Health savings accounts (HSAs) offer many valuable benefits to participants. However, many employees do not fully understand how HSAs work and may be missing out. In fact, it is estimated by the Flexible Benefit Service Corporation that 40-50 percent of HSA-eligible individuals do not have an HSA.
One reason for the underutilization of HSAs may be that employees do not understand the value that HSAs offer. In addition, some may assume that HSAs are the same as flexible spending arrangements (FSAs), except that they are tied to a plan with a higher deductible. Employers that want to change this perception of HSAs can show employees the value that these accounts have.
For example, while FSAs and HSAs have similarities, there are also many differences. One major difference is that HSAs are owned by the individual, and are portable. An individual does not lose his or her HSA when leaving employment. In addition, there is no “use it or lose it” provision that FSAs require. An individual’s HSA dollars continue to roll over from year to year (and may even accrue interest).
Also, while there are strict rules regarding an individual’s eligibility to make tax-free contributions to an HSA, once the funds are in the HSA, they can be used for qualified medical expenses tax-free at any time after the HSA is established. This is true even if, at the time of the HSA distribution, the individual is not considered “HSA-eligible.”
To increase employee participation in HSAs, employers should try to demonstrate the real dollar value that HSAs can provide. This could involve demonstrating the tax advantages/savings associated with contributing the maximum dollar amount to the HSA. After all, HSAs provide a triple-tax advantage:
- Contributions to an HSA are taxfree;
- Interest/investment earnings on the
HSA are tax-free; and
- Distributions from the HSA for
qualified medical expenses are also
In addition, consider showing employees how HSA contributions can cover the high deductible that is required to be met under the plan.
If the employer provides a matching contribution to employee HSAs, be sure employees understand how much they need to contribute to obtain the full match from the employer.