HSA Essentials: Understanding the Benefits for Both Employers and Employees

Understanding Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a specialized savings account designed to help individuals set aside money on a pre-tax basis for eligible medical expenses. These expenses may include deductibles, co-insurance, prescription costs, and a wide range of healthcare services and products.

Quick Overview: HSAs in Numbers

• By the end of 2022, around 72 million Americans had coverage under 35.5 million HSA plans.
• Americans aged 50 and older held more than $56 billion in HSA balances.
• Roughly 20% of people in their 30s had an active HSA.
• HSAs come with three primary tax advantages: pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
• Only those enrolled in a high-deductible health plan (HDHP) are eligible to open an HSA.

Using untaxed income to pay for healthcare expenses can significantly reduce an individual’s out-of-pocket burden, making care more accessible and affordable.

A Guide for Employers: How HSAs Function

In this resource, we’ll walk you through the structure of HSAs, their tax treatment, benefits and challenges, and how they can support retirement planning.

What Is an HSA?

Think of HSAs as similar to 401(k) plans, but for healthcare. Like retirement accounts, individuals make contributions with pre-tax income, often through payroll deductions.

Employers can also contribute, similar to a 401(k) match. Data from the Plan Sponsor Council of America shows that nearly 80% of companies offering HSAs contribute to employee accounts.

According to the 2022 Devenir HSA Research Report:

• Employers contributed 26% of all HSA funds, averaging $869 per employee annually.
• Employees made 63% of total contributions, averaging $2,147 each.
• In total, $47 billion was contributed to HSAs in 2022, with $34 billion withdrawn.

Eligible Uses for HSA Funds

Though HSA funds generally can’t be used for insurance premiums, they do cover a broad scope of healthcare-related costs, such as:

Covered Costs Include:
Health plan deductibles, co-pays, coinsurance
Prescription and over-the-counter meds
Durable medical equipment (e.g., wheelchairs, hearing aids)
Mental health and counseling services
Physical therapy and alternative treatments like acupuncture
Dental and vision care (e.g., cleanings, eyeglasses, surgery)
Preventive screenings and annual checkups
Feminine hygiene products
Long-term care services
Healthcare for dependents

Withdrawals for non-qualified expenses before age 65 incur both income tax and a 20% penalty. After age 65, funds can be used for any purpose, but non-medical use is subject to regular income tax.

Exceptions for Premium Payments

HSA funds may be used to cover premiums in specific situations:

• During periods of unemployment when receiving federal or state benefits.
• For COBRA continuation coverage following job loss.
• At age 65 or older for retiree health plans (excluding Medicare Supplement policies).

Who Is Eligible for an HSA?

To open and contribute to a Health Savings Account, the primary requirement is enrollment in a high-deductible health plan (HDHP). As the name suggests, HDHPs come with lower premiums and higher deductibles compared to traditional insurance plans.

These are sometimes referred to as “HSA-compatible” plans. Here are the federal thresholds employees should be aware of:

HDHP Minimum Deductibles:

• 2024: $1,600 (individual) | $3,200 (family)
• 2025: $1,650 (individual) | $3,300 (family)

HDHP Out-of-Pocket Maximums:

• 2024: $8,050 (individual) | $16,100 (family)
• 2025: $8,300 (individual) | $16,600 (family)

Additional HSA eligibility requirements include:

• Not being covered by any other non-HDHP health insurance.
• Not being enrolled in Medicare.
• Not being claimed as a dependent on someone else’s tax return.

Once enrolled in Medicare, individuals can no longer contribute to an HSA, but they can still withdraw funds tax-free for qualified expenses not covered by Medicare or Medigap policies. HSA funds may also be used to pay premiums for Medicare Part B, Part D, or employer-sponsored retiree health plans for individuals 65 and older.

Setting Up an HSA with Beyond

When companies like Beyond offer HSAs, they typically do so under a Section 125 cafeteria plan, allowing employees to make tax-advantaged contributions via payroll deduction. Here’s what the setup process usually looks like:

1. Employer Chooses a Provider: This might be a bank, credit union, or another financial institution. Beyond handles the onboarding process, beginning with verifying that the employee is enrolled in an eligible HDHP.
2. Account Creation: Personal and tax information is collected to establish the HSA in compliance with IRS rules.
3. Funding the Account: Once the account is active, both employers and employees can begin contributing. Beyond’s administrative team ensures contributions stay within annual IRS limits.

2024 HSA Contribution Limits:

• $4,150 for individuals
• $8,300 for families
• +$1,000 catch-up contribution for individuals age 55 and older

2025 HSA Contribution Limits:

• $4,300 for individuals
• $8,550 for families
• Catch-up amount for those 55+ remains $1,000

Note: These are total contribution limits, meaning combined employee and employer contributions must stay within them. For example, if an employee contributes $2,500, the employer could only contribute up to $1,800 more.

Special Case: Spouses Working at the Same Company

Spouses can both contribute to HSAs, but they must maintain separate accounts, joint HSAs aren’t permitted. However, one spouse can use their HSA funds to pay for the other’s qualifying healthcare expenses.

The Pros and Cons of Health Savings Accounts

Health savings accounts (HSAs) can offer meaningful advantages for both employers and employees, but they aren’t without challenges. Understanding the full picture helps businesses like Beyond make better decisions about offering this type of benefit.

Employer Benefits of Offering HSAs

• A powerful recruitment and retention tool: Employees increasingly value access to HSAs, especially those focused on long-term financial wellness. It’s a competitive benefit in today’s job market.
• Employer contributions are tax-deductible: Contributions made by Beyond to employee HSAs are considered a business expense, reducing the company’s taxable income.
• No payroll taxes on contributions: Since HSA contributions aren’t treated as wages, Beyond avoids paying federal income tax, Social Security and Medicare (FICA), and federal unemployment (FUTA) taxes on those amounts.
• Lower insurance costs: Offering HSAs alongside HDHPs can reduce overall healthcare spending for the company compared to traditional plans.
• Minimal reporting obligations: HSAs are generally not subject to ERISA rules, making the administrative burden lighter. However, employers must still ensure contributions are reported correctly on employees’ W-2 forms.

Employer Challenges

• HDHP requirement may deter participation: Some employees are reluctant to choose high-deductible plans due to the potential for large upfront medical costs.
• Underutilization of benefits: A study by the Employee Benefit Research Institute (EBRI) shows many account holders don’t contribute the maximum or invest their HSA funds, missing key advantages.
• Ongoing employee education is essential: Understanding how to use an HSA effectively isn’t automatic. In fact, a 2023 Plan Sponsor Council of America survey found that 58.3% of employers consider employee education a top concern, though that’s down from 70% in 2021.

Employee Advantages

• Triple tax savings: Contributions are pre-tax, account earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free.
• No “use it or lose it” rule: Unlike FSAs, HSA balances roll over from year to year and can accumulate significantly over time.
• Funds are portable: Employees keep their HSA funds even if they change jobs or retire. It’s their money, not the employer’s.
• Covers dependents’ medical costs: Even if a spouse or child isn’t enrolled in the HDHP, their qualifying expenses can still be paid using HSA funds.
• Investment options: Many HSA providers allow account holders to invest their balances in mutual funds or other assets, similar to a 401(k).
• No required minimum distributions (RMDs): Unlike traditional retirement accounts, HSAs don’t require withdrawals at any age, even after 73.
• Convenience: Many HSA accounts come with a debit card for easy use at point of service, or for reimbursement after the fact.
• Legacy benefits: Upon death, unused HSA funds can be passed to a spouse with the same tax-advantaged status. Non-spouse beneficiaries will owe taxes on the balance, but no penalties.

Employee Challenges

• Non-medical withdrawals are costly before age 65: They trigger ordinary income tax plus a 20% penalty, making HSAs less flexible in emergencies.
• High upfront costs: HDHPs can be risky for employees who require regular care or prescriptions. In 2024, out-of-pocket limits could hit $8,050 for individuals or $16,100 for families.
• Strict documentation: If the IRS audits an individual’s HSA activity, detailed receipts and records must prove funds were used for qualifying expenses.
• Account fees: Some HSA providers charge monthly maintenance or transaction fees, though these are often waived if a minimum balance is maintained.