Today is the third annual day of the HSA, an event that falls midway through the typical tax filing year (returns are due April 15 in most years). Now is the time since health savings accounts offer separate tax savings for homeowners.
For Americans with an HSA-qualified health plan, an HSA is the only account through which they have the opportunity to benefit from contribution tax savings (including payroll tax savings on deductions. on pre-tax payroll to fund their accounts), any income on those contributions, and distributions (for a wide range of eligible medical expenses).
Related: Employees Don’t Get HSAs – What Should an Employer Do?
By comparison, none of the types of accounts intended for retirement savings – not a traditional or Roth 401 (k) plan or individual retirement account, not a 403 (b) plan, not a 457 plan, not a SEP IRA or SIMPLE IRA – is exempt from federal income and payroll taxes and state income taxes (although HSA contributions are included in state income taxes in California and New Jersey) on deposits, account growth and withdrawals. Of course, tax considerations are only one aspect of determining the advisability of an investment.
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But these benefits – and many other non-tax features – are enjoyed by account holders (employees). What about companies sponsoring or considering sponsoring a health savings account program? What benefits do they receive when workers enroll in an HSA program?
Benefits for the employer
Employers do not pay their share of federal payroll taxes on pre-tax employee payroll deductions to fund their HSAs. That’s a saving of 7.65%. When an employee deposits $ 2,000 into their account, their employer saves $ 153 (or less if the employee earns more than $ 142,800 in 2021). Even though the company absorbs the monthly account administration fee, the net savings exceed $ 100.
This is the main visible financial benefit for employers. But there are other benefits to offering this option to employees and having a support program that helps workers understand how a health savings account can help them manage their immediate and longer-term health expenses.
Polls show that most Americans I don’t have $ 1,000 saved for an unforeseen expense. Recent data from Voya participants shows that unreimbursed medical bills are the number one reason for difficult withdrawals from company-sponsored pension plans. And a host of medical studies show how stress – including financial worries – can manifest itself in Physical illness.
Unlock the benefits
Employers need to do more than just offer their employees a High Deductible Health Plan (HDHP) HSA program. A static offer that simply presents a health savings account as another benefit option among the dozen or more that the company sponsors is unlikely to gain employee attention. Here are some approaches employers can take to help employees choose the optimal medical and financial benefits plan:
Commitment. Think of Isaac Newton’s First Law of Motion: “An object at rest remains at rest, and a moving object remains in motion at a constant speed and in a straight line unless it acts on an unbalanced force. We know full well that many employees go through open enrollment quickly by checking the same benefit boxes they select each year. Employers can solve this problem by requiring positive (rather than passive) enrollment each year, so employees have to make benefit choices. And the most effective approach may be to present these options without indicating the worker’s current choices.
Education. Many employers present new benefits to their workforce during open enrollment. This is a mistake with health savings accounts, especially when the generally abbreviated discussion of HSAs follows a discussion of medical coverage under a high deductible health plan. A better approach is to integrate HSA education into the company’s continuing financial education program for employees. When workers understand the features of this flexible account before signing up, they can make a hedging decision that fits their overall financial strategy.
Incentives. Many companies pay HSA participants a portion of the premium savings in the form of an employer contribution to their accounts. The most common approach is an annual or pay period deposit. Employees appreciate these funds – the money helps them offset their shared medical costs, as well as dental, vision, and other eligible expenses – but this contribution approach does not provide the leverage typically needed to build up. sales quickly.
We’ve learned that the most effective way to get employees to increase their contributions to a qualifying pension plan is to set a default choice (called a negative choice in Internal Revenue Service notices on HSAs) and d ” offer matching contributions. This combination – a minimum percentage of deferred pay, plus an incentive that motivates employees to grab the full match percentage – offers the potential to help participants establish balances faster than if they were left to fend for themselves without. employer support.
These same tools are available to companies whose HSA contributions go through a cafeteria plan, which they should do if the company allows employees to make pre-tax contributions through a payroll deferral. Using one or both of the approaches is likely to increase balances. Companies considering either approach are advised to design the offering with the guidance of a benefits advisor to ensure the program complies with a host of federal regulations.
Another option: Offer incentives to perform activities designed to improve health. Some companies make part of their contribution conditional on accomplishing certain tasks, such as an annual wellness visit or a conversation with a health coach. There are various federal rules regarding health incentives, so be sure to discuss a program with a benefits advisor.
Investments. Finally, choose a Health Savings Account partner whose product includes a robust investment program. Some things to consider:
- A low liquidity threshold ($ 1,000, for example) before account holders can start investing.
- A variety of low cost mutual funds to build a diversified portfolio.
- Perhaps target date funds (e.g. Retirement 2045) to provide additional options for workers with limited investment experience or confidence.
- A swipe feature that allows account holders to direct all new contributions to the investment choices the holder selects, simplifying the process for them in the future.
The reward for employers
The average health savings account has a balance of about $ 3,000. That figure includes about half of the 31 million HSAs with an average balance of less than $ 500. Among the roughly 6% of accounts (about two million) with a portion of the balances in investments, the average account value is nearly $ 18,000. It is the employees’ money, not the employer’s money. But it’s no exaggeration to imagine that a worker with $ 16,000 or more set aside for healthcare expenses would experience less financial stress than a worker with little or no savings to cover a medical bill, unexpected dental or visual. And that stress reduction can translate into greater productivity, better overall health, and fewer sick days.
Ultimately, a strong HSA program can become a differential advantage for employers in their quest to attract and retain top talent and maintain or increase productivity.
Neither Voya nor its affiliates offer tax or legal advice. Please consult your tax and legal advisers regarding your personal situation.
Bill stuart is Director of Business Planning and Analysis at Voya Financial, and author of “HSA: The Tax-Perfect Retirement Account”.