5 ways HSAs can help employees and what employers should know

While retirement accounts remain integral to an employee’s overall financial wellness picture, companies can further round out their benefits package by offering Health Savings Accounts (HSAs) in conjunction with high-deductible health plans. These tax-advantage accounts are an additional financial tool that offer the opportunity for eligible employees to contribute funds that they can then use towards qualified medical expenses now — and down the road.

Plus, offering HSAs may also help with employee retention. According to a recent consumer sentiment study conducted by Voya Financial, more than half of employed Americans are more likely to stay with their current employer if offered access to health spending and savings accounts (51%), voluntary benefit offerings (51%) and mental health benefits and resources (54%).¹

Here are five benefits of HSAs for employees — and need-to-know information for employers:

1. Employees don’t risk forfeiting unused HSA balances at year-end

HSA balances remain available for use now, next year or 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 help their employees better understand these accounts and who are then potentially less-likely to underfund their accounts out of fear of needing to forfeit unused funds.

2. Employees can change their contributions mid-year

HSA owners can increase — or decrease — their contributions at any point in the calendar year based on their own needs. 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 on the amount employees contribute to their HSAs through pre-tax payroll deductions. Keep in mind that the IRS designates an annual maximum contribution amount.

3. HSA distributions can reimburse some insurance premiums

Employees who leave the company 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 essentially 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, once the balance reaches a designated threshold, the account holder may 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.

When employees choose to invest HSA funds they give their money the opportunity to grow. It’s important to remember that as with any investment, there are risks. Be sure to fully explore those risks before choosing to invest your balance.

5. HSAs can be beneficial in retirement

HSAs offer tax advantages that in some cases are similar to those offered through a retirement account, and in some instances are different. For example, contributions to both a tax-deferred 401(k) plan and an HSA aren’t included in federal income taxes.

However, federal payroll taxes always apply to tax-deferred 401(k) contributions. Employers who point out this tax difference not only offer their employees the chance to save more for retirement, but they enjoy payroll-tax savings a tax-deferred 401(k) plan does not.

Funds in an HSA can be beneficial in retirement in other ways as well. 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. It is important to know that once you're enrolled in Medicare you can longer contribute to your HSA but the funds in the account remain yours to use.

Summary

A well-structured HSA program can potentially help support the goals of both employers and employees. For employers, the objective is to retain top talent. For employees, the goal is to right-size their medical coverage so they can apply their benefits dollars to other coverage — and when eligible, contribute to an HSA with which to reimburse current and future qualified expenses.

Talk to your Voya representative for more information about Voya’s HSA offering.