Higher limits on health savings accounts present a new opportunity for brokers and their clients to remind employees about the benefits of using them.
“As employees take on greater financial burden for their healthcare expenses, HSAs will become a critical component of an overall healthcare strategy,” writes Cort Olsen for Employee Benefit Adviser.
However, many eligible employees might be missing out on the benefits of these accounts, Whitney Richard Johnson writes for BenefitsPro. “It’s been estimated that nearly half of Americans who are eligible to open an HSA haven’t—usually because they can’t afford to,” she writes. “Unfortunately, they are missing out on potential tax benefits.”
The new limits: “For self-only plans, the 2017 contribution limit (employer and employee) is $3,400; this represents a $50 increase over the 2016 limit. For family plans, the 2017 limit remains unchanged from the 2016 amount of $6,750,” according to compensation.blr.com. The IRS defines a high-deductible health plan “as one with an annual deductible of not less than $1,300 for self-only coverage or $2,600 for family coverage.”
An employee must be covered by a high-deductible health plan (and no other plan) in order to be eligible to open an HSA. The benefits are many: Employers may contribute to an HSA, but the money belongs to the employee alone. Even if an individual ceases to be eligible for the account (because of changed coverage or a different job), he or she can use existing money in the account for qualified health expenses.
“HSA owners can simply let the account grow until they do need it,” Johnson writes. “At age 65, an HSA owner can use the balance for any reason without penalty, but the HSA owner will have to pay income taxes on amounts withdrawn for nonmedical expenses.”
An HSA has several tax benefits. It reduces its owner’s income for federal tax purposes, and many states offer income tax breaks on the amount of the HSA contribution, as well. “HSA owners receiving HSA contributions pre-tax through an employer, either employer contributions or employee payroll deferral through a Section 125 plan, also avoid Social Security taxes, Medicare taxes, federal unemployment taxes, Railroad Retirement Act taxes, and in most cases state unemployment taxes,” Johnson writes.
Plus, the earnings grow tax-free. “HSA owners that use the HSA for qualified medical expenses enjoy tax-free distributions,” Johnson writes. “This is a better deal than traditional IRA or 401(k)s because those plans are only tax-deferred, not tax-free.”
More employers are offering incentives for employees to open HSAs, Olsen writes, including as rewards for participating in wellness challenges or meeting specific goals. “To entice participation,” he writes, “we see more employers contributing to these accounts, much like they do with a 401(k) match.”
Employer and broker education can also go a long way, writes Robert Steyer for Pensions & Investments. “Sponsors need to include the HSA message into their whole retirement message,” he writes. “Communicate this as a retirement benefit plan.”