During this year’s open enrollment period, millions of employees will enroll in high-deductible health plans. According to the National Center for Health Statistics (NCHS), high-deductible health plans have become increasingly common in recent years, with more than 43 percent of people under the age of 65 with private health insurance being enrolled in one.
Although the low premium can make these plans attractive, the risk of high out-of-pocket costs is a drawback. Luckily, this drawback can be mitigated with the use of a health savings account, or HSA. Indeed, as high-deductible health plans have become more common, so too have HSAs. In 2010, only 7.7 percent of people with private health insurance had one, according to NCHS. By 2017, that figure had risen to 17.9 percent.
It might be even higher if more people understood how these accounts work. According to PlanSponsor, a 2017 survey from LIMRA found that many Americans got basic facts about HSAs wrong: 61 percent didn’t know how HSAs differed from flexible spending accounts, or FSAs, and 49 percent incorrectly believed that funds in HSAs expired after a year.
Help employees make the best choices this open enrollment by educating them on HSA basics.
HSAs and FSAs
It’s easy to confuse HSAs and FSAs. After all, they’re both savings accounts that help individuals pay for medical expenses, and the abbreviations only differ by one letter. Despite this, there are some important distinctions.
- FSAs are available to any employee whose employer decides to offer one, whereas HSAs are available only to people enrolled in high-deductible health plans. This means that some people who don’t qualify for an HSA might qualify for an FSA.
- FSAs are owned by the employer, whereas HSAs are owned by the individual. This means that people with HSAs can take their accounts with them when they change jobs or retire.
- The funds in FSAs expire each year, although some plans may offer a short grace period or small carryover amounts. The funds in HSAs never expire. Even after the account owner enrolls in a non-high-deductible health plan and can no longer contribute to the HSA, the funds remain available for withdrawal.
The Tax Advantages of HSAs
HSAs already sound pretty great, but they also offer triple tax advantages that further boost their appeal.
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- First, the initial contributions are made pre-tax.
- Second, the contributions can earn interest, and this is also tax-free. Remember that the funds don’t expire, so the interest can keep accumulating year after year.
- Third, if the money is withdrawn for eligible medical expenses, the withdrawals are also tax-free.
For these reasons, HSAs are often used in retirement planning. In fact, HSAs can be an appealing option for individuals who want to save more for retirement but are also worried about their current health care costs.
If you need help administering your company’s HSAs or FSAs, Travisoft has you covered. Learn more about our flex spending administration platform.