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The ins and outs of HSA’s; helping you navigate the 2020 “healthscape”

2020 is the year of “health” -- finding ways to maintain or restore health as individuals and communities and, seemingly, against all odds. All of the prominent health care issues that are so often reduced to political talking points are only being amplified in the present environment, be it the skyrocketing trajectory of costs, or strategies that employers and owners can implement to prevent those costs from shattering their budgets to smithereens.

Taking the pulse of benefits

In its 2019 report, the Society for Human Resource Management (SHRM) notes that the prevalence of High Deductible Health Plans (HDHPs) has increased over the past five years, while the prevalence of Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO) arrangements have remained “stable” over the same time period. Furthermore, SHRM reports that in 2015 43% of the HR representatives noted that their companies offered a Health Savings Account (HSA); in the 2019 report, more than half (56%) offered HSAs. At the same time, employer contributions increased from 30% of reporting organizations to 39%. In all, 59% of those employers surveyed offered an HDHP tied to an HSA or to another health savings or spending account, an HRA (Health Reimbursement Arrangement) or FSA (Flexible Spending Account). Only 19% of respondents noted that their organizations offered HDHPs without the benefit of an HSA, HRA or FSA.

SHRM highlighted the “portability” of HSAs, and its particular appeal to employees with low “health care utilization.” They reinforced how HSAs provide a vehicle to defer taxable income, while also preparing for future health care-related expenses. So, in addition to the cost-saving benefits that may be afforded with HDHPs (lower monthly premiums), HSAs present triple-tax savings that can be passed on to employees:

  • Contributions are not subject to payroll tax and income tax when deducted from paychecks.

  • Funds may be invested and allowed to grow tax-free.

  • If funds are withdrawn and used for “qualified” medical purchases, they aren’t taxed or subject to penalties.

It’s one thing for benefits professionals to discuss these advantages with you as an employer, and it’s quite another for you to communicate these benefits to your associates. Failure to communicate properly results in a failed opportunity to ensure keen participation, engagement, and costs management. Without a good understanding of the HSAs (and the HDHPs paired with them), employees may bypass this benefit as an option during open enrollment. Or, if an employee does opt in, he or she may fail to get the most out of the benefit. SHRM further suggests:

  • Highlight the unique tax advantages associated with these accounts in ongoing communications.

  • Make it clear “why” and “how” this option is attractive.

  • Such messaging is also an opportunity to clarify common misconceptions; for instance, employees may think HSAs have “use it or lose it” restrictions on unspent funds. In truth, funds in FSAs must be used before the calendar year. HSAs roll over and have no such restrictions.

  • Examples or anecdotes are always a great way to get across the importance and potential benefits of these accounts. Tailoring communication specifically to “light users” of health care that are wary of HDHPs may go a long way to make complex insurance-oriented conversations more tangible.

  • Reach your associates where they “are.” Think text messages and mobile-friendly platforms before paper and email. Keep it as hassle-free and convenient as possible.

  • Play up the savings aspect, not just the spending part. As noted by SHRM, once there are sufficient funds in the HSA to meet the deductible, the remainder may be invested to grow monies long term. There are no hoops to jump through to access funds, and those funds may be moved between investment and spending as needed and as needs evolve.

Are HSAs right for your organization?

To help shoulder the expenses within HDHPs, employees enrolled in HSAs may use those funds to help pay the deductible. HSA funds may also be applied toward copays. Some HDHPs may pay for preventive services (such as mammograms) before the deductible is met. In fact, just last year, the IRS expanded coverage so that HDHPs and HSA-eligible plans would pay for more treatments related to chronic conditions before enrollees meet their deductibles. These qualifying treatments included beta blockers for coronary artery disease. Along with some of the communication mentioned above, it’s important to convey the importance of routinely reviewing these provisions to your staff. Spouses must be enrolled in HDHPs (if he or she uses insurance as secondary coverage), and the HDHP must generally be the only health insurance plan. Dental, vision, disability and long-term care insurance coverage are excluded from these restrictions.

Employers at some point may also consider Flexible Spending Accounts (FSAs) as an alternative. As noted, HSAs allow for all unused funds to be rolled over to the next calendar year; however, FSAs only allow for up to $500 in unspent funds to be rolled over. This is where the notion of “use it or lose it” comes from. Additionally, employer-sponsored FSAs don’t allow for associates to take the money with them wherever they go, be it retirement or a workplace or career change. Alternately, HSAs are flexible and account for life and job changes.

Generally, employers who offer HSAs as a benefit with HDHPs find that associates appreciate:

  • The ability to control how much money is set aside, and the ability to control how that money is spent

  • That employers can contribute to their accounts (great for leadership to demonstrate their value!)

  • Unused monies are theirs indefinitely (untaxed!)

  • The savings component can’t be overstated; consider that the Federal Reserve reports 39% of Americans don’t have enough money in the bank to cover a $400 emergency expense.

A few considerations for employers and employees alike include:

  • As an unpredictable facet of life, illness-related expenses can be near impossible to budget for.

  • Credible data on the quality and value of services rendered at health care facilities can be confusing. The U.S. Centers for Medicaid and Medicare Services provides a good start with its “Hospital Compare,” a consumer-oriented website that provides objective data on performance measures such as readmissions and mortality rates.

  • Older, sicker, “higher utilizers” of care may find it particularly challenging to set aside sufficient monies in an HSA.

  • In fact, the Mayo Clinic surmises the pressure to set aside money in HSAs may lead some people to forgo medical care when they need it, which adds up to greater costs down the road due to their deteriorating health care status.

  • In today’s uncertain environment, should money be taken out and applied toward nonmedical or nonqualifying expenses, those funds will be taxed. Associated fees are no joke. On top of being taxed on the withdrawal, a 20% penalty is also assessed. This penalty applies to accountholders under age 65.

What makes an expense “qualified”?

Just as one’s health status evolves over time, so have the health expenses that may be funded with an HSA. Generally speaking, though, qualified expenses include:

  • Those related to diagnostics, not limited to lab fees that are part of medical care and devices such as blood sugar test kits

  • Supplies and services that are associated with the prevention, management and treatment of medical conditions (i.e. bandages, wigs for hair loss due to cancer treatments)

  • Meals and lodging linked to medically-necessary treatments; for instance, inpatient substance abuse treatment

  • “Capital” improvements or modifications to homes and vehicles, from wheelchair ramps to specialized hand controls

  • Ophthalmological exams, prescription eyewear, contact lenses and associated supplies (i.e. saline solution)

  • Training and care of guide dogs or other service animals

  • Physical and other therapy services related to medical treatments

  • Transportation used for medical reasons, such as out-of-pocket fuel costs

Expenses that aren’t included are those that don’t “meaningfully promote the proper function of the body or prevent or treat illness or disease,” including cosmetic surgery. Reconstructive surgeries following cancer treatments and to correct other trauma are covered. Health clubs, spas, household assistance, vitamins and supplements, diet foods and beverages, and personal use items largely don’t qualify unless they are recommended by doctors to treat specific conditions.

A note on CARES Act changes

The Coronavirus Aid, Response and Economic Security (CARES) Act legislation allows for enrollees to use HSAs, HRAs and FSAs on OTC medications and some feminine care products. These permanent changes apply retroactively to purchases (as of January 1, 2020). Additionally, CARES legislation allows HDHPs to cover telemedicine and other remote care services without cost-sharing through 2021. These services are also covered before enrollees have met their deductible and without affecting their HSA contributions. For plan year 2020, “self-only” coverage contributions max out at $3,550, while the maximum allowable family contributions are set at $7,100. The annual limits for 2021 go up $50 and $100 for individuals and families, respectively, at $3,600 and $7,200, which are in line with previous years’ increases.

These aforementioned telehealth/remote care provisions are slated to sunset at the end of next year, unless they are extended by Congressional approval. The thought is that altering telehealth rules during the pandemic will ease the burden on in-person facilities and limit the spread of COVID-19.

We are more than accounting. As partners in your business, we’re happy to help you get started. Since every team is different, we look forward to discussing your situation.

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