With the contribution limits for health savings accounts (HSAs) poised to take a significant leap in 2024, this is a good time for all types of employers to consider adding the arrangements to their benefits packages. These often-misunderstood health care vehicles come with valuable benefits for both employers and employees.
Health Savings Accounts in a Nutshell
An HSA is a tax-favored medical savings account owned by an individual employee. Employees can use funds in the account to pay for current qualified medical expenses and save for future such expenses. Qualified medical expenses generally include any expense that qualifies for the federal medical and dental expense deduction, including deductibles, copayments and prescription medications (but not premiums).
Employees usually receive debit cards for their accounts that they can use to pay for medical expenses for incurred by them, their spouses and their dependents. Distributions for unqualified expense are taxable and subject to a 20% penalty.
While the accounts are owned by the employee, contributions can come from the employee (usually via a payroll deduction), the employer or anyone else; contributions are subject to annual limits (see below). Employees also can opt to grow their accounts by investing in a range of investment alternatives.
Employees with HSAs must be enrolled in a high deductible health plan (HDHP), typically provided by the employer. These health plans generally only cover preventive services until the deductible is met. Employees use their HSA funds to cover their other healthcare expenses until the policy kicks in. Employees cannot have an HSA if they also have a flexible spending account (FSA) or health reimbursement arrangement (HRA).
Contributions vest fully when they are made. That means employees can take the accounts with them when they terminate their employment with the employer (provided they maintain HDHP coverage).
Related Read: Health Savings Accounts: A Can’t-Pass-up Savings Proposition
Benefits to Employers and Employees
Employer contributions are deductible and not subject to federal income tax, payroll taxes or unemployment taxes. HDHPs usually have lower premiums than traditional group health plans, saving employers money.
Moreover, because it is up to the employee to determine whether an expense is qualified and to ensure excess contributions are not made, the employer does not need to pay for a third-party administrator, in contrast to FSAs and HRAs (but employers are responsible for reporting contributions on employees’ Form W-2s). Employers can encourage compliance with applicable tax laws and regulations by reminding employees to maintain complete and accurate records of their payments and withdrawals.
The tax perks for employees are three-fold. Contributions are made with pre-tax dollars (regardless of the source), so they reduce taxable income. In addition, any growth in an HSA is tax-free as long as the funds remain in the account or are used for qualified expenses. Distributions made for qualified medical expenses are tax-free, too.
Related Read: 2023 Employee Benefit Plan and Transportation Limits
The Critical Numbers for 2023 and 2024
The contribution limits apply to combined contributions from employers, employees or others.
For 2023, the contribution limit is $3,850 for self-only coverage and $7,750 for family coverage. Due to inflation, the contribution limits for 2024 jump to $4,150 for self-only and $8,300 for family coverage. Accountholders age 55 or older also are allowed annual catch-up contributions up to $1,000, which can prove helpful for those close to retiring who want to increase their healthcare savings
The minimum deductibles for HDHP plans in 2023 are $1,500 for self-only coverage and $3,000 for family. They increase to $1,600 for self-only and $3,200 for family coverage in 2024. The annual out-of-pocket expense limit is $7,500 for self-only and $15,000 for family coverage in 2023. Next year, they rise to $8,050 for self-only coverage and $16,100 for family.
For more information, contact Georgia Smeu at 312.670.7444 or [email protected]. Visit ORBA.com to learn more about our Employee Benefit Plans Services.