For better or worse, high deductible health plans (HDHP) are becoming increasingly common, especially among Americans with employer-based health coverage. Though a HDHP means employees pay a lower premium each month, the amount they have to pay before their insurance kicks in is a lot higher than with a traditional health plan.
Many Americans are already worried about how they're going to afford care. That's where health savings accounts, better known as HSAs, come in. A special kind of tax-exempt savings account, HSAs make it easier for people to meet the financial demands of higher deductibles (and rising healthcare costs) without wiping out their bank accounts.
What does HSA stand for?
HSA stands for health savings account. An HSA isn't just any savings account, though. It's a type of savings account that allows for money to be put aside, pre-tax, that you can later use to pay for qualified medical expenses.
Sounds simple, right? But you're not alone if you're still unclear about what an HSA is and how it works — the topic is pretty complex. There are many requirements surrounding HSAs: who can have one, what the money from an HSA can be used for, and how an HSA can be used as an investing tool, among other nuances. Let's break it down even further.
How does an HSA work?
An HSA allows employees to make contributions with pre-tax dollars to a savings account that they can use, now or later, to cover healthcare costs. As the benefits manager offering a high deductible health plan, you should be able to set up an HSA for your employees, and they choose how much pre-tax income to contribute each time they get paid. Each year, the government determines a maximum HSA contribution limit. This means that throughout the year, they can't contribute more to their HSA than this set amount.
Many employers also contribute a set amount to their employees' HSAs or match their contributions, up to a certain dollar amount. It's important to know that the contribution limit is aggregate, meaning that you plus your employees (or anyone else contributing funds) cannot exceed the federal limit in a given year.
Once your employees have funds in their HSA, they can use them for any qualified medical expenses. This is helpful for many people because it allows them to save money just for healthcare expenses — and your money can go up to 30% further due to tax savings, which helps your overall medical spend . Ideally, the amount saved in their HSA will be equal to or greater than the amount of their deductible. In that case, by the time they've met their out of-pocket maximum, employees will see their insurance kick in and cover the rest.
What are the qualifications for an HSA?
In order to qualify for an HSA, employees must have an HDHP. Each year, the federal government determines a minimum threshold that must be met by deductibles to be considered an HDHP. There's a different threshold for individual plans and family plans.
In addition to having an HDHP, the Internal Revenue Service (IRS) states that in order to qualify for an HSA, employees must:
- Not be covered by other health insurance
- Not be enrolled in Medicare
- Not be eligible to be claimed as a dependent on someone else's tax return
What can employees pay for using an HSA?
The IRS determines what can and cannot be used by an HSA to pay for. In general, the restrictions are pretty relaxed, allowing the HSA to pay for anything that's a “qualified medical expense,” including:
- Health plan co-pays
- Prescription drugs
- Dental work
- Eyeglasses and contact lenses
- Surgery, therapy, and counseling
- Vaccinations and other preventive care
This list is by no means comprehensive—the line between what is and isn't a “qualified medical expense” is often blurry. HSA funds can also be used for children's or spouse's qualified medical expenses, even if they aren't covered under one HSA-eligible health plan.
Should employees withdraw money from their HSA for non-medical expenses?
Employees can withdraw money from their HSA for any reason. A better question to ask is, should they? When employees use the money for anything other than a qualified medical expense, they'll face tax penalties. This means that using an HSA for non-medical expenses, will result in having to pay taxes on the amount spent. If an employee is under age 65, they'll have to pay a 20% penalty on top of that.
Once an employee is over age 65 they can use their HSA for other expenses. While they will have to pay the taxes on those expenses they will incur no additional penalty.
What are the benefits of having an HSA?
HSAs are designed to help lower the overall cost you'll pay for healthcare in a given year. There are a lot of advantages to having an HSA, including:
- The money in an HSA rolls over year after year for employees.
- An HSA balance can be invested.
- HSA's are transferable from jobs, health plans, and even into retirement.
- As an employer, you can contribute to the HSA, which helps fit to an employee’s needs.
- HSAs have triple tax benefits for your employees because they contribute pre-tax dollars to their HSA, their contributions made with after-tax dollars can be deducted from their total income on tax returns, and they’ll owe less to the IRS come tax time.
How can you get an HSA?
There are a lot of different kinds of HSA vendors out there. But not many combine industry expertise, data, and guidance to ensure that HSA contributions make an impact beyond your employees’ wallet, and your healthcare budget. To learn more about our HSA feature, click here.