Are Health Savings Accounts a Smart Choice for Corporate Employees?
What are HSAs?
Health Savings Accounts (HSA) offers a valuable tax incentive to set aside money on a tax-favored basis for current or future medical expenses. Employees’ contributions and withdrawals for eligible expenses and earnings are tax-free. Plus, unlike other medical spending accounts, any unspent HSA funds roll over year to year. Employees have the benefit of building funds to cover any eligible health care expenses (such as medical, dental, vision, and prescription drugs) they incur until reaching their high deductible.
How do you use HSAs?
In order to have an HSA, you must also have a High Deductible Health Plan (HDHP). According to the National Center for Health Statistics (NCHS), 43.4% of persons under age 65 with private health insurance were enrolled in an HDHP in 2017 – an increase of 18.4% from 2010.1 In 2020, the minimum deductible for a plan that qualifies under federal rules for a tax-exempt health savings account is $1,400 for an individual and $2,800 for a family. Including employer contributions, you may be able to contribute to an HSA as much as $3,550 for individuals and $7,100 for families in 2020. The good news is that many high deductible health plans cover preventive care services in full even if the member has not met the annual deductible.
What are HSAs becoming so popular?
The average health care premium for family coverage has increased 22% over the last five years and 54% over the last ten years, significantly more than either workers’ wages or inflation.2 Traditionally, HSA was offered more in smaller businesses that could not afford more expensive health care plans. But large corporations are increasingly using them shifting some employees away from more expensive traditional managed care plans such as PPOs and HMOs to a high deductible plan with health savings accounts to reduce costs.
How are HSAs different from traditional health care plans?
Historically, one of the perks of working at a big company has been generous health benefits with modest out-of-pocket costs. But increasingly, large companies are offering their employees only one option such as a plan with a relatively high deductible linked to a savings account for medical expenses.
Unlike traditional health care plans, one feature of HSAs is its rollover feature, which enables participants to build up a balance for unexpected major medical expenses that can be used now or for retirement. But research shows that most HSA account holders appear to be using them as specialized checking accounts rather than investment accounts, which is not fully using its great benefit. This behavior appears to change the longer an HSA account owner holds an account and becomes more educated about its use.
HSAs can be viewed as a retirement investment vehicle similar to a 401k. However, as mentioned account owners often appear to be using the accounts mostly to cover current medical expenses rather than fully taking advantage of the tax preference by contributing the maximum.
What are the drawbacks of HSAs?3
1. Maintaining modest account balances: Between 2011 and 2018, end-of-year account balances increased but remained low — going from $1,990 in 2011 to $2,803 in 2018. This is much below the annual limits.
2. Contributions below the maximum: Average total contributions combining individual and employer contributions increased from $2,348 to $2,919 between 2011 and 2018. However, this average was just above the minimum allowable deductible amount for family coverage and less than one-half of the allowable contribution maximum for family coverage.
3. High incidence of withdrawals: Overall, 59 percent of account holders withdrew funds. The average annual amount distributed was $1,865 in 2018, implying an average rollover of $1,054.
4. Low use of investments: Very few account owners invested their HSA balance in investments other than cash despite the tax-saving advantages. In 2018, a mere 6 percent had investments other than cash.
5. Exposed to upfront costs. Many employees do not want to be exposed to costs upfront when they go to the doctor. Other individuals want the security knowing that they will be covered when they need it.
6. Unpredictable costs. Costs are very predictable in the PPO plan. Instead of owing the entire cost of a doctor visit or trip to the emergency room until they reach their annual deductible, participants in the PPO plans generally owe set copayments or coinsurance charges for most types of care.
What are the benefits of HSAs?
1. You maintain ownership of the investment account.4 The employee fully owns all contributions to the account as soon as they are deposited. Account-holders are responsible for making sure they use the account funds properly and have to provide supporting evidence in an IRS audit.
2. Control and choice. HSAs represent an important option to provide Americans with greater control and choice over their health and financial security. From this increased choice, this can lead to greater peace of mind.
3. HSAs operate as a triple tax-advantaged savings account.4 Contributions are tax-deductible, or if made through a payroll deduction, treated on a pre-tax basis. a) Money invested has the potential to grow tax-free, (b) Employees may make tax-free withdrawals for qualified medical expenses, and (c) Money invested has the potential to grow tax-free.
4. Recruitment tool. With continued growth in this employee benefit, this could mean that more employees will look for employer HSA contributions as part of their process to evaluate job opportunities in the future, similar to the value placed on 401(k) contribution matching.
5. Lower premiums. Premiums are typically lower in high-deductible plans and HSAs. For younger employees that do not have high health care needs, an HSA can significantly reduce costs and be a smart choice.
Are HSAs right for me?
Large corporations are increasingly offering HSAs as a more consumer-friendly choice for their employees along with more traditional health care plans. They are doing this to improve employees’ choice, but at the same time trying to drive down the rising costs of health care. This blog outlined what they HSAs are and some of the benefits and drawbacks of these plans. It is best to talk to a financial planner to see if an HSA fits within your individual circumstances.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.