When it comes to saving for healthcare expenses in retirement, there are few better options than a health savings account (or HSA). Because HSAs are relatively new (2003), many employees either do not know or are misinformed about their benefits; however, the triple-tax advantage of an HSA makes it worth taking the time to get educated.
HSAs, which are offered in conjunction with a high-deductible health plan (HDHP), are tax-exempt accounts that pay or reimburse certain medical expenses. No permission or authorization from the IRS is necessary to establish an HSA. Accounts are set up with a trustee – this can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee. The HSA can also be established through a trustee that is different from your health plan provider. (Fun Fact – HealthyCapital has its own HSA you can use!)
HSAs have several benefits:
- They provide a tax deduction for contributions that anyone (the employee, employer, or other source) makes to the HSA, even if the person doesn’t itemize the deductions on Schedule A (Form 1040).
- Employer contributions (including those made through a cafeteria plan) may be excluded from gross income.
- Contributions remain in the account until they are used.
- Interest and other earnings on assets in the account are tax-free.
- Distributions may be tax-free if they are used to pay for qualified medical expenses.
- An HSA is “portable.” It stays with the individuals if they change employers or leave the workforce.
The employer, the individual, or both can make contributions to HSAs. Employer contributions are not taxable to the employee; in fact they are excluded from income and wages.
Limit on contributions
The amount you or any other person can contribute to an HSA depends on the type of HDHP coverage, age, date of eligibility, and the date that ceases eligibility. In 2019, for self-only HDHP coverage, individuals can contribute up to $3,500 and families up to $7,000 per year.
How to educate your employees about the benefits of an HSA
The best way to educate employees might entail a multi-tiered approach that includes personalized messages and a healthcare-cost calculator, which 1) reveals the employee’s projected retirement medical expense and 2) illustrates how much the employee could save in an HSA based on time to retirement, after-tax returns, and contributions.
To see our own healthcare cost calculator, which is available to your employees through the HealthView HSA (within the HealthyCapital app), visit the HealthView Asset Management website.