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The Benefits of Having a Health Savings Account

A health savings account (HSA) can be a profitable investment option for your employees and their families for years to come. There are numerous benefits to having an HSA and, for your business, to offering one as part of your benefits package.

An HSA Primer

An HSA combines high-deductible health insurance with a tax-free savings account. Money in an HSA may be used to pay that deductible. If unused during a plan year, the funds will roll over for the account holder  to use for future eligible expenses.   Unused funds may also earn interest.

HSAs offer triple tax benefits. Funds are:

  • Tax-deductible: Contributions are 100% deductible up to the legal limit, just like an IRA.
  • Tax-free: Withdrawals are never taxed.
  • Tax-deferred: Interest earnings accumulate tax deferred.

For you or your employees to reap the benefits of an HSA, the law requires that it be combined with a qualified high-deductible health insurance plan, which in the long run, can cost less than other plans.

HSAs vs. FSAs

While flexible spending account (FSA) funds also can be used to cover eligible medical expenses, they are considered “use them or lose them.” They disappear by the end of the year. But HSA funds do not expire.

HSAs vs. HRAs

An HRA is funded by the employer only and employees are not given a pre-tax savings opportunity. When an employer funds an HRA the funds still technically belong to the employer, while an HSA is fully owned by the employee. Employers also have discretion over HRA plan design and the option to rollover funds from year to year. When an HRA provides a rollover feature, both HRAs and HSAs offer asset accumulation for employees. However, an HRA benefit will not continue long-term once an employee leaves the sponsoring employer. HSAs offer employees long term, portable savings for major medical expenses now or in retirement.

HSAs vs. IRAs

Increasingly, people are using the tax advantages of an HSA to save towards retirement.  For those who have already reached the annual maximum to their 401(k) and IRA, contributing towards an HSA may be a good way to supplement retirement savings for future medical expenses.

Although a 401(k) or IRA can offer a reduction on taxes, it’s still necessary to pay income tax on any distributions taken for retirement funding purposes. Roth IRAs do not offer reductions on current taxes, but distributions taken at retirement are tax free. For medical expenses, HSAs can be the best option of all, as funds are tax-free upon withdrawal for eligible medical expenses, and earnings continue to grow tax-free over the years.

  • For employees with health insurance through their employer, contributions can be made via payroll deduction.
  • Contributions to an HSA must end once an individual reaches age 65 and enrolls in Medicare.

Distributions received are only tax-free if spent on eligible expenses for the employee or his or her dependents or spouse. Otherwise, a distribution is considered taxable income and is subject to a 20% penalty tax.

Employee benefits, including HSAs, FSAs and similar products, are increasingly more complex – and employees scrutinize them more thoroughly than ever before. The experts at HR Works can help you navigate the ever-changing benefits landscape and offer competitive packages to ensure you attract, hire and retain the best talent on the market. Read our related posts or contact us today to learn more.

 

 

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HR Works, Inc., headquartered at 200 WillowBrook Office Park in Fairport (Rochester), New York, with an office in East Syracuse, is a human resource management outsourcing and consulting firm serving clients throughout the United States. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.