What is it about health savings accounts (HSAs) that people aren’t getting?
During open enrollment and throughout the year, those three little letters (or, more accurately, erroneous beliefs about them) are responsible for more exasperated questions and misguided choices than nearly any other benefits concept.
From your perspective as an HR professional, the widespread confusion around HSAs is a shame.
You understand the triple-tax-advantaged, money-saving, long-term-investment potential of an HSA. You grasp how enrolling in an HSA — coupled with a high-deductible health plan (HDHP) — can be an affordable and effective healthcare strategy for employees of all ages and health situations. Furthermore, you know that increased HSA/HDHP enrollment can lower company-wide healthcare spending.
And yet, employees don’t seem to be picking up on all these benefits. According to one survey, about a third of adults enrolled in an HDHP haven’t opened an HSA.
The gap between what you understand about HSAs and what your company’s employees believe is a vast chasm. To bridge that span, it helps to know where the employees are coming from.
Here are the five most common misconceptions about health savings accounts:
Myth #1: An HSA Is Just Another Healthcare Headache
For better or worse, getting a health insurance claim paid can often involve jumping through a series of administrative hoops — verifying coverage, securing referrals, requesting pre-approval, and so on. Naturally, employees may be under the impression that using an HSA to pay for health costs requires untangling similar red tape.
The truth: HSAs are essentially financial accounts, and as such, they are as easy to use as a bank account. Modern HSAs come with debit cards that can be used to make qualifying purchases. In other words, if you can use a debit card, you can use an HSA.
Myth #2: HSAs Are Only For Spending (Like FSAs)
Nearly two-thirds of Americans believe HSAs and FSAs are the same thing. It’s a reasonable assumption. After all, both can be used to cover health-related expenses and can be funded with pre-tax dollars.
There are, however, some critical differences between FSAs and HSAs, not the least of which is what that “s” stands for: health savings accounts vs. flexible spending accounts.
The truth: FSA contributions are use-it-or-lose-it, typically expiring two-and-a-half months after the plan year’s end. HSA accounts, on the other hand, belong to the employee, not the employer. Funds roll over indefinitely (and can even be passed on to beneficiaries should the original account holder die).
As the name makes clear, HSAs are savings accounts. HSA balances can earn interest and be invested. Their advantage over traditional savings accounts such as IRAs is that they are triply tax deductible:
- No taxes on HSA contributions
- No taxes on HSA growth
- No taxes on HSA use for qualified medical expenses
For this reason, many financial experts recommend deferring HSA reimbursements until retirement. As one advisor explains:
If your child breaks their arm skateboarding and you end up with $10,000 in medical bills when you’re 25, but delay reimbursing it until retirement, that $10,000 could grow to $100,000 by the time you retire and you’d still be able to take out the original $10,000 tax-free.
Myth #3: HSAs Are Not For Individuals or Families With High Healthcare Costs
From an employee’s perspective, the scariest thing about an HSA is the health plan it’s tied to, a high-deductible health plan (HDHP). Only HDHP members qualify for HSAs.
With traditional health plans, high deductibles can translate into high out-of-pocket costs for seeing doctors, filling prescriptions, and undergoing tests and procedures. So, the idea of choosing a high-deductible health plan can be unnerving, especially for those who have or anticipate significant healthcare needs.
The truth: HDHPs are nothing to be afraid of. First, they typically come with significantly lower premiums — which means more take-home pay for employees or money that can be reinvested back into the HSA.
Secondly, tax-free HSA funds can be used to pay out-of-pocket healthcare costs, including doctor visits, medications, and testing. In addition, because HSAs grow tax-free and roll over indefinitely, they can be used to offset future healthcare expenses.
Myth #4: Unused HSA Funds Are Lost Forever
Some employees may feel that contributing to an HSA is akin to throwing away money regardless of the tax savings. According to this line of reasoning, HSA funds are only for qualified health expenses, and if you don’t have qualified health expenses, the money remains beyond your grasp.According to this line of reasoning, HSA funds are only for qualified health expenses, and if you don’t have qualified health expenses, the money remains beyond your grasp.
The truth: Everyone — even healthy people — buys health-related products and services. Eligible HSA purchases go well beyond those covered under a typical health insurance plan. Among other things, you can use an HSA to buy:
- Eyeglasses, contact lenses, contact lens solution, and prescription sunglasses
- Over-the-counter medication (such as painkillers or cough suppressants)
- Women’s hygiene items, including tampons and pads
- Birth control, condoms, and pregnancy tests
- Sunscreen
- Smoking cessation programs and aids, including nicotine patches or gums
Considering the wide range of options for spending HSA funds and the fact that HSA accounts never expire, it is nearly impossible to “lose” HSA contributions. Plus, after age 65, HSA account holders can withdraw funds with no financial penalty (withdrawals for non-medical purposes are taxed as income).
Myth #5: If You Leave Your Job, You Lose Your HSA
Millennials have been dubbed “the job-hopping generation” for good reason. People change employers frequently these days. And with all these employment changes, some workers may be reluctant to put down roots, such as financial accounts that can’t follow them from workplace to workplace.
The truth: HSAs are portable between jobs and into retirement. Once an HSA has been established, the funds within it belong to the account holder, not the employer. (A fact that only 50% of employers are aware of.) This includes matching funds contributed by the employer.
Helping Your Employees Separate HSA Fact From Fiction
The five myths described above and others like them may be preventing your company’s employees from choosing health plans and accounts that will help them reduce their healthcare costs and tax burdens while saving for retirement.
But myths are made to be busted.