So many health & welfare benefits acronyms, so little time to understand them. How to help your employees decipher the difference between HSAs and HDHPs.
High Deductible Health Plans (HDHPs) with Health Savings Accounts (HSAs) are becoming more popular as benefits consumerism increases throughout the country. Enrolling your employees in HDHPs is one way to educate them on the true cost of healthcare. And if they use an HSA correctly, it can help them better manage their medical expenses, and yours.
But understanding how an HDHP works and ensuring your employees will get the most out of an HSA can be tricky.1 And choosing a benefits plan is stressful because it’s a decision that will impact them for a long time. This is further complicated by the trend toward rising employee contributions and the issue of escalating healthcare costs. Employees are taking on more cost share and the plan sponsor has a responsibility to do a better job of educating them to make the best decision at open enrollment.
We all know how an HSA benefits the employee:
- Just like a retirement plan, HSAs can be funded with pre-tax money.
- Employees can choose how much they want to contribute each pay period and it’s automatically deducted.
- Employers can also contribute funds to an HSA until the limit* is met.
*In 2017, the employer and employee contribution limit for individuals is $3,400; for families it is $6,750. If an employee is over 55, they can contribute an extra $1,000.2
How much an individual or family contributes to an HSA is up to them. They should budget for medical expenses. However, your employees should also know that unlike a Flexible Spending Account (FSA), funds in an HSA roll over from year to year.
The devil is in the details: discuss tax-time changes
Employees using HSAs will see an extra number or two on their W-2s and receive additional tax forms.
- The amount deposited into the HSA will appear in Box 12 of the W-2.
- Employees may also receive form 5498-SA if they deposited funds in addition to what has been deducted via payroll.
- Employees must submit form 8889 before deducting contributions to an HSA. On the form they’ll have to include their deductible contributions, calculate the deduction, note what you’ve spent on medical expenses, and figure the tax on non-medical expenses you may have also paid for using the HSA.
- Employees will receive a 1099SA that includes distributions from the HSA.
Importantly, most tax software walks employees through these steps.
A lot of confusion surrounds HSAs because they’re yet another acronym that employees have to remember when dealing with their health & welfare benefits (more on that later). Here are a few myths you should work to dispel:
- Funds are “use it or lose it.” Unlike an FSA, funds in an HSA never go away. In fact, they belong to an employee. So even if they go to another job, they can still use the HSA to pay for medical expenses tax-free.
- HDHPs with HSAs are risky. There are benefits to choosing an HDHP with an HSA for both healthy people and those with chronic illnesses. Healthy people benefit from low HDHP premiums and can contribute to an HSA at a level they’re comfortable with. On the other hand, people with chronic illnesses will likely hit their deductible each year; after that time, medical expenses are covered in most cases.
Help employees understand they’re in control
High-deductible plans with an HSA might seem intimidating, but they put employees firmly in control of their healthcare. This is increasingly important in today’s insurance landscape. When employees choose an HSA, healthcare becomes more transparent. They can shop around for services and find the best deal for services before they make a decision.
Users can cover medical costs as they happen or collect receipts and get reimbursed later. Finally, employees don’t have to worry about sending in receipts to be reviewed. This means they must be responsible for using the funds the right way, or face tax penalties.
When you’re ready to talk to employees about HSAs, resist “insurance speak”
As an HR professional you may not realize how much benefits jargon you use every day. After all, you deal with health & welfare benefits all the time, so using industry terms is second nature. Jargon, especially the alphabet soup of insurance acronyms that I mentioned earlier, is confusing to employees.
One tip is to spell out acronyms on the first reference. Second, simplify the explanation by shortening sentences so that anyone can understand it.
Here’s an example of a way to introduce an HSA:
A Health Savings Account, also called an HSA, is a tax-free savings account. An HSA helps you cover healthcare expenses. You can use the money in your HSA to pay medical, dental and vision costs for yourself, spouse and dependents who are covered by your health plan. You can use HSA funds to pay for non-medical expenses, but you will have to pay taxes on them…
You get the idea.
As responsibility for health & welfare benefits continues to shift to employees, they may need more education in small chunks over time to reinforce their knowledge. As the employer, it’s in your best interest to help employees choose the best plan and use it the right way.
- HSA, HRA, FSA: Interpreting the Alphabet Soup of Healthcare Spending Accounts
- What’s Next for American Healthcare? A Greater Focus on Insurance Consumerism
- VIDEO: IRS Sets HSA/HDHP Limits for 2018
© 2017 Corporate Synergies Group, LLC. No part of this material may be republished or distributed without prior written consent.