As health savings accounts grow in popularity, this is an opportunity for brokers.
Employers are wondering if they should take the leap and offer them to their employees.
They’ve heard of the tax advantages, and perhaps know about HSAs’ portability factor, but beyond that they might not even know what questions to ask. The benefits broker they’ve already established a relationship with is in a prime position to help them.
For 2021, the annual limit on deductible contributions is $3,600 for individuals with self-only coverage under an HDHP (a $50 increase from 2020) and $7,200 for family coverage (a $100 increase from 2020).
The limits on annual deductibles are also subject to annual inflation adjustments. For 2021, the lower limit on the annual deductible for an HDHP is $1,400 for self-only coverage and $2,800 for family coverage, both unchanged from 2020.
The upper limit for out-of-pocket expenses is $7,000 for self-only coverage and $14,000 for family coverage, both increased from 2020.
A great benefits broker not only understands HSAs (and HDHPs), he or she can anticipate what employers new to HSAs might want to consider in their decision-making.
Here are 5 HSA questions and answers to use in helping employers who might want to know basic, bottom-line information to begin considering whether to offer them or not.
1. What are the advantages to an employer of offering an HDHP and HSA combination?
The benefits of offering employees an HDHP and HSA vary dramatically depending upon the circumstances. A major strength of offering an HSA program is flexibility.
Employers can be very generous and fully fund an HSA and also pay for the HDHP coverage.
Alternatively, employers can also use the flexibility of the HSA to allow for the employer to reduce its involvement in benefits and put more responsibility onto the employee. Generally, employers switch to HDHPs and HSAs to save money on the health insurance premiums (or to reduce the rate of increase) and to embrace the concept of consumer driven healthcare.
The list below elaborates on strengths of HDHPs and HSAs.
• Lower Premiums. HDHPs, with their high deductibles, are usually less expensive than traditional insurance.
• Consumer-Driven Healthcare. Many employers believe in the concept of consumer-driven healthcare. If an employer makes employees responsible for the relatively high deductible, the employees may be more careful and inquisitive into their health care purchases. Combining this with an HSA where employees can keep unused money increases employees’ desire to use health care dollars as if they were their own money – because it is their own money.
• Lower Administration Burden. Given the individual account nature of HSAs, much of the administrative burden for HSAs is switched from the employer (or paid third-party administrator) to the employee and the HSA custodian as compared to health FSAs and HRAs. This increased burden on the employee comes with significant perks: more control over how and when the money is spent, increased privacy, and better ability to add money to the HSA outside of the employer.
• Tax Deductibility at Employee Level. The ability of employees to make their own HSA contributions directly and still get a tax deduction is advantageous. Although it is better for employees to contribute through an employer, an employee can make contributions directly. An employer may not offer pretax payroll deferral or it may be too late for an employee to defer. For example, an employee that decides to maximize his prior year HSA contribution in April as he is filing his taxes can still do so by making an HSA contribution directly with the HSA custodian.
• HSA Eligibility. Becoming eligible for an HSA is a benefit that also stands on its own. Although not all employees will embrace HSAs, savvy employees that understand the benefits of HSAs will value a program that enables them to have an HSA.
2. What are employer responsibilities regarding employee HSAs?
If an employer offers pretax employer contributions, then the employer has the following responsibilities.
• Make Comparable Contributions. If the employer is making a pretax employer contribution (nonpayroll deferral), it must do so on a comparable basis.
• Maintain Section 125 Plan for Payroll Deferral. If the employer allows pretax payroll deferral, then the employer must adopt and maintain a Section 125 plan that provides for HSA deferrals. This includes collecting employee deferral elections, sending the deferred amount directly to the HSA custodian, and accounting for the money for tax-reporting purposes.
• HSA Eligibility and Contribution Limits. Employers should work with employees to determine eligibility for an HSA and the employee’s HSA contribution limit. Although it is legally the employee’s responsibility to determine his or her eligibility and contribution limit, a mistake in these areas generally involves work by both the employer and the employee to correct. Mistakes are best avoided by upfront communication. Also, the employer does have some responsibility not to exceed the known federal limits. An employer may not know if a particular employee is ineligible for an HSA due to other health coverage but an employer is expected to know the current HSA limits for the year and not exceed those limits.
• Tax Reporting. The employer needs to properly complete employees’ W-2 forms and its own tax-filing regarding HSAs (HSA employer contributions are generally deductible as a benefit under IRC Section 106).
• Business Owner Rules. Business owners generally are not treated as employees and employers need to review HSA contributions for business owners for proper tax reporting.
• Detailed Rules. There are various detailed rules that fall within the responsibility of the employer that are too numerous to list here but include items such as: (1) holding employer contributions for an employee that fails to open an HSA, (2) not being able to “recoup” money mistakenly made to an employee’s HSA, (3) actually making employer HSA contributions into employees HSAs on a timely basis, and (4) other detailed rules.