Health Savings Account (HSA)
What Is an HSA?
A health savings account (HSA) is a tax-advantaged account employees can use to save money to pay for qualified medical expenses. It’s tied to a high-deductible health plan (HDHP), and contributions are automatically deducted from their paychecks each pay period. The benefits of HSA include:
- Reduced Financial Burden: HDHPs have lower premiums and higher out-of-pocket costs. HSAs make it easier for people to meet short- and long-term health needs.
- Tax Advantages: Depositing money into an HSA reduces an employee’s taxable income. Contributions grow tax-free year over year, and employees don't have to pay taxes on withdrawals as long as they're for healthcare purposes.
- Retirement Savings: Employees can invest HSA funds in stocks, bonds, mutual funds, and more, increasing their nest egg for retirement.
- Employee Ownership: An HSA belongs to the employee, so it stays with them if they switch jobs or leave the workforce.
- Yearly Rollover: Unused HSA money isn't forfeited at the end of each year—it remains in the account until the employee spends it.
HSA vs. FSA: What’s the Difference?
A company may offer an HSA along with a flexible spending account (FSA). Employees can sign up for an FSA whether or not they have insurance. But while it allows them to set money aside for medical costs like an HSA, the FSA doesn’t roll over from year to year and can’t be invested. Also, it's employer-owned, which means employees can’t take the money with them if they leave the company.
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How Does an HSA Work?
Employees sign up for a HSA-eligible health plan and an account during your company’s open enrollment period. Each employee adds money through pre-tax payroll deductions, and the employer may make additional contributions. Participants spend HSA money on themselves, their spouses, and eligible dependents using the following payment methods:
- HSA card or check linked to the account
- Online bill pay via the account administrator
To enroll in a program, employees must meet HSA eligibility criteria defined by the IRS. Among other stipulations, they must be covered by an HDHP and not be claimed as a dependent on someone else’s tax return. IRS rules also dictate HSA contribution maximums and what constitutes a qualifying health plan.
Annual HSA Contribution Limits
HSA limits are the most an employee and their employer may deposit collectively each year. The 2024 HSA maximums are $4,150 (single) and $8,300 (family), plus an extra $1,000 catch-up contribution for participants age 55 and older. Any funds deposited over the limit are subject to a 6% excise tax.
The IRS also sets HDHP definitions and parameters. For 2024, an HDHP plan must have an annual deductible of at least $1,600 (single) and $3,200 (family). Out-of-pocket expenses (deductibles, copayments, and other amounts excluding premiums) for the plan must not exceed $8,050 (single) and $16,100 (family).
Employees can use their HSAs to pay for approved medical, dental, vision, and pharmacy expenses at a provider’s office, in-store, or online. According to the IRS, qualified medical expenses are costs related to the diagnosis, mitigation, treatment, cure, or prevention of disease, such as:
- Copayments for doctor’s visits
- Prescription drugs
- Over-the-counter (OTC) medications
- Vitamins and supplements
- Maternity and prenatal care items
- Diabetes care supplies
- Family planning
- Mobility aids
If employees use their HSA to pay for non-eligible items, they’ll be subject to a tax penalty. After age 65, employees can spend their HSA funds without penalty (just like other retirement investments).
Helpful Resources for Employees: HSA Online Stores
Target, Walmart, Walgreens, and other prominent retailers make it easy for account holders to figure out what they can buy with their HSA. Through designated sections of their websites, they help people find the items they need, maximize their funds, and discover new HSA-eligible products. Many retailers also have an FAQ section for more information about HSA spending and reimbursement.
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What Is HSA Reimbursement?
HSA reimbursement is permitted for any qualified medical expense. This is when an employee uses their HSA to pay themselves back for out-of-pocket costs. While it usually happens when the total cost exceeds the amount available in the account, employees can typically do this at any time via check, ATM withdrawal, or online transfer.
HSA Reimbursement Example
Let's say Rob isn't feeling well and visits the hospital on his way home from the office. After running some tests, the doctor determined the cause of his persistent stomach ache was appendicitis. Rob is immediately prepped for surgery and wakes up hours later without his appendix.
In emergencies like this, the employee may not have time to check to see if they can afford a necessary procedure. When Rob's final bill arrives, the total is over $10,000—more than twice what he has in his HSA—and after negotiating with the hospital, Rob still owes more than $5,000. He has enough to cover the balance in his personal savings, but he loses the tax benefit of using his HSA.
This is where HSA reimbursement comes into play—Rob can leverage the tax advantage of his account, even though there was no money in it at the time of his procedure. Using receipts from his out-of-pocket hospital payments as proof, Rob can withdraw $5,000 from his HSA as the funds become available.
Yearly HSA Planning
To get the most from an HSA program, many employees plan ahead, ensuring they're contributing enough from each paycheck to pay the costs of their current medical care and prepare for the unexpected. While this can lead to substantial savings, each person's health and situation is different. Educating your team on HSA benefits, limitations, and planning tools can help them make the most of their tax-free money in the ways that work best for them.
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