Health Savings Accounts (HSAs) are still in their infancy, but they are growing rapidly and are particularly popular among millennials.[1] But, does everyone understand the pros/cons of HSAs well enough to make an informed decision about whether an HSA is the right fit both for the employer and the employee?
This post will identify five things employers with HSAs should help their employees understand about HSAs and a follow-up post next month will help plan sponsors vet their HSA service provider.
Let’s get started:
- HSAs are different from Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs). A common misconception among employees is that they must spend the money in their HSA by the end of the year. While that may be the case with an FSA, that’s not the case with an HSA. An HSA rolls over from year-to-year with no time limits. Likewise, an HSA does not have required minimum distributions once the employee hits 70 ½.
- HSA limits for 2018.The HSA limits, meaning the maximum contribution into an HSA, for 2018 is $3,450 for an individual and $6,900 for a family. There is also a $1,000 catch-up for individuals age 55 and over. HSA contributions can come from the employer, the employee, friends, or family; however, the total maximum contribution remains the same regardless of the source.
- The responsibility is on the employee, not the employer. Unlike a 401(k) or a 403(b) plan, the HSA places the responsibility on the employee. HSAs are individual accounts that are owned by the employee, which puts the responsibility on the employee to save receipts and know the limits, for example.
- HSAs are savings vehicles. Fidelity annually estimates what a 65-year old couple, retiring in the current year, will need to cover healthcare and medical expenses throughout retirement. The 2017 estimate is $275,000.[2] Given the cost of healthcare in retirement, HSAs can assist employees in saving for healthcare costs in retirement today. Most employees do not realize that HSAs can be invested. While only a small number of HSA providers have an open architecture investment platform today, it will likely become the trend in the next few years. Today, many HSA providers have a limited offering of pre-selected funds available.
- HSAs provide a triple tax advantage. Many employees do not realize the triple tax advantage of the HSA. Contributions are tax-free. Earnings grow tax-free. And, distributions are tax-free.
It’s important to note that HSAs are not for everyone, as an individual with chronic health problems and substantial medical bills year-over-year may find the HSA is not an appropriate option. This post should provide an overview of key areas of confusion in the marketplace that an employer may determine are appropriate for additional education with participants. For more information regarding HSAs and the education that plan sponsors with HSAs may consider making available to employees, contact a consultant at Multnomah Group.
Notes:
[1] In reviewing participation by age, a study showed that millennials (under age 26) had the highest participation in high deductible health plans at 44.6%, closely followed by millennials over age 26 at 40.3%. Benefitfocus, “The State of Employee Benefits – 2017”.
[2] See, Health Care Costs for Retirees Rise to an Estimated $275,000 Fidelity Analysis Shows, available at: https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-retirees-rise.
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