Health Savings Accounts (HSAs) are health care expense accounts for people covered under high-deductible health plans (HDHPs), designed to help them save and pay for certain health care costs tax-free, right away or anytime in the future. HSAs are intended to empower employees to take more responsibility for their own health care decisions/costs. In personal finance and benefits news, I’m seeing HSAs increasingly recognized as a powerful investment vehicle, provided people can afford to contribute and not use that money for current health care costs. I wanted to know more. Below is a quick HSA 101 based on what I learned.
I will highlight a few of the unique features of HSAs by expanding on each initial letter. The IRS HSA rules can be complicated, and I won’t cover many of the technicalities here. Check out IRS Publication 969 for more guidance. You may also be interested in the International Foundation e-learning course HSA and HRA Basics for an in-depth overview of each.
Health
Health Plan: If you want your employees to be eligible for an HSA, they must have an HDHP.
For 2017, an HSA-eligible plan must have a deductible of at least $1,300 for individual coverage and $2,600 for families. The maximum annual out-of-pocket costs for these plans are $6,550 for individuals and $13,100 for families. The HSA contribution limits fall somewhere in between, at $3,400 for individuals and $6,750 for families. Plan sponsors must work within these parameters when designing the HDHP and HSA.
Health Expenses: Employees can make tax-free withdrawals from HSAs for qualified medical, dental and vision expenses (deductibles, copays, coinsurance) as well as for over-the-counter drugs and medical supplies, prescription drugs and some insurance premiums (Medicare, COBRA and long-term care).
Savings
Triple Tax Savings:
- Contributions are pretax or tax-deductible.
- Account balance grows tax-deferred.
- Withdrawals for qualified health expenses are tax-free .
Longterm Savings: The money rolls over year to year. Employees can build up savings for future expenses, including health care costs in retirement. Note that having an HDHP is required to be eligible to contribute to an HSA; however, withdrawals can be made from an HSA even if the employee is no longer covered by an HDHP.
Account
Account owner: Your employee owns the HSA and controls the account. It’s portable from job to job. The owner usually pays the administrative fees.
Trust or Custodial Account: Employees, or employers if your company is setting up the HSAs, must work with an IRS-approved HSA trustee who manages the account according to IRS rules. Employees can’t simply specify a personal bank account as their HSA. Todd Berkley of Conduent explains, “Banks and credit unions are automatically approved as HSA trustees. Non-bank trustees must meet the same criteria as IRS trustees by demonstrating to the IRS that they are qualified fiduciaries, can account for transaction accurately, and understand HSA rules.”
Additional Resources
Where can I find data on plan design and employer contributions?
Kaiser’s Employer Health Benefits Survey.
How are HSA owners using their accounts?
EBRI HSA Database report and Devenir semi-annual HSA survey results.
Jenny Lucey, CEBS
Information/Research Specialist at the International Foundation
