Unlocking the power of HSAs for employers and employees
Each year, October 15th is annual HSA Day, an event that falls at the halfway point of the typical tax-filing year (returns due April 15 most years). The timing is appropriate since Health Savings Accounts (HSAs) offer distinct tax savings for owners.
For those Americans with an HSA-qualified health plan, an HSA is the only account through which they have the opportunity to enjoy tax savings on contributions (including payroll-tax savings on pre-tax payroll deductions to fund their accounts), any earnings on those contributions, and distributions (for a wide range of qualified medical expenses).
By comparison, none of the account types intended for retirement savings – not a traditional or Roth 401(k) plan or Individual Retirement Account, not a 403(b) plan, not a 457 plan, not a SEP IRA or SIMPLE IRA – is exempt from federal income and payroll taxes and state income taxes (though HSA contributions are included in state income taxes in California and New Jersey) on deposits, account growth, and withdrawals. Of course, tax considerations are only one aspect of determining the appropriateness of any investment.
But those benefits – and many more non-tax features – are enjoyed by account owners (employees). What about the companies that sponsor, or are considering sponsoring, a Health Savings Account program? What benefits do they receive when workers enroll in an HSA program?
Employers don't pay their share of federal payroll taxes on employees' pre-tax payroll deductions to fund their HSAs. That's a 7.65% savings. When an employee deposits $2,000 into their account, their employer saves $153 (or less if the employee earns more than $142,800 in 2021). Even if the company absorbs the monthly account administration fee, the net savings exceed $100.
That's the chief visible financial benefit that employers enjoy. But there are other advantages of offering employees this option and delivering a support program that helps workers understand how a Health Savings Account can help them manage their immediate and longer-term health-related expenses.
Surveys show that most Americans don't have $1,0001 saved for an unexpected expense. Recent Voya participant data shows that unreimbursed medical expenses are the #1 reason for hardship withdrawals from company-sponsored retirement plans. And stress – including worry about finances – may manifest in physical illness.2
Unlocking the benefits
Employers need to do more than merely offer their employees an HSA program in connection with the high-deductible health plan (HDHP). A static offer that merely presents am HSA as another benefit option among the dozen or more that the company sponsors is unlikely to grab employees' attention. Here are some approaches that employers can adopt to help employees choose the optimal medical and financial benefits program:
- Engagement. Think Isaac Newton's First Law of Motion: "An object at rest remains at rest, and an object in motion remains in motion at a constant speed and in a straight line unless acted on by an unbalanced force." We know all too well that many employees breeze through open enrollment checking the same benefits boxes they select every year. Employers can address this issue by requiring a positive (rather than passive) enrollment each year, so that employees have to make benefits choices. And the most effective approach may be to present those options without indicating the worker's current choices.
- Education. Many employers introduce their workforce to new benefits during open enrollment. That's a mistake with Health Savings Accounts, especially when the usually abbreviated discussion of HSAs follows a discussion of medical coverage under a high-deductible health plan. A better approach is to integrate HSA education into the company's ongoing financial education program for employees. When workers understand the features of this flexible account prior to open enrollment, they can make a coverage decision that fits with their overall financial strategy.
- Incentives. Many companies give HSA participants a portion of premium savings in the form of an employer contribution to their accounts. The most common approach is either an annual or per-pay-period deposit. Employees appreciate these funds – the money helps them offset their medical cost-sharing, as well as dental, vision, and other qualified expenses – but this contribution approach doesn't offer the leverage typically necessary to build balances quickly.
We've learned that the most effective way to incent employees to increase their contributions to a qualified retirement plan is to set a default election3 (referred to as a negative election in Internal Revenue Service notices on HSAs) and offer matching contributions. This combination – a minimum percentage of salary deferred, plus an incentive that motivates employees to capture the full percentage match – offers the potential to help participants build balances faster than if left on their own with no employer support.
Those same tools are available to companies whose HSA contributions flow through a Cafeteria plan, which they must if the company permits employees to make pre-tax contributions through payroll deferral. Utilizing either or both these approaches is likely to boost balances. Companies considering either approach are advised to design the offering with the advice of benefits counsel to ensure that the program complies with a host of federal regulations.
Another option: Provide incentives for completing activities designed to improve health. Some companies make a portion of their contribution contingent on completing certain tasks, for example an annual wellness visit or a chat with a health coach. There are various federal rules around health incentives, so be sure to discuss a program with benefits counsel.
Investments. Finally, choose an HSA partner whose product includes a robust investment program. Some items to consider:
- A low cash threshold ($1,000, for example) before account owners can begin to invest.
- A variety of low-cost mutual funds to build a diversified portfolio.
- Perhaps target date funds (for example, Retirement 2045) to provide additional options for workers with limited investment experience or confidence.
- A sweep feature that allows account owners to direct all new contributions into the investment choices that the owner selects, thus simplifying the process for them going forward.
The reward for employers
The average HSA has a balance of about $3,000.4 Included in that figure are about half the 31 million HSAs with an average balance of less than $500. Among the roughly 6% of accounts (about two million) with a portion of balances in investments, the average value of the account is nearly $18,000. That's employee money, not the employer's. But it's not a stretch to imagine that a worker with $16,000 or more set aside for healthcare expenses would feel less financial stress than one with little or no savings to cover an unexpected medical, dental or vision bill. And that lower stress may translate into greater productivity, greater general health, and fewer sick days.
Bottom line, a robust HSA program may become a differential advantage to employers in their quest to attract and retain top talent and maintain or increase productivity.
Bill Stuart is director of planning and business analysis at Voya Financial, and author of "HSAs: The Tax-Perfect Retirement Account."
- Ostrowski, Jeff. “Survey: Fewer than 4 in 10 Americans could pay a surprise $1,000 bill from savings.” Bankrate.com, January 11, 2021.
- “Mental well-being inherently connected to financial wellness.” Purdue Today, Purdue University, January 27, 2021.
- Satter, Marlene Y. “Default retirement savings rates could go much higher.” BenefitsPRO, October 16, 2017.
- “Devenir Research: 2021 Midyear HSA Market Statistics & Trends – Executive Summary.” Devenir Group, LLC, report released September 16, 2021.
Neither Voya or its affiliates offer tax or legal advice. Please consult with your tax and legal advisors regarding your individual situation.