How to handle health insurance benefits is a question more than one business owner has wrestled with over the years. You want to help employees as best you can with a rock-solid medical plan, but you also want to do what is best for the company's bottom line. Finding that sweet spot is a lot like finding the perfect Christmas gift.
One option is to combine a high deductible health plan (HDHP) with a health savings account (HSA). This sort of combined benefit theoretically reduces costs and gives employees more freedom to determine how they use monies dedicated to healthcare.
An HSA is effectively a savings account containing money that can only be used to cover qualified healthcare expenses. Normally it is funded by a combination of employer and employee contributions. Employee contributions are made by way of payroll deductions.
Here are the top five benefits of the health savings account:
1. Tax Benefits
There are multiple ways to approach HSAs from a tax perspective. Let us start with pretax contributions. This is normally how an HSA is funded. For 2019, individuals can contribute up to $3,500 in pretax wages to an HSA. Families can contribute up to $7,000.
Next up are after-tax contributions. An employee looking to add to an HSA with after-tax contributions can deduct that money from gross income on his or her federal tax return. Note that regardless of how an HSA is funded, earnings on the account are tax-free. Withdrawals are also tax-free as long as they are used to pay qualifying medical expenses.
2. Other Contributions
HSAs do not have to be funded exclusively by employers and employees. Other people can contribute to an HSA as well. Annual limits are still in place, but everyone from an employee's parents to her best friend from high school can contribute to her account if they so choose.
3. Benefit Portability
Unlike health insurance plans, employees own their HSAs. That means the accounts are portable. An employee with several thousand dollars in his HSA takes that money with him should he change jobs. The new employer can contribute to the account as well.
4. Rolling over Unused Funds
Even though HSAs come with contribution limits, there is no mandate to actually spend the money. Any money left over at the end of the year automatically rolls into the following year while contribution limits are reset. In simple terms, employees can continually accumulate funds in their HSAs until a genuine need arises.
There is a caveat here: the IRS considers transferring funds from one HSA to another as a rollover. There are some conditions on such activity. First of all, only one such transfer is allowed per 365 days. So if an employee makes a transfer on June 1, another transfer cannot be made until June 1 the following year.
The second condition stipulates that the employee must complete the transfer within 60 days of withdrawing from the original HSA. Miss that 60-day deadline and the withdrawn money is now subject to taxation.
5. Qualifying Expenses
Finally, HSAs cover many more qualifying expenses than most people know. You can use money in an HSA to pay for prescription medications, cover the co-pay for an office visit, or even pay for tests or treatments your medical insurance will not cover. And because most HSAs these days issue debit cards, making payment is quite convenient.
Combining HSAs with HDHPs is one way to address the medical plan component of your benefits package. It is at least worth looking into if your company does not currently offer an HSA.