What is an HSA?
An HSA is essentially an employee-owned savings account for healthcare related expenses. To be eligible for participation in an HSA, an employee must also be enrolled in a high deductible health insurance plan (HDHP.) Both employees and employers can contribute to an employee’s HSA. But what really makes an HSA special is its triple tax-advantage:
- Funds are deducted from an employee’s paycheck on a pre-tax basis and deposited into their HSA account
- Funds can be invested within the account and grow tax-free
- Funds are even able to be withdrawn and spent tax-free – if the expenses are qualified
Some employees use their HSA funds each year as they incur expenses, but others use it as a savings vehicle and bank the allowable funds, allowing them to grow over time.
Clearly, the triple-tax advantage is a huge plus for employees but employers’ benefit from HSA’s as well.
- Decrease insurance premiums: HDHPs typically offer employers substantial premium savings.
- FICA is reduced: When an employee contributes to an HSA on a pre-tax basis, neither the employer nor employee pay FICA tax on that contribution.
- Employee Retention: Employees often sight insufficient benefits as a reason to change jobs. Adding an HSA as an option provides an unmatched savings vehicle for employees and increases satisfaction with their benefits. Additionally, since employees own the funds in their HSA, they can formulate a long-term investment strategy, if they wish, and allow those funds to grow tax-free while building a nest egg for retirement.
There are 4 basic contribution strategies an employer can consider when establishing an HSA.
Basic contribution strategies for establishing an HSA
The first option is for there to be no employer contribution. The employee can still contribute to the HSA, if they elect to do so.
- This option is a solid choice for companies that have budgetary constraints to consider.
- When a more traditional health plan is offered alongside an HSA eligible plan with no employer contribution, this sometimes drives more employees to select the traditional plan which can increase employer costs.
- Employees may be less likely to make their own HSA contributions in the absence of an employer contribution.
Second, the employer could contribute “seed” money to eligible employees HSA accounts.
- Often, providing “seed” money encourages employees to participate in an HSA eligible plan since they don’t want to miss out on the employer contribution.
- Many employers choose to provide the HSA funding to be deposited each payroll throughout the year.
- Employer HSA contributions can be designed in a way that is cost-neutral to the employer so that no matter which medical plan an employee selects, the overall cost to the employer remains unchanged.
Third, the company can decide to just match any dollars the employee contributes to the HSA.
- Employers can designate a limit on their match, not to exceed a certain amount.
- Potential new hires view benefits with an employer match favorably.
- Employer matching HSA plans are often highly adopted by employees.
The fourth option would be a seed plus match combination.
- This option provides the best of both worlds. The match drives overall employee participation as many don’t like to pass up “free money.” The seed money is viewed positively since it is employer sponsored.
- This model tends to see an increase in employee contributions over HSA models that do not match.
- Employers who choose this dual model approach can fund the seed and match dollars in a variety of ways. A trusted benefits advisor can help determine what is right for your organization.
benefEx Can Help Your Company Choose the Right HSA
HSAs provide a win-win for your employees and your company. Work with experienced employee benefits consultants to choose the best option for your business. Contact our team today to get your questions answered by industry-leading experts!