As the cost of healthcare zooms upward, many employers are shifting to high deductible health plans (HDHPs), which include a lower monthly premium and, as the name implies, a higher deductible. In 2016, 29% of all insured employees were enrolled in HDHPs—an increase of 9% since 2014.1 Often, employers offer Health Savings Accounts (HSAs) along with HDHPs to enable employees to save money tax-free for qualifying medical expenses.
However, HSAs are often underutilized by employees, who may not understand the full benefit of this type of healthcare spending account. And now, there’s a greater imperative for understanding how HSAs work. The proposed Republican plan for replacing the Affordable Care Act significantly expands HSAs.2
To date, employees have largely viewed HSAs as a short-term savings solution—similar to a medical Flexible Spending Account (FSA)—that offsets qualifying medical expenses until they reach their deductible. Importantly, there are a number of differences between FSAs and HSAs, and employers should be prepared to help employees understand those details.
Retiring employees may not realize that HSA $$$ can be spent on Medicare premiums.
HSAs can be rolled over from year to year, similar to a 401(k). And like other retirement savings plans, HSAs can reduce employees’ tax liability and help them save money for retirement.
There are three ways employees can save on taxes with an HSA:
- Contributions are tax deductible and are typically deducted during payroll.
- HSAs are investment accounts, so earnings are tax-free.
- Withdrawals for all qualifying medical expenses are also tax-free.
29% of all insured employees were enrolled in HDHPs—
an increase of 9% since 2014.
When financially feasible, it’s ideal for employees to max out their contributions. This pool of money can become a nice complement to any 401(k) savings an employee has built up. The limits for 2017, including employer contributions, are:
- $3,400 for self-only coverage
- $6,750 for family (a family is considered two or more people on the plan) coverage
Similar to the 401(k) catch-up contribution provision, employees age 55 or older can contribute an additional $1,000 to healthcare spending account each year.
Employees may not realize that there is no age requirement to begin withdrawing HSA dollars, though you can no longer contribute when you reach age 65 and become Medicare eligible.
Though this money is meant to offset deductibles and related qualifying medical expenses, if at all possible, employees should hold onto the money and pay for those expenses out of pocket and use this bucket of cash to supplement their retirement. After all, the future of Social Security is uncertain, as are the market conditions that impact 401(k) plans.
Employees sometimes need a nudge when it comes to creative saving strategies. It’s up to employers to help them develop saving strategies. One strategy might be to calculate the difference in premiums for the HDHP compared to a PPO (which is usually more expensive), and urge employees to save the difference in an HSA account.
If the employer also contributes 25-50% of the HDHP deductible to HSA accounts, another strategy is to encourage employees to contribute the balance of the deductible. Providing access to an online HSA Calculator can be an effective tool to help model contributions.
Tips for Employees After They Retire
After retirement, withdrawals for qualifying medical expenses remain tax free, so it makes sense for employees to prioritize money for those purposes. However, it’s important to remember that tax brackets also come into play. In many cases, employees are in a lower tax bracket in retirement, which provides savings even when money is withdrawn for other expenses.
Many employees don’t realize that in retirement their HSA dollars can be spent on premiums for Medicare parts A, B and D; long-term care; dental care, contact lenses and many other health-related items.
When planning for an HSA, beyond the contribution amounts, it’s wise to designate a beneficiary. In the event of your employee’s death and if the beneficiary is their spouse, they take ownership of the account and can use it as their own. Otherwise, the money is included in the estate and becomes taxable.
Your employees may see HSAs as a way to help meet a deductible in the short-term, but educating them on using it for retirement can help them build a better retirement plan.
1 Kaiser Family Foundation, “Average Annual Workplace Family Health Premiums Rise Modest 3% to $18,142 in 2016; More Workers Enroll in High-Deductible Plans With Savings Option Over Past Two Years”
2 The New York Times, “The Parts of Obamacare Republicans will Keep, Change, or Discard”
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