The Value of Health Savings Accounts
- Lauren Hargrave
- 8 min read
The ground shifted under employers as the pandemic caused many workers to reevaluate their values, their jobs, the companies they worked for and even their careers. We likely won’t know the full impact of the pandemic and The Great Resignation for years to come but even with continued economic uncertainty and a potential recession, one thing is clear: employees are demanding more from their employers. In fact, a study from Lively found that in the past year 84% of HR leaders increased benefits to attract and retain employees facing a high employee turnover rate.
At the same time, employers have fewer resources and need to keep their budgets in-check while retaining and recruiting talent. They need benefits solutions that offer a bigger bang for the buck, and 80% of HR leaders say that competitive financial benefits are more important than they were a year ago. That’s where Health Savings Accounts (HSAs) come in.
A brief overview
HSAs are personal savings accounts participants can use to save pre-tax money to pay for qualified medical expenses. Money is contributed to the account tax-free, any interest earned on the money is tax-free and distributions made on eligible expenses are tax-free as well (that’s why HSAs are called triple tax-advantaged accounts). Account owners can choose to invest their savings so that they grow at the rate of the market or to keep it in a savings account earning interest. The money never expires and rolls over from year-to-year.
Another beneficial feature is that anyone can contribute to an employee’s HSA. That includes the employee themselves, their employer, their friends and their family. The only caveat is that the total of all contributions must not exceed the IRS’s annual contribution limit for that year.
These features make HSAs a good tool to help employees save for future medical expenses and even retirement as the account functions as a traditional retirement account once the participant turns 65. The only exception is when the account holder uses their HSA to pay for qualified medical expenses as these distributions stay tax-free, even in retirement.
There are a few eligibility requirements for employees to contribute to an HSA: 1. They must be actively enrolled in a High Deductible Health Plan (HDHP) and that must be their only health insurance coverage. 2. They must be under the age of 65. 3. They must not qualify for Medicare. 4. They can’t be counted as a dependent on someone else’s taxes.
For these reasons, HSAs are popular among employees. And what’s even better is the same features that are popular, are also beneficial to employers. This makes HSAs a valuable benefit to offer. Let’s take a deeper look.
One of the qualities that makes HSAs so valuable to employers is the ability of this account type to lower their cost per employee. HSAs can lower companies' costs directly by encouraging employees to choose more affordable health insurance plans as well as indirectly by lowering the companies’ FICA obligation.
Reduce the cost of health premiums
The financial benefits HSAs offer employers include the ability to reign in the cost of health insurance. In a recent survey, employers said they expected their spending on medical care to rise 6% in 2023, after increasing 5% in 2022. If you’re looking to contain the costs of your benefits package while still offering quality health insurance, consider an HDHP/HSA combination.
According to the Kaiser Family Foundation (KFF), the average annual premium in 2022 for a family HDHP was $21,079, of which employers paid $15,891. Compare this to the average annual premium of $23,003 for a non-HDHP health plan, of which employers paid $16,893 and you can see that offering this type of plan can help you save $1,000 per employee that enrolls.
A great way to incentivize employees to enroll in the HDHP is to pair it with an HSA and, if your budget allows, to offer an employer contribution. You can structure this contribution as a match or a flat amount for all employees who are actively contributing to their HSAs.
Lower your company’s tax obligation
Since employee contributions to their HSAs are taken pre-tax, their gross taxable income is reduced. The less gross taxable income they have in their paycheck, the less FICA taxes you, as the employer, pays. This is why it’s important to not only offer an HSA, but strategize about how much, if any, you will contribute to employees’ accounts. It might be beneficial to contribute a small amount to encourage employees to enroll in the HDHP/HSA benefits combo, but not too much so that it disincentivizes them to contribute themselves.
Just like with employees’ contributions, HSA contributions from employers are also tax-free.
To find out how much you can save on FICA taxes by offering an HSA, use our FICA tax savings calculator.
Improved recruiting and employee retention
The estimated cost of annual turnover at a mid-sized company costs as much as $7.5 million and depending on the employee, costs as much as 213% of their salary. Average turnover at all companies is currently about 18% per year. Many employers are left scrambling to adjust their retention and recruitment efforts. If you’re one of these employers, here’s what the experts say you can do to keep more top talent in the building:
- Make sure your benefits are in line with the labor market as a whole, not just your industry. Workers, especially those at entry level will happily jump industries if it means earning a higher wage or receiving better benefits. Note: In 2020, 59% of employers offered an HDHP/HSA combo, compared to 50% of employers in 2016.
- 88% of job seekers will weigh the chance of getting better health insurance benefits for a lower-paying job against lower-quality benefits at a higher paying job.
- Not all employees have the same needs so employers should offer a benefits package that allows for flexibility and personalization.
- HSAs are popular. KFF found that 24% of all covered workers are enrolled in an HDHP/HSA combination.
To keep employees, you have to keep them happy and a good benefits package with popular, usable options that allow flexibility and personalization is one way to do that. HSAs help employers achieve this by:
- Giving employees the flexibility to pay for the medical care they want with pre-tax money instead of paying a higher monthly premium for care they might not need.
- Giving employees a tax-free opportunity to save for future medical costs.
- Giving employees a tax-free way to augment their current retirement savings plan with an additional savings vehicle.
- Giving employers an opportunity to show employees they’re invested in their employees’ financial and physical health and well-being.
- Giving employees a convenient way to use their savings with debit cards that can be used to pay for medical care at the point of purchase.
More productive employees
Did you know that a 2013 Gallup study found that employees’ lack of engagement at work costs the U.S. economy $450-550 billion a year? And over 275 million working days are lost a year due to stress?
In a recent survey, FINRA found that workers, especially younger employees, are feeling more financial stress than ever before. In fact, 60% of respondents reported feeling financial stress because they’re worried about their futures, mounting medical bills, their lack of savings and the state of their physical health and that of their families.
So what does that have to do with you, the employer? Everything. First, researchers have found a causal link between happiness and productivity. Happier employees are 13% more productive on average than unhappy employees. Second, stress accounts for 7.2-11.3% of employee turnover annually. Which means the cost of turnover is $251-$14,492 per employee.
And the employees who stay? Twenty percent of workers report spending at least five on-the-clock hours per week thinking about their stressors. If the employee works 40 hours a week and has an annual salary of $60,000, that’s $1,500 per employee per year in lost productivity.
So what can you, as an employer do? You can give your employees increased opportunities to save and augment those savings with contributions from the company. An HSA is a great way to do that.
HSAs help alleviate financial stress because they allow participants to set aside money pre-tax to pay for medical expenses. Participants can invest these savings, allowing them to grow their safety net at the rate of the market and to improve their financial well-being. HSAs also help employees answer the question, “How am I going to pay for that?” when an emergency arises. The fact that HSAs can double as a retirement account is another valuable feature for plan participants and can add to their overall feeling of financial stability.
Employers that contribute to their employees’ HSAs show their workers that they’re invested in them. That investment goes a long way toward making employees feel valued. Which makes them feel happier at work. Which leads to higher productivity. Stress is an insidious cause of lost productivity in the current work environment, but it doesn’t have to be. An HSA can help.
How to get started
If you’ve decided that offering employees an HSA is the way to go, you’ll want to talk with your benefits professional about how an HDHP/HSA combination fits into your current compensation package. You’ll want to decide which HSA administrator you want to use, as HSAs are health-plan agnostic, meaning they can be used with any qualifying health plan. Then you need to figure out how much (if any) you’re going to contribute to your employees’ accounts.
One thing to consider is that many HSA administrators require employers to do a lot of the heavy lifting when it comes to operating the plan. Lively doesn’t. Once you’ve set up your plan, you simply invite your employees to participate and we take care of their onboarding and education. You’ll be able to manage the plan seamlessly from our clear and informative dashboard and there will be no hidden fees to contend with. If you run into trouble, we’re here to help. We’re your partner in offering the best benefits package possible for your company.
Find out more about Lively today
If you’re ready to offer an HSA to your company, you can get started or reach out to our team to walk you through the process.
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.