The Health Savings Account (HSA)

A Health Savings Account is a special type of savings account that allows individuals to put aside tax free money to be used for health care expenses. Employers, as well as individuals, can set up an HSA. To participate, the individual/employee must be under age 65 and be covered by a high deductible health insurance plan. HSA premiums are typically lower than the premiums for traditional plans making them attractive for employers to offer their workforce.

Employer offered HSAs are becoming common as employers try to lower their health care costs as well as extend greater latitude to employees for managing their health care decisions and expenses. Many employers offer their employees a choice between a traditional health care plan and a high deductible plan tied to an HSA. Because HSAs are a relatively new concept, employees tend to be cautious about participating. Consequently, when offering an HSA, it is critical that the employer (or their broker) does a thorough job of providing educational materials and face-to-face opportunity for employee questions. To encourage employee selection of the HSA, employers will often take the savings they are getting by their lower plan premiums and contribute those dollars towards the employees’ HSA account.

Some HSA facts:

  • An HSA is a triple winner for employees. They get to defer taxes on money going in, they get to retain and roll over unused balances from year to year, and the money that is taken out for health expenses is a tax-free withdrawal. For 2011 the IRS allows employees with HSAs to save up to $3,050 for an individual and $6,150 for a family. In addition, HSA holders who are older than 55 may save an additional $1,000. These maximums include any employer contributions on the employee’s behalf.
  • HSAs give the employee greater control over their health care decisions as well as the ability to decide where to save or invest the money in their account. In addition, the funds carry over year to year and when the employee leaves the company they may take their account with them. This is a big plus for healthy people who are not using their insurance coverage often – their HSAs go unused and grow over time.
  • For 2011, the HSA annual minimum insurance plan deductible must be at least $1,200 for an individual and $2,400 for a family. Annual out-of-pocket expenses, like deductibles and co-payments, cannot exceed $5,950 for individual coverage and $11,900 for family coverage.
  • A perceived negative aspect of the HSA is typically experienced by employees who often use their health care insurance and are not so keen with the high deductible up front. Also it is important to note that participants must be willing and able to contribute to their HSA. The worst situation would be if an individual chose the high-deductible plan, got sick and did not have the money to pay their medical bills. Because of that possibility, participants should think of the health-insurance deductible as the minimum amount to put into an HSA. Reducing these fears is why many employers opt to contribute to the employee’s HSA when they are first introduced.
  • The HSA is intended for putting aside money for health care expenses. Consequently, when money is withdrawn from an HSA for unqualified expenses (non-medical expenses) the employee is charged with taxes as well as a 10% penalty. The 10% penalty no longer applies at age 65+ but the employee must still pay the taxes.
  • Many HSAs offer both debit cards and checkbooks for use to pay medical expenses directly or to reimburse the participant. Important to note: employees with an HSA are not allowed to have a flexible spending account (FSA) in addition to their HSA.

For many businesses HSA’s are an excellent alternative to the traditional health care offerings. Do you offer the HSA option to your employees? What experiences have you had with HSAs?

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