Stephanie Dwilson

HSA Primer: How to Use This Essential Tool

The idea of using a health savings account (HSA) may sound overwhelming at first. HSAs can be a great investment and come in handy when your employees need help with health care costs, but some of your staff may feel intimidated by a concept that feels foreign to them. Since HSAs work so differently than a typical health care plan, there’s a learning curve before staff can really take advantage of one. This primer will help you understand the basics of how health savings accounts work, so you can better help your employees understand and use them.

What Is It?

In basic terms, an HSA holds tax-deductible contributions from your staff to pay for current and future medical expenses. You can also contribute to your staff’s accounts if you want, and your contributions will count as business expenses. Anything in the account that isn’t used grows tax-free. Typically, HSAs work like traditional 401(k)s with employees’ contributions taken out of their paychecks before taxes, according to CNN. If employees get their own account outside of work, they just need to deduct their contributions from their gross income on their tax return to get the same benefit.

The big draw of this type of account is it helps with taxes in a few ways: contributions are deductible, the money isn’t taxed as the account grows and money can be withdrawn tax-free if used for specific purposes.

However, there’s one catch: Not everyone can open this type of savings account, Kiplinger noted. A person’s insurance must be a high-deductible, HSA-eligible plan. This gets a little complicated, but essentially the policy must have a deductible with a floor of $1,300 for individuals and $2,600 for families. In addition, the health plan should have the same deductible for everything, besides preventive care. If it has a separate deductible for prescriptions, for example, it won’t qualify. As an employer, consider talking to your broker to find out if the plans you offer qualify for this specific account. Then let your employees know which plans qualify, so they don’t miss out on starting this savings account if it’s an option for them.

What Can You Put Into the Account?

HSAs have guidelines for how much anyone can contribute. Employers and their staff can’t simply put as much money in them as they might want. If a person only has individual coverage, they and their employer can only contribute a total of $3,400 a year. If they have family coverage, up to $6,750 can be contributed a year, Kiplinger noted. A policyholder who’s 55 or older can contribute an additional $1,000. Employees with HSAs have until the tax deadline to make contributions for the year they’re filing taxes. But note: Anyone who signs up for Medicare can’t contribute to their HSA anymore.

How Can the Money Be Used?

A big benefit of an HSA is that employees can take the money out when needed and it isn’t taxed as income, as long as it’s used according to the rules, CNN reported. For example, the funds can be used for out-of-pocket medical expenses, including deductibles and co-payments. You may be surprised to learn that these funds can be used on health bills that insurance may not cover, such as vision and dental. These account holders can even wait until after they retire and use the funds for certain Medicare payments. Talk to an insurance professional for details on how the Medicare part works, as it can be a bit complicated.

Your employees also have the option of using their funds for non-medical purposes, but they should avoid that unless it’s absolutely necessary. If someone withdraws funds for anything but a qualified medical expense and is younger than 65, they’ll have to pay both a penalty amounting to 20 percent of the total account and an income tax on the funds. If that person withdraws the funds when they’re 65 years of age or older for a non-qualified expense, they’ll still be taxed on the money but won’t get hit with the 20 percent fine. In addition, if an employee leaves her job or changes insurance plans to one that isn’t HSA-eligible, she can still take the account with her and use the funds, CNBC explained.

Anyone who qualifies for this special savings account can open one at many banks or brokerages. As an employer, you can make this even easier by offering these accounts as a benefit with qualifying high-deductible health plans. You can make using your accounts more tempting by offering incentives, such as contributing to your staff’s HSAs or adding bonuses for participating in wellness programs. Any contributions you make as an employer count as business expenses, so talk to your insurance broker about whether offering HSAs is good for your company.

Stephanie Dwilson has extensive experience providing expertise on topics including health, law and marketing. She’s a science journalist published by Fox News, a marketing expert and a non-practicing attorney with experience in personal injury law. She’s also a small business expert featured by Businessweek and has worked as a PR lead for one of the largest churches in America.