Is a Health Savings Account (HSA) Right for Your Business?
What is It?
The HSA, Health Savings Account, is a plan that a business uses to allow their employees to set aside pretax dollars to pay for qualified medical expenses. The properly formed HSA can reduce health insurance costs for both the employer and their employees. These pretax funds can be used to pay for qualified doctor costs, prescriptions, vision, and dental care.
How Does it Work?
The employee designates an amount of pretax money they want to contribute to the HSA on an annual basis. These pretax dollars can be used to pay for expenses up until their health insurance policy’s deductible is reached, as well as other copayments and out-of-pocket costs. Another benefit, quite valuable, is that the unused funds roll over from year-to-year, so there is no pressure to use them by the end of the current yeari.
The employee can add a beneficiary to their HSA account as well. A spouse as the beneficiary will allow them to continue to use the HSA after their spouse’s death. Another benefit is that you can withdraw your HSA funds after age 65 for non-medical purposes. You will not be penalized, but you will have to pay tax on the withdrawn funds. Should you withdraw them for non-medical purposes before age 65, you will incur a 20% tax penalty.
What are Contribution Limits?
From the IRSii:
The following table shows the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses for HDHPs for 2020.
Self-only coverage limit of $1,400, Family coverage $2,800
Max annual deductible & out-of-pocket expenses for Self-only $6,900, Family $13,800
For those over the age of 55, they have eligibility for catch-up contributions of up to $1,000/year.
The HDHP, High Deductible Health Plan
By combining the HSA with the HDHP, employers and employees save money on health insurance premiums. The HDHP is a plan with higher minimum deductibles and maximum out-of-pocket expenses. Not all HDHPs are eligible to work with the HSA, so check to be sure.
The higher deductibles and out-of-pocket expenses mean that the insurance company’s risk is lower and they lower premiums accordingly. The employee offsets the higher deductibles and out-of-pocket expenses with money from the HSA.
The Benefits to the Employee
- Contributions are pretax, so all dollars work for health care.
- Earnings in the plan grow tax free.
- Up to limits, the employee decides what they need to contribute.
- Even after leaving, the funds stay with the employee.
- Qualified expenses withdrawals are tax free.
The Benefits to the Employer
- Employers save payroll taxes on contributions.
- There is a federal tax deduction for contributions made toward employee accounts.
- Accounts, both HSA and HDHP, are easily moved.
- Employees take more interest and time in managing their health care costs.
- The HSA is a recruiting benefit.
Consult with professionals on setting up these accounts, as you must be sure to properly calculate the allowable contributions.