The case for HSAs: How these accounts work overtime to improve health and wealth

When it comes to employer-sponsored benefits, a Health Savings Account (HSA) offers the most utility for employer clients. In almost all respects, they deliver superior value relative to 401(k)s, 403(b)s, 457 plans and health Flexible Spending Accounts (FSAs). And as such, HSAs should be a part of every employee benefits package. 

Designed to accumulate money on a pretax basis to pay for qualified medical expenses and provide for retirement savings options, HSAs are known for their unique triple-tax advantages. Contributions reduce taxable income, while qualified withdrawals and investment growth within the account are tax-free. 

But there’s even more than meets the eye to these vehicles, which must be coupled with a high-deductible health plan. Sponsors can position HSAs as a health-and-wealth strategy capable of quadruple duty. This involves covering out-of-pocket (OOP) medical costs in current and future years, funding Medicare and long-term care insurance premiums, and providing for retirement income and survivor benefits. 

Read more: Ask an Adviser: How can we reframe our HSAs to support DEI efforts?

HSAs have become increasingly valuable considering how healthcare inflation is impacting employee contributions and OOP costs of financially fragile Americans. To offset this, experts recommend that health plan sponsors and members focus on proactively building savings for rising medical expenses. HSAs are ideal for workers who are unprepared for everyday expenses, let alone unexpected OOP medical expenses. Most have no savings earmarked for regular medical cost sharing. Done right, an HSA strategy will better prepare participants for copayments, deductibles, coinsurance and OOP costs. 

HSAs receive America’s most valuable benefits tax preference: contributions are pretax for federal income tax purposes, but it’s also the same for most state income taxes, as well as FICA (Social Security) and FICA-MED (Medicare). Earnings accumulate tax deferred and payouts for eligible medical expenses are tax free. More medical expenses qualify under HSAs than under health FSAs. Unlike FSA accounts, there are no use-it-or-lose-it provisions. Unspent money rolls over from one year to the next.

Because employees are still learning the benefits of HSAs, education needs to focus on the advantages and rewards HSA savings offer — both now and in the future. Health plan sponsors should consider how HSA-capable coverage is communicated to employees to encourage adoption and optimization of these accounts. 

Read more: 5 experts and advisers discuss the pros and cons of HSAs

The educational challenge is to get workers to focus on the differences in employee contributions, deductibles and employer contributions to HSAs, as well as differences in OOP expense maximums. It may be significant where an employer simply adds HSA-capable coverage as an alternative to a traditional PPO and/or HMO option without any adjustments or transitions. 

Traditionally, HSAs-capable health coverage must incorporate a minimum deductible. Too often, health plans are named by the amount of the deductible, or described as “high deductible.” That can lead employees to believe the HSA-capable option is more expensive. It may disincentivize workers from enrolling. But plan sponsors can reframe employee perceptions by shifting the focus to a comprehensive comparison, highlighting the lower monthly employee contributions or by referring to HSA-capable coverage as a “consumer-driven” health plan or “health savings option.”

When introducing HSA-capable coverage for the first time, your employer clients should consider conducting a full-positive annual enrollment. They also should consider deploying choice architecture so that when individuals elect medical coverage, the HSA-capable option and a positive HSA contribution amount are set as the defaults. Employees can opt out if they want a different coverage option. 

Employers also may want to open the HSA on the first day of HSA-capable coverage with a nominal employer contribution to get employees off on the right foot. Opening the HSA starts the claims clock so that all qualifying medical expenses on or after that date receive tax-favored reimbursement. Also, adding midyear HSA reenrollment can prompt higher participation and contributions. 

Read more: Benefits 101: What to know about HSAs as open enrollment approaches

The best overall strategy is to leverage HSAs, the health FSA and tax-qualified retirement savings plan. Leveraging automatic features in terms of both HSAs and FSAs requires positioning medical coverage to get the incentives right. This might include adjusting coverage design for options that are not HSA-capable to parallel the HSA-capable coverage structure.

To succeed at prompting workers to save and leverage the tax preferences only available through an HSA, a plan sponsor should deploy many of the same processes widely used to prompt saving in 401(k)s and other retirement plans. 

Reduce the health coverage offer to a single HSA-capable option that applies to all who enroll in health coverage. Deliver employer financial support in the form of an HSA matching contribution. Default individuals into the HSA for both enrollment and a contribution amount at least sufficient to fund the deductible. Provide transition rules, features and protections for individuals when they first enroll in HSA-capable coverage, and prompt mid-year re-enrollment into the HSA, or a mid-year automatic escalation in HSA contributions.

Plan sponsors should consider the value of a medical billing partner that is fully engaged in guiding plan administrators through the most effective strategies. Effectively designed HSA-capable coverage, along with reference-based pricing, adequate participant protections against balance billing, participant advocacy and litigation support as needed, your clients will gain a competitive edge while better serving the current and future needs of today’s workers who are living paycheck to paycheck.