5 ways HSAs can help employees plus attract and retain top talent
Written by William G. (Bill) Stuart
Research indicates 70 percent of employees say benefits are either the most important or a very important factor in accepting a job offer or staying in their current job.1 In the age of the Great Resignation, companies can further round out their benefits package by offering Health Savings Accounts (HSAs) to help keep productive employees and recruit talent.
While retirement accounts remain integral to an employee's overall financial picture, HSAs also represent a financial opportunity for employees and employers alike. Here are five ways HSAs can help your employees:
1. Employees don’t risk forfeiting unused HSA balances at year-end
Make sure your employees don’t confuse an HSA with a Health FSA. Health FSA participants who carry balances into the end of the plan year may scramble to spend the final dollars rather than forfeit unused funds. (Employers can reduce the forfeiture risk by adding a grace period or limited carryover of unused balances. But Health FSAs are still a use-or-lose account.)
In contrast, HSA balances remain available for use next month, next year or decades into the future – there’s no deadline to make tax-free withdrawals for qualified expenses. Employees who contribute more than they spend build a larger balance that can be used to reimburse future qualified expenses. These unspent funds can represent both an emergency fund and a retirement medical reimbursement account.
Employers who emphasize this point benefit because employees become less likely to underfund their account out of fear of forfeiting unused balances.
2. Employees can change their contributions mid-year
Another key difference between a Health FSA and an HSA: Health FSA participants make a binding annual election they can’t adjust as they incur unexpected expenses during the plan year (though they may be able to change their election if they experience a range of life events like a birth, marriage, adoption, divorce, or death).
In contrast, HSA owners can increase their contributions at any point in the calendar year based on their own needs. While not required, this can be useful if they experience an unbudgeted qualified expense, receive a raise or bonus, or change their long-term financial planning strategy.
Employers must allow their employees to make prospective election changes at least monthly. This flexibility is a win-win – since neither employees nor employers pay federal payroll taxes (7.65% on the first $147,000 of income in 2022, then 1.45% above that figure) on the amount employees contribute to their HSAs through pre-tax payroll deductions. Employees also pay no federal income taxes or state income taxes (except in California and New Jersey) on their pre-tax payroll contributions.
3. HSA distributions can reimburse some insurance premiums
Employees who leave the company unexpectedly may experience a financial impact as they pay the full (not subsidized by the employer) premium for their medical coverage. If they’re collecting unemployment benefits or using COBRA to continue coverage on the group plan, they can pay their premiums with tax-free withdrawals from their HSA.
Paying premiums with pre-tax funds reduces their net cost of coverage – even if they make current tax-deductible contributions to pay current premiums. And if they built a balance prior to leaving employment, they have an emergency medical-premium fund to pay their monthly premiums.
4. HSA balances can be invested
Not only do HSA balances carry over from year to year, but a portion of them can also be invested. Most, but not all, HSA owners have access to a menu of investment options.
HSA administrators or employers usually set a minimum cash balance account owners must maintain. Above that threshold, HSA owners can invest their balances to match their time horizon and personal risk tolerance.
Employees can build their HSA balance, which can help reduce the financial impact of eligible medical expenses, and also have the opportunity to invest which can help them feel more financially confident.
5. HSAs can pull double-duty as a great retirement account
HSAs offer tax advantages traditional retirement accounts can’t match. For example, contributions to both a tax-deferred 401(k) plan and an HSA aren’t included in federal or state income taxes (though California and New Jersey don’t allow a state income tax deduction for HSA contributions).
In contrast, federal payroll taxes always apply to tax-deferred 401(k) contributions. Employers who point out this tax difference not only help their workers save more for retirement, but they enjoy payroll-tax savings a tax-deferred 401(k) plan can’t deliver.
The benefits of HSAs as a retirement account extend beyond contributions. Unlike distributions from a tax-deferred retirement account, HSA balances aren’t subject to Required Minimum Distributions (RMDs). And withdrawals from an HSA for qualified expenses aren’t included in the calculations of income used to determine Medicare Part B and Part D premium surcharges and the percentage of Social Security benefits taxed.
A well-structured HSA program can help support the goals of both employers and employees. For employers, the objective is to attract and retain employees. For employees, the goal is to right-size their medical coverage so they can apply their benefits dollars to other coverage – including building a tax-advantaged account with which to reimburse current and future qualified expenses.
- Torre, Tom. “Employer-Sponsored HSAs Help With Recruitment and Retention.” InsuranceNewsNet, June 1, 2021.
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.