Plan selection mistakes

Another Tool to Combat Rising Costs: the HSA

Let’s do our best to limit confusion. In our last post, we discussed the potential health care savings that can be realized through the use of a tool called an HRA, or Health Reimbursement Account.

This post is dedicated to a similarly-named tool called a Health Savings Account, or HSA. While the end result of both tools is the same — to take the sting out of having to shift employees to a plan with higher premiums or deductibles — they take very different routes to get there.

What is an HSA?

An HSA is a tax-favored savings account. It can be used in conjunction with any Qualified High Deductible Health Plan (HDHP) that has a minimum deductible of $1,300 for an individual, or $2,600 for a family.

With an HDHP, all medical expenses are paid out of pocket until the full deductible is met. The money held in an HSA can be used to help pay that deductible expense, therefore helping an employee to “pay off the gap.”

Contributions into an HSA (limited to $3,350 for an individual and $6,750 for a family in 2016) are 100% tax deductible, just like an IRA or 401k. If an individual is 55 or older, an additional $1,000 catch up can be contributed annually.

Employers can also contribute to an HSA, often through a match plan, just like a 401k. As in an IRA, contributions can be made until April 15th of the following year.

The first $2,000 invested in an HSA is required to be in cash, but any balance over $2,000 can be invested in stocks, bonds, or mutual funds, just like an IRA or 401k. The money in an HSA belongs to the employee or account holder and is theirs to keep. There is no “use it or lose it,” as is the case with FSAs, and it continues to grow tax deferred.

How do you use it?

Withdrawals from an HSA account used to pay qualified medical expenses, including deductibles, dental, and vision, are tax free. In most cases, insurance premiums are not considered a qualified expense, but there are a few exceptions.

Withdrawals to pay premiums for qualified long-term care insurance, COBRA premiums, and Health insurance premiums while an individual receives unemployment are qualified expenses and tax free, as are Medicare premiums for individuals over age 65. Any funds you withdrawal for non-qualified expenses will be taxed as ordinary income, plus a 20% penalty if you are over 65.

The downsides

Despite some great benefits, Health Savings Accounts also come with a few drawbacks. As previously mentioned, HSAs can be rolled over from employer to employer, meaning that any matching program is at the same time an investment that can be lost. Companies with higher than average turnover rates should be cautious about offering a generous HSA match.

HSAs also come with a number of restrictions. For example, they can only be paired with insurance plans with the minimum deductibles: $1,300 for an individual and $2,600 for a family. With the exception of most premiums, employees also have full control over what medical expenses to pay for, meaning they could utilize treatment options or providers that the company does not prefer.

So which companies would benefit?

As is the case with HRAs, Health Savings Accounts really should be carefully considered by any company that needs to migrate to a higher deductible plan. However, turnover rate is truly a very important factor to consider for employers who intend to contribute to HSA accounts on the employee’s behalf.

Companies with high retention rates and stable work forces (particularly younger ones) will benefit most from HSAs, as their employees build cushy accounts over time and keep the company’s matching investment in-house. Companies with high turnover rates, on the other hand, run the risk of never seeing a return on their investment.

• To learn about the benefits of Health Reimbursement Arrangements, read the Creative Benefits blog post on HRAs.

About the author: Robert Ritinski is a Benfits Consultant with Creative Benefits, Inc. He specializes in working with clients to design, implement, and service benefits programs that are tailored to meet their specific needs, while reflecting the unique culture of their organization.