A group health savings account, or HSA, is a type of health benefit that allows employees to set aside pretax earnings to pay for qualified medical expenses. An HSA usually goes hand-in-hand with a high deductible health plan (HDHP) since it offers a way to offset the higher out-of-pocket expenses.
It is a kind of savings account that allows you to set aside money on a pre-tax basis for paying for qualified medical expenses. If you use the untaxed money in the Health Savings Account (HSA) for paying for copayments, deductibles, and other expenses, you can easily lower your healthcare cost. Generally, they are not used for paying premiums. You can use the money in HSA for paying for the qualified medical expenses but you can only contribute to the HSA if you have a High Deductible Health Plan.
A health savings account is similar to a flex spending account (FSA), but with some important differences. The primary one is that an FSA does not allow for leftover funds in the account to be rolled over into the next year. An HSA, by contrast, does allow for contributions to be used in the future since the plan is technically owned by the individual and not the company offering it, as would be the case with a health reimbursement arrangement (HRA). There is no time restriction on when funds from a Health Savings Account (HSA) may be used toward medical expenses.
Employers stand to benefit in a number of ways from offering a group HSA. For one, a higher deductible plan means lower employer contributions for premiums, which adds up to savings for employers and employees. An HSA can also be included as part of a company’s employer-sponsored insurance coverage, which means that corporate taxes do not apply to plans that feature a health savings account.
A high deductible plan coupled with an HSA also offers many benefits to employees. Aside from the tax-exempt status of the accounts, they provide employees with a health care option that allows them more control over their healthcare decisions. Since the deductible is higher with an HSA, the bulk of the savings usually comes from the HSA and not insurance reimbursement, which allows for greater freedom in choosing treatment options. Not only can funds left in an HSA account grow over time and roll over from year to year, but they can also be transferred between employers.
People with a High Deductible Health Plan can open Health Savings Account (HSA). So, if you have a High Deductible Health Plan, you can qualify for an HSA account. Usually, the two are paired together. To be eligible for it, you need to meet the criteria set by Internal Revenue Service.
You will be eligible for HSA if you have the following-
You do not have to pay any taxes on the money that you are putting into the HSA. The maximum annual HSA contribution limits are $3650 for an individual and $7300 for a family. This limitation on the contribution is applicable to the total amount contributed by both the employee and the employer. But if you are an individual who is over 55 years, you can contribute an additional $1000 to your HSA account balances.
Here are some of the reasons why employers dream of offering HSA to their employees.
After the health care coverage reform, several employers have shifted to consumer-directed health insurance plans for controlling the premium costs while advocating smarter healthcare spending. By adopting the Affordable Care Act, several young adults in the nation chose higher deductible plans. As per the Kaiser Family Foundation, employee contributions in HSA qualified plans have increased with time.
Health Savings Accounts are available to people below 65 years of age with individual health insurance coverage or high-deductible plans, including ACA. The health plan should have a minimum deductible of $1400 or more for a single person and $2800 or more for a family. The premium can make the high-deductible plan more erratic. High deductible health plans usually see a premium percentage lower than the PPO plans.
The good thing about HSA is that it doesn’t get affected when an employee changes the job. It will follow him or her to the next employer. After the money gets deposited into the account, the employee can use it, save it, or invest it. The money deposited doesn’t come with an expiry date. Upon death, the money can simply be passed over to the beneficiaries.
HSA makes your employees feel that they have complete control over their money and manage it as they want for getting health care services. They can use it for prequalified medical expenses or save it for retirement. Providing HSA gives employers a significant opportunity to offer the best advice to their employees regarding the best decisions for their financial well-being and wellness.
But employers need to understand the difference between HSA and FSA. Unlike FSA, HSA comes with retirement options. Educating employees about the differences and similarities between the two helps in increasing awareness.
Health Savings Accounts will let your employees control their insurance premiums for a health insurance policy. This is going to make them feel empowered. Also, they can manage health care expenses wisely. Additionally, it allows your employees to save for their retirement and get tax free earnings. Hence, you are giving an exceptional employer experience with preventive services and Medicaid services. Apart from being easy to use, it is a cost savings resource with tax free distributions. All these help in retaining employees and keep them from choosing another company over you when given the option.
Health savings accounts are often misunderstood. But they are worth a look. Here are some of the benefits of health savings accounts.
An HSA is a medical saving account that you are eligible for when you enroll in a qualified HDHP. With the increasing cost of healthcare, many companies have started providing HDHPs as employee benefits.
Most high deductible health plans are combined with health savings accounts that are funded on pre tax basis money, which is deposited into your account, generally through payroll deductions. Thus, you can use it to pay for qualified medical expenses. It also lets you plan for and covers high deductibles related to the health plans.
One of the primary benefits of HSA is the triple tax advantages that it offers on minimum annual contribution limits.
HSA contributions are restricted every year by the internal revenue service (IRS). For tax year 2022, the contribution limit was $3650 for self only coverage and $7300 for family coverage. While individuals over 55 years can contribute an additional $1000 to get tax savings benefits.
It is a great idea to consider optimizing your HSA contributions to tap into the triple tax advantages. Moreover, when you are near your retirement age, you can use HSA funds to pay for general living expenses-travel, food, or housing. Unlike 401k, HSA contributions made through deductions from payroll are not subject to FICA taxes. Also, you don’t have to take a minimum distribution, no matter what is your age.
A majority of the people don’t realize that when you are enrolling for qualified health plans through your company it will not be tied to your employment. Unlike your flexible spending account and health insurance plan that is generally tied to your employment, HSA is flexible and transferrable. It is only attached to your account.
So, even if you leave your job or get laid off, your funds in the tax free earnings account are going to stay with you. Use the pre tax dollars from gross income for paying for qualified medical costs.
HSAs are also not use-it-or-lose-it accounts. So, your balance will be carried over to the next tax year. If you are enrolled in HSA and High Deductible Health Plans, you can pay for your medical expenses out of your pocket for now and take the tax-free distribution in the future in the amount of the current expense.
You can use the Health Saving Accounts to save for retirement. When you are 65, you can use the money for various purposes with tax free earnings. The fund taken out to pay for the eligible healthcare expenses are tax-free earnings. But you can also take out money for various other reasons without even paying a penalty.
Health Savings Accounts can be set up with a credit union or banks. You can ask the employer or the insurance company for recommended places to set up the HSA. You also have the option of starting one with the bank where you have your savings and checking account.
But before you make the HSA payments for annual deductible contribution limits, here are a few questions that you need to ask.
You should have a high deductible health plan to opt in for HSA. High deductible health plans don’t allow sharing costs like co-insurance or co-pays, on majority benefits before reaching the minimum deductible.
Remember, if you already have enrolled for Medicare, you aren’t going to be eligible for HSA. Moreover, in case you have other group health plans, you won’t be eligible for an HSA. Thus, if you are not sure, you need to ask the insurance company or the employer.
Several HSAs come with a fee similar to common bank accounts. A few will charge a fixed fee every month, while others will charge you when you are operating the account with their human resource management system. While there are some that have a fee combination. You may also need to pay for opening an account or transferring pre tax contributions.
Check the discounts that are available to get lower premiums. For instance, some banks do not charge fees when you make minimum employee contributions to the HSA every tax year.
As soon as have an HSA, you have multiple options when it comes to adding money. You can deposit money from some other bank account, either by setting up automatic deposits from gross income or one-time payments. In case you want, your employer can always arrange to deduct the money from gross income, prior to you paying payroll taxes.
In case you get qualified health plans through the employer, ask them if they have employer contributions to the HSA.
Most HSAs have a checkbook or debit card to pay for healthcare services. However, not every HSA offers that. So, you should check with the HSA administrator what are the options for spending the pre tax dollars HSA amount.
The money that sits in it will grow tax free and earn interest with time. You can check with your HSA admin about the interest you are going to earn for tax free distributions.
You need a quick and easy way to find out how much money is in the HSA insurance coverage and learn how you have spent it. A majority of the banks provide access to the pre tax contributions and account balances using their app or website.
Once you have accumulated a good amount of money in the HSA, as per internal revenue service, you can move some of the self only coverage money to a different account for investing in mutual funds.
In case your insurance premiums are paid directly, just ask your employer if they will have employer contributions into the HSA as a benefit.
Having a health insurance account enables you to keep track of all healthcare-related expenses. However, HSAs aren’t foolproof, you need to be diligent. If you are not, you can mess up the HSA.
Here are some of the common mistakes that you need to avoid with HSA self only coverage and family coverage.
One of the biggest blunders you can make with an HSA self only coverage or family coverage account is to use health insurance when you are not eligible. In case you own a high deductible plan, switching to a lower premiums deductible will not contribute to the HSA. Use the leftover funds but you cannot add more funds to it.
Often, a few persons mistakenly open an HSA when the deductible is on the higher side. Make sure that you compare the HSA rules since the federal government guidelines keep changing.
Similar to 401k or IRA, HSA, too, comes with a tax free dollars limit, as we have already mentioned. In case you are putting in too much money and do not take out the excess money before April 15th of the financial year, a fine of 6% will be levied by the internal revenue service.
You might think every healthcare expense will be automatically eligible for HSA insurance coverage reimbursements, such as optional surgeries, cosmetic surgeries, or fitness club memberships. Also, OTC medicines are only going to be eligible if your doctor writes in the prescription.
In case you haven’t qualified expenses with the HSA, you can face a fine of 20%. Whenever you use the HSA card, make sure that you retain the receipt to prove it’s an eligible tax deductible expense.
The use of HSA is to cover emergency medical expenses, which have come up, and not to squirrel money for retirement. However, if you would like to use it to save for your retirement, you can consider covering some health expenses with your income or standard savings. This way you will be able to use more of the HSA funds for investing and spending after retirement.
Have you considered how much money you are going to need for covering the cost after retirement? Fidelity Retiree Health Care Cost Estimate’s study showed that an average retired couple who is 65 years old in 2021 might require $300,000 in their after-tax savings for covering the health expenses after retirement. This is for those not receiving unemployment compensation.
No one can tell what the future holds. So, you can consider reserving the money in HSA just for medical care and not using it for anything else. If you reserve a solid amount of money from your payroll taxes for healthcare, it can secure your future to some extent.
You might not have thought about using HSA, primarily because you didn’t have an idea about the tax advances or that you are eligible. However, health savings accounts are applicable to a wide range of people. In order to be eligible for HSA, you need to have a high deductible health plan.
But not all healthcare insurance with a high deductible is going to be HSA-compatible. Thus, make sure that you check it out before choosing a plan. You have to decide if the HDHP is suitable for you. In case it works, you can use the tax benefits of the HSA for optimizing your retirement savings.
According to the IRS, you can make payments for other people’s medical bills using your HSA if the person is your spouse or an eligible dependent. A family coverage dependent has to be a person who stays with you and is a dependent.
Domestic partners, boyfriends, girlfriends, and roommates aren’t eligible for the family coverage HSA money, even when they are paying the rent. Even if your fiancé is a part of the health insurance plans, you can’t use the family coverage account for the medical bills.
Just as any healthcare insurance, HSA comes with its own advantages and disadvantages. When you weigh your choices at hand, think about the healthcare and budget you might need next year.
In case you are healthy and would like to save for future health care expenses, an HSA can be an attractive choice. If you are nearing the age of retirement, the health savings account can be a good option as you can use the money to offset the medical care cost after retiring.
But if you think, you will need costly health care in the following year, and might not be able to meet the deductible, a high deductible health plan and an HSA can be the ideal option.
Before you get a health savings account, here are a few drawbacks you need to consider.
A high deductible health plan that you need to have to qualify for the health savings account might put a greater financial burden on you. This pressure can be much greater than what other health insurance put on you.
Even though you have to pay lesser premiums every month, it might be difficult even with the money in the HSA for coming up with the money to cater to the deductible for an expensive medical procedure like vision expenses. It is something that you need to consider before you get the HSA. You never know if you are going to get big medical bills in a specific plan year.
A few HSAs come with debit cards that let you pay for the medical expenses on spot using the money in your account. But there are others that might require you to pay for those funds all by yourself. Thereafter, you should claim the money for reimbursement and not premiums. No matter what is the case, if you are planning to use the HSA, you have to be really careful about retaining the medical receipts as you have to prove that the withdrawals have been taken for covering qualified tax-deductible costs. So, you risk losing the documentation and running into some trouble.
A few HSAs are going to charge a maintenance fee or a fee on each transaction fee that varies from one institution to the other. Even though the fee is not very high, it is higher than what an interest account might earn. They do cut into the bottom line. At times the fees can be waived if you maintain a minimum balance.
The main aim of an HSA is to save health expenses. Thus, the IRS doesn’t take lightly the withdrawals for any non-medical expenses that are not premiums. In case you remove the fund from the HSA before the age of 65 years for something except for qualified medical expenses, you will have to pay a 20% early withdrawal penalty.
Apart from the penalty, you are going to be taxed on the tax deductible amount you are withdrawing for non-medical expenses. It holds true, irrespective of age. But if you are making a withdrawal for non-medical expenses after you reach 65, a 20% penalty won’t apply.
With HSA, you will have a health insurance plan with a high deductible. You need to be responsible for coming up with the money to pay for the deductible prior to the insurance plan starting to pay for the healthcare cost. It means you have to pay for the visits to the doctor, prescriptions, and medical procedures unless you are satisfying the deductible.
A majority of the financial institutions that offer health savings accounts will provide their customer’s different ways to check the account balance. These are-
If you have a high-deductible health plan, the tax advantage of the health savings account and the ability to roll over the unspent money can be quite appealing. It can take care of your future healthcare expenses and also help with income tax deduction on payroll taxes. You just have to pay a health insurance premium annually.
Call us today at the number at the top of the page to learn more about how a qualified HSA plan can help your employees and your business! Get a FREE cost estimate by requesting a proposal through our online submission form! All estimates and consultations are FREE OF CHARGE!
We’re ready to help! Call today: 800-903-6066