How to Make the Most of a Health Savings Account

Do your employees have $220,000 or more stashed away?
That’s how much it’s estimated a 65-year-old couple retiring in 2015 would need to cover out-of-pocket medical expenses for the duration of their retirement — and that’s not including nursing home care. Encouraging employees to invest in health savings account benefits can be a smart way to ensure they’re prepared for the future.

A recent report by Benefitfocus found that health savings account (HSA) participation (of those offered the choice of an HSA plan) has increased from about 50 percent in 2017 to over 80 percent this year. People in every age group are increasingly using these tax-favored accounts to cover their health costs. Here’s what you and your employees need to know to make the most of this trend.

HSA Benefits and Misconceptions

Simply put, HSAs are savings vehicles available to U.S. taxpayers who are enrolled in a high-deductible health plan (HDHP or CDHP, consumer-driven health plan.) HSAs contributions can come from the employee or the employer — up to $3,450 annually for individuals, $6,900 for families — though funds must be spent on qualified medical expenses to avoid penalty.

According to the Internal Revenue Service (IRS), some benefits of contributing to an HSA include:

  • Contributions to the account may be excluded from gross income
  • Interest on the account is tax-free, as are withdrawals for qualified expenses
  • Funds remain in the account until used, even when the holder changes employers or leaves the workforce

While the growing popularity of HSAs may be an indication that employees are seeing their value, not everyone understands how HSAs function. The most common mistake employees make about health savings account benefits is assuming that an HSA operates like a flexible spending account (FSA) — or thinking they’re the same thing. While both of these accounts are for health care savings, how each one handles contributions differs. With an FSA, if the participant doesn’t use the money in the account before the annual deadline, they’re likely to lose those funds. By contrast, participants may keep HSA balances for as long as necessary, making them attractive options for long-term or unpredictable health care needs. Annual FSA contribution limits are capped at $2,650, and once you choose an amount to contribute, your ability to change it is limited.

Employees may also confuse HSAs with HRAs or health reimbursement accounts, which allow employers to pay for copays and deductibles. Unlike HSAs, these accounts do not necessarily have to be paired with high-deductible health plans, and employees must forfeit unused funds.

How Can Employees Make Sure They’re Using Their HSAs Wisely?

To help your employees take full advantage of their HSAs, start by making sure they know the full range of health savings account rules. While providing articles or other educational content is a good idea, an even better bet is to host an in-person meeting or workshop where employees can have questions answered in real time by you — or a guest expert like an insurance broker.

From there, encourage your employees to think beyond saving for high deductibles and short-term medical expenses. The unique benefits of HSAs mean they can be attractive retirement savings vehicles. Stashing more money in the account before age 65 doesn’t just give your employees’ money time to grow; at that point they can take money out for any reason with no penalty (though they’ll still owe income taxes).

In addition, many people don’t realize that HSAs can also be invested in stocks or mutual funds to grow their money even further. Participants considering this route should ask a personal financial adviser not only about the benefits but also about the potential risks and red tape, including minimum balance requirements and fees, which can cut into earnings.

Choosing to jump on the HSA trend can be a difficult decision for employees: Should they take money out of their paycheck to save for potentially unknown medical needs, or should they keep that money available for today’s myriad other expenses? You can play an important role by helping them understand how their HSA fits into their wider wellness and financial goals.

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