Why HSAs Could Be Your Company’s Health Care Solution
The Health Savings Account (HSA) market is growing—and it’s likely to be on your company’s benefits radar soon if it isn’t already. A 2016 report from America’s Health Insurance Plans shows the number of enrollees in such plans has reached 20.2 million nationwide, reflecting 3.4% growth since 2015. (1)
Not only is the popularity of an HSA benefit easy to understand in light of rising health care costs, but employers are also recognizing that financial and physical wellness are linked. In fact, Aon Hewitt’s 2017 report “Hot Topics in Retirement and Financial Wellbeing” showed nearly nine in 10 companies are either very likely or moderately likely to communicate that concept with employees this year. (2)
An HSA can address both physical and financial needs at the same time by helping employees contain their medical costs and save money. Let’s look at the ways an HSA can benefit your entire team.
A Higher Deductible Means Big Savings Overall
If that sounds counterintuitive, think about the purpose of an HSA. It’s an account designed to replace traditional policies and avoid big medical expenses in the long term. An HSA is usually paired with a high-deductible insurance plan (HDHP). Although HDHP plans have higher deductibles than usual, they can save participants a lot of money through lower premiums and the ability to cover anything beyond the deductible. To see how this works, let’s compare an HDHP to a traditional plan using an example of a typical married couple who are both 30 years old, one of whom is your employee.
With a traditional 80/20 insurance plan, this couple will have a $1,000 deductible for about $250 a month. The low deductible may be appealing, but it also carries a higher premium than an HDHP. And in the event of a major medical problem, the 80/20 couple will pay not only the deductible, but also 20% of the costs up to the stop loss.
On the other hand, an HDHP will often pay 100% once the deductible is met and will typically have a far lower premium. The potential savings with an HSA are huge, even after the deductible is met.
Your Employees Have More Control of Their Money
An HSA is also a great way to give employees a sense of what the worst-case scenario would be financially because there’s an annual limit to how much they’ll owe. For example, a self-only HSA has a minimum annual deductible of $1,300. Once your participant knows the maximum they’ll need to pay in a given year, they can budget around that limit and have one more item checked off their list. It affords them the peace of mind that comes from being insured while avoiding the higher costs of traditional plans. Since most medical costs are less than $5,000, HSA premiums are much less than a traditional plan.
HSAs are especially helpful for younger workers (who may have a combination of good health with high debt) because their needs for medical care are likely less. Plus, they will certainly appreciate lower premiums! Having a clear idea of how much money they’ll need for medical costs removes a lot of fear and worry and makes for easier budgeting— which can translate to a healthier, happier team.
It’s a Smart Investment
About those premiums. One of the smartest features of an HSA is that it gives employees the ability to save up premiums and invest them in mutual funds. It’s a lot like the health care version of a 401(k). And unlike traditional insurance policy premiums, HSA payments don’t disappear in a pool of beneficiary funds when they go unused. Instead, they remain in a personal account that can grow. This has several financial advantages for your employees including:
- Money paid to the account grows tax-deferred
- All funds can be used to cover deductibles or other medical expenses
- Employees can put up to $3,400 a year in a self-only account, and up to $6,750 in a family account (3)
- Employees 55 years of age and older have the option of making up to $1,000 in catch-up contributions annually (4)
- As long as the employee uses it for medical purposes, they’re never taxed on it
- Annual contributions can be rolled over from year to year and continue growing tax-free
What Your Employees Need to Know About Taking Advantage of an HSA
The timing of when your workers enroll in an HSA can make a critical impact on their long-term financial results. Here are a few things to be sure you communicate to them before they get started with this benefit.
- They need to make debt elimination their top financial priority. Prematurely investing in an HSA won’t do your employees a bit of good if they’re draining it to cover consumer debt payments. There are also heavy penalties associated with nonqualified expenditures that we’ll discuss below.
- It never makes sense to invest without a proper emergency fund in place, and this rule includes investing in an HSA. When employees start an HSA without first saving up three to six months of living expenses, something bad happens—they treat the HSA like an emergency fund. Living without an emergency fund is not only naïve, it’s also expensive. For one thing, premature and unqualified withdrawals defeat the goal of growing HSA funds with compound interest. In addition, there are penalties and taxes involved when withdrawals are made. Employees should use their emergency funds to cover minor doctor’s office visits and reserve the HSA for deductibles and other qualified costs. Even if your company offers to match your employees’ investments, coach them on the primary need to have an emergency fund in place before starting an HSA.
- Although an HSA is a type of savings account, the key word here is health. For employees under 65, there is a 20% penalty assessed for using HSA funds to cover nonqualified expenses. That’s a pretty big hit, so it’s much better to treat the HSA like a 401(k) than an emergency fund. Taking out loans or early withdrawals on your retirement savings is obviously a bad idea, and dipping into an HSA for nonqualified events is just as foolish.
- In addition to the penalties, nonqualified expenditures are subject to income tax. Employees would be better off finding any other way possible to cover their expenses.
- The HSA is not an ideal solution for those with chronic illnesses because of the higher costs their conditions can bring. When considering this approach to health care, be sure employees take all factors into account, including their age and current level of health.
Offering an HSA benefit is a win-win proposition for your business because it enhances financial wellness for both you and your team.