October 15 is HSA Day, the point in the calendar halfway between tax-filing deadlines and a time to focus on helping employers and employees understand these
While health savings accounts (HSAs) have been around since 2004, their popularity has steadily increased among employers and employees.
For example, research conducted by Voya shows that only 2% of respondents understood the full benefits of an HSA. That's a potential missed opportunity, since HSAs can help employees manage their out-of-pocket medical, dental and vision expenses. Plus, with inflation at record levels not experienced in decades, HSAs can serve as a powerful savings and spending vehicle to help workers stretch every hard-earned dollar.
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Employers can play a key role in HSA education, and their employees are eager to learn. For example, a
Here are seven tips that employers need to either understand themselves or convey to their employees to increase adoption and effective utilization of HSAs:
1. Employers and employees avoid payroll taxes on HSA contributions
Employees enjoy the bulk of tax savings, as they don't pay federal and state income taxes on their contributions (except in California and New Jersey). The 7.65% federal payroll (FICA) tax isn't applied to either the employer or the employee. When an employee earning $147,000 or less in 2022 contributes $5,000, for example, both the company and the worker save $382.50 in payroll taxes.
Over time, those savings can add up. The payroll-tax savings on a $5,000 annual contribution ($382.50 annually) invested at 6% will grow to almost $14,500 after 20 years and to almost $31,150 after 30 years. To put that figure in perspective, if Medicare Part B and Part D premiums increase 4% annually, the 20-year payroll-tax savings would buy more than two-and-a-half years of Medicare premiums. The 30-year savings would pay for almost four years of premiums.
Payroll taxes are assessed on employee contributions to other workplace savings programs, including employer-sponsored tax-deferred and Roth
2. HSAs are a tax-efficient emergency medical spending account
Many employees don't have adequate savings to cover an unexpected bill. For example, industry research showed that roughly
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Employees who systematically fund their HSAs build balances over time. In fact, according to
3. Employees can adjust their contributions
Unlike Health FSA participants, HSA owners don't make a binding annual election. They can adjust their payroll deductions — up or down, start or stop — during the year. This flexibility further helps them manage unexpected expenses, which may help increase their satisfaction with their medical plan.
Employees who've opened and funded their accounts can reimburse tax-free their current qualified expenses with future contributions. If they have a $100 HSA balance and incur a $1,000 claim, they can adjust their payroll deductions upward and use those future contributions to reimburse the past expense.
4. Employers can structure contributions to drive employee engagement
About 30% of total HSA contributions in 2022 came from employers, according to
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Few companies condition their contribution on employee-payroll deductions. They should consider borrowing this strategy from their company-sponsored retirement plan, for the same reason: Matching contributions encourage employees to stretch financially to deposit enough to collect the full employer match. The result: Employees build balances faster and undoubtedly are more satisfied with their employee benefits when they face a large bill for a qualified expense with more funds set aside to pay the provider.
5. Employers can institute default elections
Companies can take another page from their retirement plan playbook and set default payroll deductions for each HSA-eligible employee (as long as employees are notified and given the option to opt out). This approach helps employees unfamiliar with the program to begin to build balances to cover future qualified expenses. It can be paired with a company match or stand on its own.
6. Employees can enhance their retirement readiness
Because balances aren't subject to forfeiture, employees can accumulate unlimited balances in their HSAs. Neither their annual contributions nor the value of their accounts offset their opportunity to fund their workplace retirement accounts up to their annual limits. During the distribution phase, HSAs continue to offer benefits. HSA balances aren't subject to Required Minimum Distributions (RMDs), unlike tax-deferred retirement accounts such as 401(k)s. And HSA withdrawals for qualified expenses don't figure into the calculations that determine whether Medicare premium surcharges apply or the percentage of Social Security benefits subject to federal income tax.
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This benefit extends to employers as well. Retirement-ready employees open opportunities for younger, proven workers who can find their next challenges within the company that they know and in which they're known. And employers may experience lower medical premiums and payroll as younger workers assume higher responsibilities and new, young employees fill vacancies created by promotions.
7. More HSA owners are investing balances
About 7% of HSAs have invested balances, a sharp increase over the 4% reported by
The path toward a higher percentage of HSAs with investments includes not only employee education about the benefits and mechanics of investing, but also helping workers understand the value of building their HSA balances and ultimately growing those funds to reimburse current or future qualified expenses with tax-free withdrawals.
As with any investment, there are risks and individuals should make sure to fully explore those risks before choosing to invest their balance.
Perhaps someday HSA adoption will become so widespread and employers and account owners will become so knowledgeable that HSA Day will become unnecessary. Until then, HSA Day is a reminder of the importance of continuing to test employer funding strategies and educate employees on the role that HSAs can assume in an integrated personal financial plan.
