“It’s a medical 401(k).” “It’s like an FSA but totally different.” “It’s a key component to the HDHP but separate.” “Wikipedia has a great article about it.” Struggling with the best way to explain HSAs?
Our Implementation Team spends a good deal of time coaching HR professionals on the best way to explain Health Savings Accounts (HSAs) to their employee audiences. HSAs are still relatively new for both HR teams and employees, so learning and practicing how to explain it is a good idea.
The easiest way to explain an HSA is that it’s a coupon for 25-35% off all qualifying health expenses, such as medical, dental, vision, and more. You can take that tax break before the expense occurs (by being a saver), at the time it occurs (by using your debit card) or after it occurs (by funding your account retroactively for expenses you’ve already had). And the best part is that contributions to HSAs are free of income taxes and, if contributed through an employer cafeteria plan, free of payroll taxes too.
Explaining the Four Ways Employees Can Put Money into an HSA
- Employee pre-tax payroll contributions: You can set the amount you want contributed into your HSA every month from their paycheck. You are allowed to change your payroll deduction at least once a month and the amount you contribute is tax-free which can save you between 25-35% on your healthcare!
- Employee post-tax contributions: You can also fund your account directly instead of through their payroll. However, since these contributions are made post-tax, you will be delaying up to $1,500 of tax savings until you file your taxes next April 15. Also, you only save payroll taxes (also called FICA) when the contributions go through a payroll deduction. That’s another 4-5%.
- Employer contributions: Your employer is helping you build up an account balance by making HSA contributions on your behalf. These contributions count toward your contribution limit ($3,100 for single-only and $6,250 for family) so you don’t have to contribute as much yourself.
- Rollovers: If you have an existing HSA account elsewhere, you have the option to rollover balances to your new HSA with no tax implications. While you are allowed to have multiple HSAs, you may prefer to keep all your funds in one place.
How Employees Can Manage Their Health Spending
Once funds have been put into an HSA, there are many different ways employees can manage their HSA based on their unique financial goals and lifestyle. Unlike Flexible Spending Arrangements (FSAs), any unused funds in these accounts at the end of the year can be rolled over to the following year and can be used for future medical expenses.
What Are Eligible Expenses?
The IRS has a full list of items that are eligible and non-eligible expenses for HSAs. Items such as prescriptions, contact solution, dental care, glasses, bandages and acupuncture are eligible expenses. We’ll explain more about these items and how to determine if an expense is eligible in a future post.
Let Us Do the Dirty Work For You
Still unsure about how to best explain them to your workforce? Don’t worry; we’re here to help! We created a 5-minute video (see below) that explains HSAs to employees in a simple and fun way and debunks some of the common myths about HSAs. Feel free to send it to your employees to increase their knowledge of HSAs.
Now that you’re better equipped to explain HSAs to your employees, don’t forget that that it is just the first step of ensuring a successful HSA program. The next step is that you should help them understand the importance of opening their accounts. And if that sounds a little scary, you’re in luck – we made it easy for you to do that too!
