What (and why) is a Health Savings Account?
“So… what exactly is an HSA?”
You look up from the email you were just scanning. The question came from across the room at the small table in your office, where you have new employees sit during their onboarding. In fact, that’s where the question came from — a young employee who has just started at the company and is filling out some paperwork.
“Well,” you reply, leaning in across the desk, “a better question is, ‘what isn’t an HSA.’”
This is where the general “taskiness” of the onboarding process gets interesting for you. You’re about to turn around how this person looks at every doctor’s visit, pharmacy run and even chiropractor emergency for the rest of their lives.
Paying for medical expenses doesn’t have to come out of your bucket list travel fund anymore, you say to the new coworker.
“You use the HSA alongside the high-deductible health plan you’ve chosen, and it comes out of a pre-tax account that you contribute to every month,” you say.
“Usually, it builds up quite nicely over time, and you have that money to use whenever you need it. So everything from bandages to surgery, you can pay for with your HSA account card.”
You lean back to let it all sink in. They stare at you, and slowly say, “So… if I want to get LASIK eye surgery, for example…”
“Covered! You’ll be surprised at all of the things that are covered – outside of a facelift, you’re going to be using your HSA card for a lot of purchases,” you reply. “Plus, it’s your money. If you ever decide to leave the company, that HSA money goes with you.”
You smile, knowing that with HSA benefits like this, why would they ever want to leave?
The Value in an HSA
Is that onboarding narrative a little idealized? Sure. In reality, most employees you’re onboarding will know what an HSA is; they might even already have one from another employer.
But no matter what their level of experience with an HSA, your most important job is to make them understand the value. You’re going to get the most out of it by empowering your employees to make the most out of it.
Let’s start with the basics.
Take it to the limit
Your employees who decide to enroll in the company’s high-deductible health insurance plan (HDHP) can qualify for an HSA. This helps to offset the cost of their HDHP, and give them some tax benefits in the process.
For 2023, the IRS has set (for an individual) an HSA contribution limit of up to $3,850 or up to $7,750 for family coverage. For 2024, the IRS has set (for an individual) an HSA contribution limit of up to $4,150 or up to $8,300 for family coverage. For anyone 55 or older, they will be able to contribute an extra $1,000.
It’s important for your employees to know exactly what is covered by their HSA, because they will be responsible for verifying the eligibility of purchases themselves. A lot is covered, so sometimes it is easy to make assumptions. For example, gym memberships, while health-related, are not covered.
See the list of HSA eligible expenses.
5 reasons to offer employees an HSA
HSAs are a big investment, both in money (depending on whether or not you’re contributing) and in the time to get the offering up and running. If you need to sell the concept to the top brass, or to encourage employees to use the HSA program you’ve recently set up, start with these five reasons:
1. “Fund as you go” medical assistance
Even people who have been putting off their trip to the eye doctor (because they don’t have an HSA) can see the main benefit: it is a “fund as you go” account that they can use to pay for eligible medical expenses. This includes deductibles, copays and coinsurance, as well as other qualified medical expenses that aren’t covered by the medical plan.
Note: insurance premiums usually cannot be paid for with HSA funds.
2. “I am the master of my fate; I am the captain of my soul” – William Henley
Unlike many health accounts, once money is in an HSA, it belongs solely to the account owner, who has complete control over how to spend it. There is very little oversight or substantiation on thef part of the company.
It is the HSA account owner who is in charge of verifying purchases and ensuring they are within rules — administrators can provide guidance, but they cannot control how someone spends or utilizes the money.
Unlike a Flexible Spending Account, for example, your HSA balance rolls over from year to year, so you never have to stress about “use-it-or-lose it” deadlines. The account will also stay with its owner forever, even if the account owner changes jobs.
3. Investment potential for HSAs
One of the most underutilized advantages of HSAs (and admins, highlight this for your employees over and over again) is that a portion of the funds can be used for investments. We’re talking mutual funds, stocks and other investment tools, which can be used to amplify the HSA benefit into even more money.
If you don’t provide a 401(k) or IRA with a contribution or matching option, you will especially want to highlight this aspect of an HSA. It will help your employees grow their funds without relying on employer contributions to help the available amount increase considerably over time.
The long-term advantage is undeniable. There is risk with any investment, of course, but just like a 401(k) or a Roth IRA, the HSA investment return is shielded from long-term capital gains and dividend related taxes.
4. The rich get poorer … at least in the eyes of the IRS
One of the biggest benefits is that HSA contributions are pre-tax/tax-deductible. The money will grow in the HSA account tax-free, and when used, funds will come out tax-free as long as the guidelines are followed. This means that the money comes out of the account owner’s paycheck before they (or the IRS) even know it’s gone.
HSAs are a triple tax advantage — not subject to federal income tax, Social Security or Medicare taxes.
Employees may hear “pre-tax” and nod, but make sure they understand what that actually means for them. Because income is taxed after an employee makes their HSA contributions, if they make $50,000 per year and contribute the full $3,500 allowed in 2019, in the eyes of the government they’re making (and therefore only being taxed on) $46,500. So not only are they contributing to their financial future, but at the same time, they are lowering their overall tax burden.
The HSA is the most tax-advantaged investment option for medical expenses and retirement, and, unlike other retirement investment accounts, has no minimum required distributions at age 70.
When contributions roll into an employee’s HSA through their payroll deduction, it is tax-free, as discussed earlier. That means it is not subject to FICA (Federal Insurance Contributions Act), the federal income tax that goes towards Social Security and Medicare. That gives the employee 7.65% more into their HSA for 2019.
So while 401(k) and IRA contributions will avoid state and federal taxes, they are still going to be hit with that FICA tax.
This tax saving advantage extends to the employer too. Not only does the HSA have a lower administrative burden, but employer contributions to employee HSAs are tax deductible as a business expense.
5. You can’t afford not to
As HSA offerings become more and more common, top tier talent is coming to expect benefits such as an HSA plan from their employer. HSA research firm Devenir found that health savings accounts grew to over 31 million accounts in 2021, and those accounts held $92.9 billion in assets — a 26% increase over the year before.
Why are HSAs on the rise? Simply put, it’s a competitive economic environment. In light of the pandemic, employers are having to do more in order to attract talent, and to keep the talent they have. This isn’t a short-term trend, either — Devenir projects that the HSA market will exceed 36 million accounts by the end of 2023, holding over $131 billion in assets.
From Contributions to Distributions: Four Steps to Administering an HSA Plan
Step #1. Establish an HSA plan
No permission or authorization from the IRS is necessary to establish an HSA.
First, in order for your employees to be eligible to contribute to an HSA, they have to be covered under a qualifying HDHP with either self-only or family coverage.
Establishing an HSA is relatively easy. Once your employee becomes HSA-eligible through their HDHP, they can establish an HSA at any time on or after that date. State trust law determines when an HSA is established.
First of all, your employee will need a qualified trustee or custodian. Likely, as an employer offering an HSA, you are either in the process of, or have already selected an HSA administrator in the form of a company like Ameriflex, who can properly execute it. In this case, once you’ve submitted your employees’ HSA enrollments, your employees will be set up with HSA accounts through the HSA custodian.
An HSA trustee or custodian is an insurance company, bank, credit union, brokerage or other IRS-approved financial institution. Financial institutions that manage HSAs are also called HSA administrators.
Q: What is the job of an HSA trustee/custodian/administrator?
A: To hold HSA assets in a secure account.
Q: Can my employee request a different HSA administrator?
A: Yes. A qualified individual is under no obligation to keep their funds at one institution. If you have an employee request to transfer their funds, have them get in touch with the provider, who will handle the transfer. Your employees can also have more than one HSA. As long as the aggregate of their contributions doesn’t exceed the annual maximum contribution limit, they are free to have two, three, or more separate HSA accounts if they wish.
Q: Can an individual who is not HSA-eligible establish an HSA for a period of past eligibility?
A: Let’s say that one of your employees, Danielle, was HSA-eligible from January through June. On July 1, she becomes covered by her spouse’s non-HDHP plan, thus losing her eligibility. Can Danielle establish an HSA after she loses her eligibility but before the contribution deadline for her period of eligibility?
The period of eligibility = the due date (including extensions) of tax returns for the year.
The answer is not a straightforward one, as it depends on the HSA trustee or custodian. However, even if it is permissible, your employee is likely going to run into some issues. Many trustees and custodians screen HSA applications by asking if the person is currently eligible — meaning, currently covered by an HDHP. Many trust and custodial agreements will require a representation of current eligibility.
This type of issue is why you should encourage employees to open their HSA as soon as possible after becoming eligible. Not only will doing so maximize their opportunities, but it will avoid running into potential issues such as this.
Q: Can my employee and their spouse establish a joint HSA?
A: No. HSAs are individual trusts, so they cannot establish a joint account, even if they are both covered by the same HDHP. Married couples must share one family HSA contribution limit. If both spouses have their own HSAs with individual coverage, they may only contribute up to the individual limit.
Note: in a family HSA, the funds can be divided in any manner the couple likes – they can even allocate 100% of their combined annual contribution limit to one spouse.
Q: Do employer contributions have to be the same every time?
A: No. As part of your administration of the HSA, one of the first things you will need to do is decide what HSA contribution plan is going to work best for your company. You have a few options, all of which are just as valid as the other:
- Yearly or monthly lump sum payments
- Per pay period payment
- Matching an employee’s contribution
- Periodic lump sums
- None at all
The relative versatility for both employer and employee is one of the many reasons that they are a strategic benefit choice — HSAs are what you make of them.
Q: What is nondiscrimination testing?
A: HSA employer contributions are subject to Section 125 Cafeteria Plans, which means that employers are also subject to the IRS guidelines’ nondiscrimination component. This means that HSA plans cannot unfairly benefit employees who are more highly compensated — essentially, you can’t offer your Executive team a better HSA match than someone who recently joined the company in a lower level position.
All employees must have the plan options made available to them at all range of salary levels, and your employees should be seen to utilize the plan fairly evenly across income levels.
Q: Can I go ahead and establish an HSA for my employees?
A: Even with the best of intentions, this is likely a poor idea. According to the IRS, whether or not an employer can legally establish HSAs for its employees without the employees’ direct written consent is a matter of state law. If state law does not require the account beneficiary’s signature to create an effective trust or custodial account, then the employer could, in theory, establish HSAs for its employees without their consent (or even their knowledge).
However, while it may be legal in some states to create HSAs for employees without their consent, the practice may create problems — both personally with your employees and administratively. The account opening process is not only your best chance to educate employees about the program and get them excited to contribute, but you will get information about their eligibility as well.
Funding the accounts of employees who turn out to be ineligible can create significant administrative issues. For this and other reasons (including the ability to maintain uniform procedures across all states), trustees and custodians typically require employees to complete and sign an HSA trust or custodial agreement before accepting contributions.
HSA Beneficiary Designation Form
When establishing an HSA, your employees will be asked to complete a beneficiary designation form. This is one of those “hope you never need it, but you need to do it” situations. In the event of the HSA account holder’s death, the balance in the account will be passed on to the beneficiary or beneficiaries they have named.
You are able to name more than one person as beneficiary as long as you designate a percentage. For example, you can name your husband and mother as 50/50 beneficiaries of your HSA. It is important to understand, however, that only a spouse beneficiary can receive a nontaxable transfer of the HSA balance.
Don’t let an ex benefit from your success: It’s a common slip up. During a life event like divorce, or the death of a loved one, your own HSA beneficiary designation is an easy thing to forget. But it is incredibly important to update your beneficiary after an affecting life event, to ensure your account will transfer to the proper person.
Step #2. When, and How Much?
Helping an employee set their contribution rate
Once your employee has established an HSA, the next step is to determine the maximum amount they can contribute, and when those contributions can be made.
When helping your employees set their contribution limit, you’re going to want to highlight a few points for them:
- Their contribution is limited by the maximum contribution amount for the year, depending on if they’re single or using family coverage
- Someone who is HSA eligible the full year can only contribute 1/12 of the overall coverage maximum each month, because the limits are applied on a monthly basis
- The full-contribution rule is a special rule that allows someone who is only HSA-eligible for part of the year (December 1 is the cut-off) to contribute the full amount
- An additional annual “catch-up” amount can be contributed for anyone who is 55 or older by December 31
Q: Do I have to contribute to my employees’ HSAs?
A: No. Although contributing to an employee’s HSA is not required, it will certainly increase participation if the company does decide to contribute to it. More employees participating means more tax savings.
Step #3. Helping Linda from the Corner Cubicle Become “The Wolf of Wall Street”
Choosing Investments for HSA Funds
Once HSA account holders have a certain balance built up in their accounts, they generally may choose how to invest the money they’ve accumulated which exceeds that threshold amount. For example, if their account custodian requires they have $2,000 in their account before they can invest, every dollar built up over that $2,000 is a dollar that can be invested.
This is the intimidating part of having an HSA – sure, your employees are getting a huge benefit just by sitting back and letting the funds accumulate. But for those who want to do more, it is well worth your time to educate them on the basics of channeling their inner “Wolf of Wall Street” (all of the investing savvy, none of the ethics violations) and working their HSA for all of its capabilities.
Typically, that money is invested in mutual funds, stocks or bonds. Here are some things you can’t use an HSA for — investing or otherwise:
- Life insurance contracts
- Collectibles (art, antiques, gems, stamps, etc)
- Collateral/security for a loan
- Borrowing or lending of money
If an employee does use their HSA for any of these prohibited transactions (other than pledging his or her HSA as security for a loan), then the HSA would be disqualified and terminated as of the first day of the taxable year in which the transaction occurred. They are then taxed as if the entire balance of the HSA were distributed on the first day of that taxable year.
The exception is if the account holder uses their HSA as security for a loan. In that case, the pledge would be a prohibited transaction, but the specific sanction for that misuse of funds is that only the amount pledged (not the entire HSA account balance) would be treated as a taxable distribution.
Step #4. Answering Employee Questions
Inevitably, your employees are going to have questions. The more they use and utilize their HSAs, the more questions they will have. Here are some of the most common questions that come up as employees begin using their HSA funds:
Q: What if I accidentally use my HSA debit card for a non-medical expense?
A: If an HSA owner withdraws money to pay an expense that he or she reasonably, but mistakenly, believed to be a qualifying medical expense, they can avoid tax consequences by returning the funds to the HSA before Tax Day (generally, April 15) of the year in which they discovered the mistake.
HSA owners are solely responsible for reporting their distributions and medical expenses to the IRS, and substantiating them. Substantiating employee expenditures is not the job of the HSA administrator or contributing employer. If any portion of the HSA account owner’s total distributions does not meet all the requirements for spending HSA funds, the HSA owner must include that portion as taxable income; they will likely be required to pay a 20% penalty.
Senior Skip: If the HSA owner is aged 65 years or older, they are not subject to the 20 percent penalty on any HSA distributions. This is also true if the HSA account owner becomes disabled.
Q: If I invest my funds, can I still use them to pay medical expenses?
A: Yes. Check with your account custodian for their specific policies on moving funds to cover a medical expense – the money may not be available to account owners immediately. Account owners should be aware of how they can put their invested money back into cash available to use, and how long that process will take.
Q: How do I access my HSA funds?
A: The way in which your employees can access their HSA account funds will differ, depending on what institution your company has serving as its HSA trustee or custodian.
Some offer access that is similar to having a checking account, while others, like Ameriflex, also offer access through the convenience of a debit card. This allows employees to easily pay for health care in a variety of environments, so long as they have the funds readily available in their account.
Note: Employers must notify employees that other methods of access to their HSA funds are available. For example, in addition to the debit card, the HSA account holder must also be aware of and able to access the HSA funds through online transfers, withdrawals from ATMs, or check writing.
Q: Can my spouse access our HSA account?
A: Yes. Although an HSA is an individual account, an HSA account holder can designate other individuals to withdraw funds, as long as they do so in whatever manner the HSA trustee/custodian has set up.
Make sure your employees educate their spouses also, so they understand the purpose of an HSA when using funds: an HSA account holder can take distributions for any purpose — but only distributions for qualified medical expenses are tax-free, and penalties may be assessed if distributions are used for non-medical expenses.
Q: Can an HSA be used for mental health expenses?
A: Yes. This is one of the best benefits of an HSA — it helps to bridge this important gap that often isn’t covered by other means. HSA funds are available to cover mental health, and this can ease the burden of getting the help your employees need.
How can I keep my administrative burden low?
HSAs are a relatively low administrative burden once they’re up and running. But they still need a watchful eye and expertise to keep up with current laws and legal interpretations. For example, in 2018, the government shutdown held an important provision (the “Cadillac Tax”) in the balance.
These political and legal decisions need to be closely monitored, and interpreted for how they will affect your business. The Cadillac Tax, for example, would have imposed a 40% excise tax on health benefits which exceed an annual limit of $10,200 for individuals and $27,500 for families. It was delayed until 2022 when the shutdown was ended, but it shows how legislation can quickly heat up and cool down — needing to be closely monitored by experts.
It can be helpful to have an expert HSA provider on your side, one who understands your best interests and fights for them through changes both big and small.
As an HSA provider, Ameriflex provides award-winning service that includes:
Multiple, easy-to-use options for access and account management of your employees’ HSA funds
A single point of contact for plan administration. This allows for Ameriflex to be a knowledgeable advisor, able to evolve your plan over time to best suit your needs and bottom line.
A plan that works for you and your employees, even if you were to change HDHP providers
If that plan involves multiple accounts, we’ll eliminate the hassle of multiple cards for your participants. We can administer your HSA, Limited Purpose FSA, and HRA — all on one card.
The ease of the MyAmeriflex Mobile App, where participants can access their account from anywhere. Check balances, check on the status of a reimbursement, and more all from their mobile phone.
Take your administrative burden from low to zero with a partner dedicated to keeping you constantly up-to-date on the latest legislative developments, alongside the technology and ease of use that keeps your plan running smoothly for employees.