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When it comes to health savings accounts (HSAs), knowledge is power. Employers and employees alike are learning that HSAs are a great way to set money aside to pay for qualified expenses, as well as a great retirement savings opportunity. Designed to help people in high-deductible health plans manage their out-of-pocket expenses, HSAs have been growing steadily in the market since their inception and are a prominent feature of today’s employee benefits landscape.
An HSA is a type of savings account that allows an employee to set aside money on a pre-tax basis to pay for qualified medical expenses. In order to open an HSA, an individual must first enroll in a qualified high deductible health plan (HDHP). An HDHP is thought to lower overall health care costs because the higher deductible lowers insurance premiums, which makes health coverage more affordable for employees and employers. An HDHP also forces individuals to become more conscious of their health care consumption.
NO SIGNS OF SLOWING
HSAs have been growing in popularity since their inception — and they’re only gathering more steam:
– Between 2010 and 2016, sheer enrollment in HSA-eligible plans more than doubled, growing from 10 million to 21 million enrollees.
– Per the Kaiser Family Foundation’s 2016 survey of employers ranging in size from 2 to 5,000+ lives, the percentage of employees enrolled in an HDHP packaged with a health reimbursement account (HRA) or HSA between 2006 and 2016 has grown from 4 percent to 24 percent.
In the face of health care or tax reform, there will likely be an expansion of what HSAs can do. Currently, any plan to repeal and replace the ACA has included major changes that should greatly expand HSA usefulness and allow them to spread more freely. In fact, legislation has been introduced in both the U.S. Senate and House that’s designed to give HSAs a boost, including doubling the current HSA limits (currently $6,550 for individuals and $13,100 for families).
WHAT’S SO GREAT ABOUT HSAs
For the employee, an HSA is essentially an individual bank or trust account that acts in conjunction with a qualified HDHP into which the employee can contribute funds on a pre-tax basis, then withdraw those funds – tax-free – when paying for qualified, medical-related expenses, including a portion of long-term care (LTC) insurance premiums.
Contributions into an HSA can help mitigate much of an employee’s out-of-pocket health care costs, especially after retirement. It’s predicted that the average couple that retired in 2016, at age 65, will spend $260,000* on medical expenses in retirement and, for those retiring after 2016, health care costs will rise between 4 percent and 6 percent annually. When paired with an HDHP, HSA contributions are made tax free, the balance accrues tax free and withdrawals – if used for qualified medical expenses – are made tax free.
From the employer’s perspective, a robust and effective health and wellness offering that includes an HSA helps to simultaneously attract and retain top talent and keep employees engaged in their work. While many employers offer an HDHP because it’s less expensive than traditional insurance, the addition of an HSA also provides tax savings for an employer. Neither the employee nor the employer has to pay payroll taxes on HSA contributions deducted via payroll (as long as they establish a valid Section 125 plan, which can be very simple to do). An employer may also take a federal income tax deduction for any contributions it makes into its employees’ HSA accounts.
HELPING EMPLOYEES CONNECT THE DOTS
HSAs have commonly been marketed as health spending accounts, rather than the health savings accounts they truly are. HSAs provide valuable coverage options for all ages. For earners of any range, but especially those middle to higher earners who
are relatively healthy – even those with high out-of-pocket costs – it’s worth it for an employee to do the math and calculate whether an HSA would work better for them than a low-deductible, high-premium health plan when offered a choice. If an individual or their family is relatively healthy, lowering premiums and contributing to an HSA would be more financially productive – especially if their employer is matching HSA contributions.
A clearer understanding of HSAs can give employees the power to make the most of their health care options. Even well-educated and informed individuals have trouble keeping track of the latest developments in health care because they’re unaware of news and trends outside of what their employers or HR departments offer.
WHAT’S ON THE HORIZON
The future success and proliferation of HSAs comes down to revenue, education and communication.
Currently, for employees, there’s a spending gap of about $3,500 between annual contribution limits and out-of-pocket maximums (roughly $6,500 and $10,000, respectively). ACA modification proposals or possible future tax reform working their way around Washington could increase HSA contribution limits to match or exceed the out-of-pocket max, eliminating this gap and delivering a boon to employees and employers alike. Even in the event that both health and tax reform are blocked or phased out, there’s always the opportunity for piecemeal change and, since HSAs have mass appeal, there will most likely be rule changes that allow the prominence of HSAs to grow even further. Since proposed changes would simplify HSA processes and make an enticing incentive to employees out of what was to be one of the key barriers to adoption, there could be an HSA boom in the future.
Looking ahead, legislators in both major political parties are in favor of increasing the annual contribution limit – doubling it, really, to about $13,000 – and that’s when we’ll see the next major expansion and growth in not only HSA usage, but HSA investment.
The big, expected change that could fuel HSA popularity highlights a potential shift in regard to HSA fund investment, employer matching and general fund availability — legislators want to see this increase in HSA contribution limits.
Even without major changes, HSAs are and will continue to be the investment vehicles that can deliver benefits to employers and employees as well as help businesses and individuals alike prepare for a brighter, more fruitful future. A viable part of an employee benefits strategy, HSAs are here to stay.
To learn more about HSAs please email us at NFP_MGInfo@nfp.com.
Securities may be offered through Kestra Investment Services, LLC (Kestra IS), Member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, (Kestra AS), an affiliate of Kestra IS.