For most employees, access to affordable healthcare coverage is the most important benefit provided by an employer outside of their paycheck. But with the cost of healthcare rising twice as fast as wages and three times faster than inflation overall, employers are struggling to keep their healthcare plans affordable for workers and their families.
Many employers have slowed the increase in insurance premiums through the use of high-deductible health insurance plans (HDHP) that include tax-advantaged Health Savings Accounts, or HSAs, for employees. In this article, we’ll define what is an HSA account and explore how HSAs could provide a valuable tool to help keep employees both physically and financially healthy.
What is an HSA insurance plan?
The IRS defines a high-deductible health plan as: “any plan with a deductible of at least $1,400 for an individual or $2,800 for a family.” Additionally, the Affordable Care Act requires that an HDHP’s annual out-of-pocket expenses for in-network qualified medical expenses (deductibles, copayments, and coinsurance) cannot exceed $6,900 for an individual or $13,800 for a family.
To help consumers compensate for the cost of a higher deductible, the government established a special form of health savings account (HSA). Employees can set aside money on a pre-tax basis to pay for qualified medical expenses, but not insurance premiums.
How common are high-deductible health plans?
HDHPs became common after passage of the Affordable Care Act as businesses positioned coverage options to avoid the 40% “Cadillac Plan” surcharge for high-end plans. That tax was repealed, but employers continued to pursue HDHPs for cost containment. Today, they’re one of the most common health plan options offered:
-
36% of all covered employees chose a high-deductible plan eligible for an HSA this year.
-
13% of covered employees face annual deductibles of $3,000 or more.
HSAs offer three types of tax advantages
One exceptional benefit of saving in an HSA is that the money employees put into the account is tax advantaged in three different ways:
Contributions are deducted from the paycheck before tax, lowering taxable income and reducing employees’ income tax burden. These deductions also do not incur FICA tax.
Funds in the HSA account can be invested to grow tax-free.
Both the original contributions and any additional funds earned through growth can be spent on qualified medical expenses without paying any taxes on withdrawal.
HSAs contribution levels increased for 2020
Next year, employees can put more pre-tax savings into their HSA accounts thanks to increased contribution limits from the IRS. 2020 contribution limits will be as follows:
-
Individual – $3,550
-
Family – $7,100
-
55+ catch-up provision – older employees can contribute an additional $1,000 on top of these limits to either individual or family accounts.
Two reasons employers should contribute to HSAs
There are two great reasons why employers should consider contributing to employee HSAs. First, when an employer offers an incentive contribution, employees may be more likely to opt for the high-deductible plan. This helps businesses keep rising healthcare costs in check. Second, when an employee makes pre-tax contributions, the 15.3% FICA payroll tax is not owed. Since the company pays half of the FICA cost, savings will add up for employers.
HSAs make a powerful savings and investment tool
HSA accounts are not just useful for people with serious medical conditions–they are one of the most powerful investment vehicles because of their triple-tax advantage.
When funds build up in an HSA, money can be invested in stocks, ETFs, mutual funds and bonds. As these savings grow, the account owner does not incur any capital gains or dividend taxes.When spent on medical costs at any time through one’s life, withdrawals are tax free. That’s a powerful incentive, considering that Fidelity projects a 65 year old couple will need to save $285,000 to cover medical expenses through retirement.
It is possible to withdraw HSA funds for non-medical purposes, but not recommended. Account holders under the age of 65 will incur a 20% penalty for withdrawing the money for non-medical expenses, and they will owe income taxes. At age 65, only income tax is owed.
An HSA provides employees with a way to reduce tax burden, invest for the future, and pay for both current and future medical expenses. Asure Employee Benefits Services can set up and administer HSAs and other benefits, while ensuring full compliance with IRS regulations, so your company can deliver a competitive benefits package.