSA Contribution Limits for 2021||Self-Only Account||Family Account|
|Company + Employee Contribution Limit||$3,600||$7,200|
|HSA Catch-Up Contribution Limit for Employees Age 55+||$1,000||$1,000|
Note: Contribution limits are based on calendar year; allowable HSA contributions are prorated by the number of months an individual is eligible to contribute. Catch-up contributions are also prorated. Eligible individuals can contribute to an HSA at any time during the tax year, including up through the federal tax filing due date (April 15, 2022). HSA contribution limits typically change each year. Visit the IRS website for further information.
Additional HSA information from the IRS is available in Publication 969.
In comparison, the dollar limit for employee contributions to an FSA remains $2,750 for 2021.
Of course, forecasting health care expenses is not easy. Being able to carry over funds from one year to the next can make an HSA more attractive to employees than an FSA.
If you have questions, check out the Mayo Clinic article, Health savings accounts: Is an HSA right for you?, or 10 Things to Know About a Health Savings Account, published by the Balance.com, for additional guidance.