The COVID-19 pandemic has affected our lives in many ways, including how companies communicate with their employees. Many employees don’t know how to use health savings accounts (HSAs) in unison with their high-deductible health plans (HDHPs) and aren’t taking advantage of several tax saving strategies as a result. A recent survey found that one in every three adults enrolled in a HDHP did not have an HSA. However, of the 2/3 of people who did have an HSA, most had not contributed any money to their account in the last year. The survey identified a lack of education and health insurance literacy as two of the main reasons for people not contributing money.
Now in our remote workspace, helping to clarify and fill in the blanks when it comes to healthcare plans is harder than ever. Below are five tips to help communicate HSA benefits to employees in our current environment.
Improve healthcare literacy
Now that open enrollment is over, employers should focus on improving healthcare literacy and ongoing communication. For employees currently enrolled in their HDHP, communicating the benefits on an HSA should be a top priority. Employers can do this by showing its unique tax savings benefits. Unlike other accounts, such as a flexible spending account (FSA), the money an accountholder puts in an HSA doesn’t have to be used to pay for current expenses. Accountholders can save money for future medical expenses and use the account as a retirement vehicle. This added benefit can also be enhanced if employers provide seed money and create communication materials detailing how employees can take advantage of the HSA.
Employers should also remind those who didn’t open their HSA at enrollment that they can do so at any time throughout the year as long as they continue to be covered by an HSA qualified HDHP – however it is important to note that they cannot pay for expenses prior to the establishment of their HSA and partial year contribution limits may apply if they do not continue to be enrolled in the HSA for the following year. Be sure to communicate benefits in everyday terms. Employees today are concerned about how they will afford prescriptions and other expenses so employers should focus on explaining how HSAs can help cover those everyday medical expenses.
HSAs can save employees money
Healthcare costs are on the rise and the Peter G. Peterson Foundation anticipates healthcare costs to increase an average of 5.5% per year over the next decade, going from $3.5 trillion in 2017 up to $6 billion by 2027. In our current environment, employees are worried about their health and the health of their loved ones, including their financial health. One common misunderstanding of HSAs is that they are only used for spending and the long-term savings benefits are often glossed over in enrollment. Employers should focus their communication on the account’s unique savings benefits.
HSAs allow employees to specifically save for healthcare and are the only account to have a triple tax advantage1, meaning that money goes into the account tax-free1, money earns tax-free interest and investment earnings, and money comes out tax-free when used for eligible expenses. In the long run, an HSA partnered with other retirement accounts can increase assets. Consider offering savings and contributions calculators that can help employees see the benefits of an HSA including the amount they can deposit yearly, how much money this account can help them save for retirement and what their account can be worth over time. Employers can also build incentive and show the value of an HSA by making seed or matching contributions.
Detail coverage changes
The pandemic has brought a lot of changes to healthcare and many people may not realize that the CARES Act has expanded what your HSA can cover. Employers should communicate these new HSA-eligible items like telehealth and other remote care services that will be covered until December 31, 2021. Over the counter (OTC) drugs and menstrual care products are also covered. Unlike the telehealth provision, this provision does not have an expiration date. COVID-19 testing and treatment are also HSA eligible. To see a full list of HSA-eligible items, click here.
Don’t forget the power of investing2
HSAs allow accountholders to take control of their healthcare spending and retirement planning by investing their HSA dollars. Employers need to explain this added benefit as many are unaware. Investment options are similar to those of a 401(k) and employees who put money into their HSA over a period of time can be better prepared for retirement.2
The average couple will need just under $300,000 in retirement for healthcare costs so an HSA can be an extremely valuable tool for your employees to have in their arsenal. HSAs play a key role in reducing the retirement income gap and can act as a long-term savings vehicle. If an individual saved $3,000 per year, compounded at a 5% rate of return, after 30 years, they could potentially have $213,743 tax-free dollars to use when they need it.
NOTE: This example is a hypothetical illustration of compounding returns over time and is not intended to represent any particular investment or savings vehicle. The rates of return are constant nominal rates, compounded monthly. Actual investments will fluctuate in value. Contributions are assumed to be made at the beginning of the month. It does not take into consideration taxes or other applicable deductions, which will lower returns.
HSAs can enhance retirement savings
Once an accountholder retires, there are several additional benefits that HSAs can provide including bridging the gap for Medicare. HSAs can pay for employer-sponsored plans under COBRA and pay premiums if an employee retires prior to 65-years-old and needs healthcare before Medicare kicks in. It can also be used for Medicare premiums and can help pay for additional expenses. After 65, the accountholder can use an HSA to pay for nonqualified medical expenses penalty-free but those expenses will be subject to income taxes.
Employers should take the time to educate their workforce and make it easy for employees to adjust contributions to both HSAs and traditional retirement accounts. Use a variety of platforms and content to show your employees the benefits of this account. If your employees understand how HSAs can be beneficial, it will also benefit your company in the long run as HDHPs with an HSA can work to save both employees and employers money.
For more information, UMB has an educational HSA virtual resource page you can share with your employees.
1 All mention of taxes is made in reference to federal tax law. States can choose to follow the federal tax-treatment guidelines for HSAs or establish their own; some states tax HSA contributions. Please check with each state’s tax laws to determine the tax treatment of HSA contributions or consult your tax adviser. Neither UMB Bank n.a., nor its parent, subsidiaries, or affiliates are engaged in rendering tax or legal advice. Withdrawals for non-qualified expenses are subject to income taxes and a possible additional 20% penalty, if you’re under age 65.
Phil Mason is executive vice president and chief operating officer for Institutional Banking and director of Healthcare Services at UMB Bank.