As health care costs continue to rise, it is becoming more common for employers to pair high-deductible health plans (HDHPs) with health savings accounts (HSAs). This strategy can help companies address two important goals: contain the cost of their company-sponsored health plan with lower premiums, while providing a powerful, tax‑advantaged option for plan participants to prepare for health care expenses. This potential win-win opportunity for employers and employees is in fact what’s likely driving the continued popularity and growth of HSAs today.
But there is still a general misunderstanding about how HSAs work and the unique benefits they provide. Our 2019 Workplace Benefits Report found only 11% of employees were able to correctly identify HSA attributes, and only 65% of employers say they have a good understanding of HSAs.
Let’s take a look under the hood of this valuable benefit.
First, to contribute to an HSA the participant needs to be enrolled in a qualified HDHP. The key issue is “qualified” because not all HDHPs qualify for an HSA. There are some important criteria health plans must meet to qualify:
|•||The minimum deductible must be a higher deductible than typical individual health insurance plans. The minimum deductible will be $1,400 for a self-only HDHP and $2,800 for a family HDHP in 2020.|
|•||A maximum limit on the total “out of pocket” costs for the annual deductible and medical expense costs, including copays and other items, is also applied. In 2020, the maximum limit for self-only coverage is $6,900, and for family coverage is $13,800.|
|•||The HDHP can only provide first dollar coverage (meaning payment before the deductible is met) for benefits that are considered preventative care, such as an annual physical. For all other benefits, such as office visits or prescriptions, the coverage cannot go into effect until the participant has met the annual deductible. It is important to note that some HDHP plan designs may include coverage for certain office visits with payment of a co-pay for office visits and prescription drugs before the deductible is met. To the extent that a plan pays for benefits other than preventative care before the covered person has met his or her deductible, the HDHP is not qualified to pair with an HSA.|
In addition, there are a few conditions individuals have to satisfy in order to qualify to participate in an HSA. They:
|•||Are covered by a qualified HDHP.|
|•||Cannot be covered by any other health plan (e.g. spouse’s plan, Medicare, military health plan).|
|•||Cannot be claimed as a dependent on another person’s tax return.|
|•||Cannot be covered by a traditional health care flexible spending account or health reimbursement arrangement.|
Employees, employers or both may contribute to HSAs and participants can use those dollars to pay for qualified medical expenses. In 2020, individuals will be able to contribute up to $3,550 (plus an extra $1,000 catch-up contribution for individuals who will be age 55 or older by the end of the year), and up to $7,100 for family coverage. That’s a sizeable amount of money employees can set aside specifically to help pay for health expenses. The big benefit here is that the contributions employees make to their HSAs are tax-free, helping them make their money go further in addressing health care costs.
HSAs are available to pay for eligible medical, pharmacy, dental and vision care services for participants, their spouses and their qualified dependents. Participants can use their HSA account to pay for medical expenses of a spouse or qualified dependents even if they are not covered under their health plan.
Because HSA dollars not used at the end of the year roll over to the next year, the money participants put aside in their HSAs has the potential to grow year over year and be used for future health care expenses. There is no use it or lose it rule—an important distinction of an HSA. In addition, unlike with a 401(k) account, participants don’t have to start Required Minimum Distributions (RMDs) at age 70½, meaning that HSAs can be retained well into retirement.
Another significant advantage of an HSA is its unique potential triple-tax advantage.1 We already noted that contributions to an HSA are federal income tax free. What’s more, when participants are ready to use their HSA funds to pay their medical bills, they won’t have to pay federal income taxes on withdrawals from their accounts as long as they are used for qualified health care expenses. HSAs, like those offered by Bank of America, also offer an investment feature allowing participants the potential to increase their account balances over time. What’s important to note is that interest and investment earnings in an HSA are also not subject to federal income tax.
HSAs offer a potential triple-tax advantage:1 Contributions are made federal income tax free, interest and investment earnings are federal income tax free, and money used for qualified medical expenses is withdrawn federal income tax free.
HSA and the potential payroll tax advantage
HSA owners receiving contributions pretax through an employer (either employer contributions or employee payroll deferral) avoid FICA payroll taxes (Social Security, Medicare), resulting in a 7.65% savings in payroll tax to the HSA holder, which is the employee’s half of the 15.3% payroll tax. While both 401(k) and HSA contributions can be made without deductions for federal income taxes, contributing to an HSA through direct employer contributions and/or employee payroll deferrals offers greater tax savings because FICA is also not withheld. HSA owners who would otherwise be subject to the Additional Medicare Tax on compensation over $200,000 could experience an additional 0.9% payroll tax savings.
You may be able to save money on your company health benefits by opting for health insurance plans with lower premiums knowing that HSAs can help employees manage the higher deductibles that come with these plans. Pairing an HSA with an HDHP offers employees a powerful, tax-advantaged option to plan and pay for health care expenses now and into retirement. Not only can an HSA help you work toward your overall workplace financial wellness goals, it can be a valuable benefit to help attract and retain workers. In addition, did you know that employer contributions may qualify for a tax deduction for the business? And, HSAs are generally exempt from ERISA (Employee Retirement Income Security Act) requirements, provided certain requirements are met.
Talk with us about how a Bank of America HSA can help meet your company’s goals.
Access resources available to help you and your employees better understand HSAs and maximize their benefits.
Download our white paper on how HSAs can be used as an additional source of retirement income to help cover health care costs.
Review the findings from our 2019 Workplace Benefits Report to learn more about the role health care costs play in financial wellness.
1 About Potential Tax Benefits: Participants can receive federal income tax free distributions from their HSA to pay or be reimbursed for qualified medical expenses they, their spouses or dependents incur after they establish the HSA. If they receive distributions for other reasons, the amount they withdraw will be subject to federal income tax and may be subject to an additional 20% federal tax. Any interest or earnings on the assets in the account are federal income tax free. Amounts contributed directly to an HSA by an employer are generally not included in taxable income. Also, if participants or someone else makes after-tax contributions to their HSA the contribution may be tax deductible. Certain limits may apply to employees who are considered highly compensated or key employees if the employer makes contributions to the HSA or the employee makes contributions through payroll deductions. Bank of America recommends employees contact qualified tax or legal counsel before establishing an HSA.