The Risks of Not Offering a Health Savings Account
- Lauren Hargrave
- 7 min read
As an employer there are many benefits to sift through before choosing the right ones for your company. Some, like health insurance benefits, you know are necessary and for most employers, are legally required. But what about the other types of accounts like Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs)?
You can offer any type of FSA alongside any other type of health insurance plan without any conflict. And if you think offering an FSA would benefit your workforce, it’s definitely something you should consider. HSAs, on the other hand, can only be offered alongside a High Deductible Health Plan (HDHP). So, is it a necessary benefit? If you’re planning to offer an HDHP, regardless of whether it’s your only health insurance option or one among many, we think offering an HSA as well is essential. Here’s why.
A brief overview of HSAs
HSAs are savings accounts that were created to complement the HDHP. The HDHP typically has a lower monthly premium than traditional health plans, but it comes with a high deductible, the maximum of which is set annually by the IRS. The HSA allows plan participants to contribute pretax money into their account and either invest it or earn interest, so they can pay for their deductible and other out-of-pocket qualified medical expenses or even save for retirement.
To be eligible to contribute to an HSA, you must be actively enrolled in an HDHP and that must be your only health insurance coverage. That means employees can’t have secondary coverage from a spouse or partner’s health plan. But, even if they only have an individual health plan, they can still use their HSA contributions to pay for qualified medical expenses for themselves, their spouse and any dependents.
Anyone can contribute to the account holder’s HSA including parents, friends and employers, so the employee’s contributions can be augmented by support from others. The only requirement is that the total sum of the contributions to a single HSA do not exceed the annual limit the IRS has set.
All distributions used for qualified medical expenses are tax-free and one of the best features of HSAs is that any money left in participants’ accounts at the end of the year simply rolls to the next. This makes an HSA a great way for employees to save for the medical rainy day that will eventually come. Also, when account holders turn 65, their HSA functions just like a normal retirement plan except that distributions for qualified medical expenses remain tax-free while distributions for other expenses are taxed at the appropriate interest rate.
This is how HSAs function and a brief overview of the benefits to employees. But there are many benefits HSAs bring to employers as well. There are also some risks you’ll encounter if you choose not to offer your employees the chance to sign up for one. Here are some of those risks.
You lose out on tax benefits
Just as HSAs have a triple tax-benefit to employees (contributions are pre-tax, they grow tax-free and distributions for qualified medical expenses are tax-free as well), there are two ways employers can also save on taxes. The first tax savings come via your FICA tax obligation. When employees make pre-tax contributions, it lowers the gross taxable income on their paycheck. The lower their gross taxable income, the less their employer must pay in payroll taxes.
Employer contributions are also tax-free so the second way employers can save on taxes is by contributing to employees’ accounts themselves. As an employer you could structure your contribution as either a flat amount for all employees actively contributing to their HSAs or as an employee contribution match. By offering to contribute even a small amount to employees’ HSAs you can provide an incentive for them to contribute as well, thus lowering your FICA obligation.
If you choose not to offer an HSA, you miss out on these tax benefits. Also, if you offer an HDHP but don’t offer an HSA, you could have a higher FICA obligation for employees who choose the HDHP over the traditional plan. This is because the monthly premium payment is lower for HDHPs than traditional plans, so employees that choose the lower premium could end up with a higher gross taxable income without the HSA contributions to offset it.
You might have higher insurance premiums
In a recent survey, employers said they expected health insurance costs for their company to rise 6% in 2023. That’s after a 5% increase this year. And many are expecting health insurance costs to be over budget this year. One way to reign in health insurance costs is to offer your employees more affordable plans.
By offering an HDHP and HSA combination, you lower your financial obligation since HDHPs typically come with lower monthly premiums than traditional plans. You could simply offer an HDHP and skip the HSA, however, the HSA functions as an incentive to employees to choose the cheaper plan. It gives employees a tax-free way to save and plan for their higher deductible as well as other out-of-pocket expenses that could be higher than would be required with a traditional health plan.
Without an HSA to help pay for the higher out-of-pocket costs, employees might choose the more comprehensive (and expensive) traditional plan because it feels safer. If this happens, you could end up with a higher health benefit budget than you were expecting.
You might have a harder time recruiting talent
Despite ongoing economic uncertainty and news of layoffs, it’s still one of the hottest labor markets in history and employers are increasingly finding the talent pool dry. To keep your current employees happy and attract new ones, you have to give them what they want. And what they want is better benefits.
In a recent SHRM survey, 60% of employees said benefits were a major factor in job satisfaction. In addition, a recent Lively report found that 70% of employees beleive that healthcare is one of the most important benefits employers can offer. This was echoed in a survey conducted by Gallup that found 64% of employees said they were looking for an increase in pay or benefits in their next job. In fact, last year Lively's research found that 84% of HR leaders increased benefits to attract and retain employees. However, better benefits doesn’t have to mean more expensive. In fact, if you can’t offer more in terms of salary, benefits, especially health benefits is an area where you can shine.
Again, you don’t have to give more expensive benefits, you just have to give benefits that people want. And employees want flexibility and choice. They want benefits that improve their financial well-being. They want to feel as though their employer is invested in their well-being. That’s why HSAs, especially HSAs into which employers contribute, are so popular. By contributing to employees’ HSAs you show that you’re financially committed to their well-being and that you believe in HSAs as a tool for saving.
Another reason the HDHP/HSA combination is so popular is it offers participants increased choice. Instead of paying a high monthly premium for an all-encompassing health plan that includes coverage for services they might not need, many employees would rather pay less monthly with the option to save for the medical care they want tax-free. The HDHP/HSA combination also gives younger employees who might not use the health system often a way to save on health insurance while also saving for their future.
The fact that many expenses qualify as eligible for HSA disbursement makes the HSA a highly usable benefit for employees. The ability to use a debit card for purchases at the point of sale makes an HSA even more convenient and usable. Benefits that employees actually use are more likely to lead to employee satisfaction than those they don’t.
Another popular feature of the HSA is that it is highly portable and rolls over from year-to-year so employees never lose access to the money they’ve contributed. This also allows them to use their HSA as part of their long-term savings and retirement plan.
The HDHP/HSA combination shows employees, both current and potential, that you care about what they want. It shows you’re invested in their financial future and well being and want to help them make the best choices for them.
Get started with Lively today
If you choose an HSA provider like Lively, the resource requirement on your part will be relatively small. A good HSA partner will take care of employee education and onboarding and will make benefit management easy with a clear and informative dashboard.
We help your employees to be successful in saving whether that means they’re investing their contributions so they grow at the rate of the market, or earning interest in a savings account. Because if they’re successful, you’re successful. And if you’re successful, we are too. If you’re interested in offering your employees one of the most popular benefits on the market, reach out today!
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.