Three “201” Strategies for Maximizing HSAs
When it comes to health care consumerism, we have good news.
Through both offline and online resources, our data shows that consumers are becoming more educated on using their health care spending dollars wisely. Consider these facts:
- Consumer Directed Health Plan (CDHP) participants are 39% more likely to check the price of a service before getting care.
- These consumers are 60% more likely to use video visits to save on costs.
Those are excellent measures as we know that in the next eight years, U.S. health care spending is expected to reach a staggering $6.19 trillion — an increase of more than 19% over today’s spend.1 What’s more, the need for medical goods and health care services is expected to grow at an average annual rate of 2.4% from 2019 to 2028, accounting for 43% of the total projected growth in personal health care spending.¹
How will consumers pay for it all? Many will look — and are already looking — to their employers for answers, demanding tools and resources to help manage and pay for care. This consumer-driected health care concept isn’t new. It’s been around for at least two decades when a handful of businesses started offering their employees’ health plans with low premiums, high deductibles and tax-exempt savings accounts. One of the ideas behind the initiative was — and still is today — to encourage employees to make better educated decisions when seeking health care.
Here are three strategies for maximizing HSAs that you can share with employees to help them stretch their health care dollars further.
#1 - Pair an HSA with a limited-purpose FSA
When it's time for your team members to choose their benefits, you may offer several types of medical plans and spending accounts to pick from. It's important to communicate that they may not have to pick just one. Depending on your offerings and their life situation, they may be able to take advantage of two or even three types of spending accounts.
With both a health savings account (HSA) and flexible spending account (FSA), your team members can set aside pre-tax money for qualified medical expenses. Since there are annual contribution limits for each account, it can be beneficial to enroll in both so employees can contribute as many pre-tax dollars as possible and reduce their taxable income. However, unlike an HSA, the FSA is a "use it or lose it" account, so it is important for employees to consider their likely expenses before deciding to enroll.
Advantages of pairing an HSA with a limited purpose FSA
- Extends the tax advantage beyond what is allowed in an HSA alone.
- Maximizes the balance in an HSA that is carried into the future while reimbursing current dental and vision services from the limited-purpose FSA.
- The full election amount is available to an individual in their limited-purpose FSA from day one of the plan. This provides an advantage to use to dollars when they are needed.
Disadvantages of Pairing an HSA with a limited purpose FSA
- Unused funds in the limited-purpose FSA might be at risk to be forfeited at the end of the plan year.
An important caveat for your team members: If they enroll in an FSA at the same time they actively contribute to an HSA, they can only use the FSA for vision and dental reimbursements until the minimum IRS deductible is met. If they or someone they cover needs orthodontal care, glasses or Lasik services, an FSA is a great way to use pre-tax funds to pay for those expenses without having to draw money from their HSA. At the same time, they can leverage the HSA for other qualified medical expenses or for saving money for long-term investment growth.
Also know that, depending on how you designed your plan, once their health plan deductible is met, your team members may be able to use the FSA for any eligible medical expenses in addition to the dental and vision expenses for the remainder of the plan year.
#2 - Delay reimbursements and save receipts
HSA owners aren’t required to seek reimbursement for medical expenses right away. In fact, they can reimburse themselves at any time, even years later. (Note: It’s critical to save receipts!) Their money stays in the HSA. And unlike an FSA, there's no "use it or lose it" rule.
Therefore, by paying for small medical expenses out of pocket instead of from their HSA, your team members can build up the balance over time, tax-free. Depending on the HSA plan you offer, the higher the balance, the more interest one can earn.
Advantages of delayed reimbursements
- Delaying reimbursements allows more funds to be kept in the account longer, earning more interest on them.
- Account holders can submit one reimbursement for multiple expenses all at once verses having to submit many claims over a period of time (simply save all receipts and attach them all to the one reimbursement request).
Generally, one should hold on to receipts for at least three years so the necessary records are in place in case audited by the IRS. In some cases, such as with an HSA, your team members should hold onto receipts for as long as they maintain the account as there is no deadline to reimburse oneself from an HSA. The receipts will prove withdrawals from the account were for eligible medical expenses. An important reminder to your team: If they withdraw money for non-eligible expenses, they are subject to paying taxes on the withdrawal and a 20 percent penalty fee.
#3 - Know what is HSA-eligible
There are many eligible expenses that can be purchased or reimbursed from a medical spending account, including medical expenses related to services and supplies incurred by an HSA-holding team member or their eligible dependent for the diagnosis, treatment or prevention of disease, or for transportation costs to get medical care. A general rule: Deductions allowed for medical expenses on your team member’s federal income tax according to Internal Revenue Code Section 213 (d) may be reimbursed through their HSA. And important note: One cannot deduct medical expenses on federal income taxes that have been reimbursed through an HSA.
Employees want to be active participants in their health care. In fact, when asked in a recent Further survey why they selected a CDHP paired with an HSA, over half said they want to put away money – not as an investment – but to have funds available to pay for health care expenses that might arise now or in the near term.
Educated, engaged consumers, who shop for the best price and demand the highest value in their health care, can drive market competition and, ultimately, push industry costs lower. Consumers now directly control $330 billion annually in out-of-pocket health care expenses, and the choices they make have the potential to affect 61% of all health care spending.² This is consumer empowerment.
¹https://www.healthaffairs.org/doi/full/10.1377/hlthaff.2020.00094?journalCode=hlthaff
²https://healthcare.mckinsey.com/enabling-healthcare-consumerism
