Why health savings accounts are a smart option for small businesses and workers

If you’re a small business owner and you’re not offering a health savings account (HSA) option to your employees, you may be missing out on a popular — and relatively inexpensive — benefit that you can provide.

The popularity of HSAs has been skyrocketing. According to an annual report published in September by Devenir, a provider of investment solutions for HSAs, more than $73 billion in assets are being held in more than 29 million HSA accounts, with investments in these accounts growing a third over the previous year. U.S. workers contributed almost $24 billion to their accounts in the first half of 2020, up 7% in a year. The typical account has $15,000 in it.

An HSA is pretty simple. You, the employer, set up the plan with your health benefits provider (a great place to do your research is here). Employees then elect to contribute pre-tax amounts directly into their own accounts.

Because the accounts are set up with pre-tax funds, any contributions an employee makes will lower federal taxable income, and you, the employer, also get a deduction for your contribution if you choose to make one. Amounts are then invested and the earnings from those investments are tax-free for federal purposes (some states, such as New Jersey, do not allow these amounts to reduce income for state taxes).

Employees can use their savings for co-pays and other qualified medical expenses such as flu shots, X-ray fees, physical therapy, and, potentially, braces, teeth cleaning, and contact lenses depending on your company’s health plan. But they can’t pay their insurance premiums with their HSA savings. A full list of qualified expenses can be found on the IRS' website.

Employees should be warned that using HSA funds for anything not on the list could subject them to a 20% penalty if the expense disqualified. If planned properly, the amounts put away in an HSA account, because they aren’t taxed, are essentially reducing health-care costs for employees similar to the taxes they would have paid.

However, there are limitations. HSAs are allowed only if you have an existing high deductible health-care plan. These come with lower premiums but more amounts that will need to be paid out of pocket before coverage kicks in. The IRS defines a high-deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.

According to the IRS, both employer and employee contributions are restricted to $3,550 ($7,100 for a family) in 2020, although employees older than 55 can contribute an additional $1,000. The Devenir report found that 32% of all HSA dollars contributed in the first half of 2020 came from an employer, with the average employer contribution amounting to $673. Employees so far have contributed $1,168, on average.

Self-employed entrepreneurs and even people working in companies that don’t have an HSA plan can still open up their own plans as long as they have a qualified high-deductible health insurance plan.

“Many self-employed or higher-paid individuals take advantage of the HSA almost exclusively for the tax benefits of an untaxed savings account,” said Edward MacConnell who owns Total Benefit Solutions Inc., an employee benefits consulting firm in Feasterville. Because high-deductible plans can be more expensive in the long run for some, MacConnell says, these plans are “best for people that are healthy and remain so over a number of years.”

A big attraction to these plans is the rollover rules. Employees can generally choose how they’d like their money invested among options that your administrator offers. Different from flexible savings accounts — which have more limitations — if not all the money is used in a year, the balance will roll over to the next year. If people leave your company, the amounts in their accounts can be transferred to another account, including individual accounts. So in a way it’s like a retirement plan for their health-care expenses.

Despite their growth, HSAs may not be for everyone, MacConnell warns. “Employers have limited control over HSAs, and many may not qualify because of their existing plans,” MacConnell said.

MacConnell says that employers should consider other options that can be used along with HSAs — such as health reimbursement accounts (a type of employer-funded health benefit plan that reimburses employees for out-of-pocket medical expenses and, in limited cases, to pay for health insurance plan premiums).

“HRA plans can be totally customized by the employer and can be used to address the most pressing concerns of a benefit plan while also getting a better handle on costs,” he said. “Because of its flexibility, an HRA plan can potentially give an employer a competitive advantage over other employers when attracting or retaining high-quality employees.”

Joseph Vogt, who owns Greystone Benefits, a benefits firm based in Berwyn, agrees. “HRA plans can allow a company to provide an enhanced level of benefits due to potentially reduced premiums,” he said. “Both employers and their workers can share the saved premium claims expenditure across the company.”

The good news is that there are more health-care options for small employers and the best approach is pass these options down to your employees. “Offer multiple plans regardless of your group size,” Vogt said. “And, at the very least, if you can, include an HSA plan in the mix.”