Despite their advantages, Health Savings Accounts are underused, according to a recent study by employee benefits consulting firm HelloWallet. Informally known as HSAs, these tax-advantaged savings accounts tied to high-deductible health insurance plans (HDHPs) are increasing in popularity among employers attempting to provide affordable healthcare coverage to employees.
HSAs allow holders to save tax-free money for medical expenses not covered by insurance. Contributions are made into such accounts by employees and/or employers, and unused funds roll over from year to year. The contributions are invested, earning returns over time, thanks to the power of compound interest. Funds can be removed tax-free to pay for qualified medical expenses, including vision and dental.
Despite the fact that HSA accounts are tax deductible for employers and employees, grow tax-free and feature tax-free withdrawals, they aren’t as widely used as you might think. Part of the reason for that is “due to the market driving premiums up on HSA qualified plans,” says health insurance agent and registered employee benefits consultant Paula Wilson. “It used to be a great idea for every small-business owner to offer HDHPs/HSAs, but now knowing whether to do so requires examining on a case-by case-basis. Sometimes it’s an excellent idea, and sometimes it’s not.”
When an HSA Makes Sense
For small-business owners wishing to lure specialized, in-demand employees, an HSA plan can be a big draw. “If you want to attract high-caliber employees, an HSA offers a way to do so without busting your budget,” says Wilson, a former board member of the National Association of Health Underwriters. “If you fully fund your employee's healthcare premiums and contribute to their health savings accounts, you provide them with affordable healthcare that is also a tax deduction for your company.”
The perks are many for the employees and small-business owners themselves, who can use the tax-free money in the HSA account for a wide variety of health-related expenses, including co-pays, dental and orthodontic care, prescriptions, eyeglasses, contacts, corrective vision surgery, acupuncture, chiropractic, smoking cessation, hearing aids, physical therapy, mental health, nursing home care and COBRA payments.
If a person remains fairly healthy and doesn’t need to withdraw money, it rolls over from year to year and can grow into a substantial tax-free, medical care nest egg, Wilson adds: “The original idea of HSAs was for people to continue to contribute to them tax-free so that they would have funds later on for more serious health conditions or long-term care expenses.” If a person remains well into advanced age and doesn’t use the funds, the money can be removed and taxed at his or her income level after age 65 without penalty.
For your small business to qualify for a high-deductible health insurance plan, you must have at least two employees, including yourself and someone who's not a spouse. Your company must also pay at least 50 percent of the health insurance premium. (An 80/20 split between the employer and employee is common.) As an added perk for your employees, you can choose to contribute to their health savings accounts, but that's not a requirement.
There's an annual out-of-pocket deductible for HSAs that must be met each year before insurance begins to pay. For 2015, it’s $1,300 for individuals and $2,600 for families. The annual maximum out-of-pocket liability is $6,450 for individuals and $12,900 for families—at which point insurance pays 100 percent of costs. And annual contributions are up to $3,350 for singles and $6,650 for families, with individuals 55 and older allowed to make an extra $1,000 catch-up contribution.
Educate Your Employees About HSA Benefits
Vivian Ciampi, a professional certified coach who worked for a large employer for 20 years prior to opening her own business two years ago, believes that HSAs/HDHPs are underused because of a lack of awareness about their many benefits.
“Health Savings Accounts were offered by my former employer, but you typically had to sift through manuals to really understand the benefits,” says Ciampi, who has an HSA plan for her company. “It behooves employers to hold seminars on this subject so that employees truly understand the benefits of what they could be saving by opening and optimizing an account like this. In today’s age of information overload, benefits such as these really need to be highlighted and made easy for people to understand and use.”
To see if a HSA plan is right for your company and employees, consult with a health insurance agent for an assessment.
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