Nov 10, 2021

The Rising Cost of Healthcare and Health Savings Accounts (A Guest Column by SavingsOak)

The rising cost of healthcare has reached a critical point.  According to EBRI, in 2020, a U.S. couple could need around $325,000 in retirement alone to cover the cost of healthcare expenses. These expenses will only continue to rise year after year. Additionally, across the U.S., 62% of bankruptcies are due to medical costs.

The impact on small and medium businesses, which account for 47% of all employees in the U.S., is significant. Both employers and their employees are affected in numerous ways. Over the past decade, there has been a 55% increase in the average premium paid by an employee for family coverage, double the average rise in their salary earnings, and three times the inflation rate. Employers are seeing a loss of productivity due to financial stress and carrying a projected extra $2000 cost per employee.

One potential solution for employers and employees to mitigate the increasing cost of health care are Health Savings Accounts (HSAs). However, the basics of these accounts—what they are and their advantages, how they compare to a Flexible Spending Account (FSA), or how to invest the dollars in them for long-term growth—are often not well known or understood.

HSA 101 for Employees

A health savings account (HSA) is the most tax-advantaged medical savings account. An HSA account holder can use the untaxed money in their account to pay out-of-pocket for qualifying medical expenses or save it to invest for retirement. HSAs are paired with an eligible High Deductible Health Plan (HDHP), or as we like to call them, a lower premium health plan. It’s up to the employer whether or not they want to offer a company-sponsored HSA along with the qualifying health plan.

HSA Enrollment is Easy Employees generally sign up during a company’s benefits open enrollment period. However, you can open an account any time during the year and begin contributing money up to the contribution limits. The contribution limits change yearly; however, for 2022, the limit is $3650 for self-only HDHP plans and $7300 for individuals with family plans. If you are 55 or over, you can make catch-up contributions of $1000.

Triple Tax Advantage The accounts have a three-fold tax advantage called “The Triple Tax Advantage”: 1). HSA contributions are all pre-tax, 2). growth in the HSA account is tax-free, 3). withdrawals are non-taxable (if used for qualifying medical expenses).

HSAs are not FSAs HSAs are often confused with Flexible Spending Accounts (FSA). It helps to remember the difference: The “S” in HSA stands for savings, whereas the “S” in FSA stands for spending. The HSA funds belong to the participant and never expire. However, unspent funds in an FSA do have a time limit.

Invest for Retirement  A key feature of HSAs is that the account can be used as a retirement savings vehicle. Use it to invest in stocks or mutual funds and watch the money grow through the magic of compound growth. Consider it a 401(k) plan for health and retirement! Let’s face it; we’re not going to come close to $325,000 in savings for healthcare in retirement by putting all of our money in a bank account and depending on growth from interest.

 

HSA 101 for Employers

Tax Advantage Employers, particularly small and medium businesses, benefit from offering an HSA to their employees. Any money contributed to an HSA by the employee, or the employer is exempt from FICA tax. That is a tax savings of 7.65% for the employee AND 7.65% for the business.

Let’s break all this down in real numbers:

Let’s say an employer has 100 employees

Each employee contributes $2000 in average contributions

Total Contributions = 100 x 2000 = 200,000

The FICA tax savings for the employer: 200,000 x 7.65%= $15,300

As you can see, the tax savings can add up quickly!

Incentivizing Your Employees Employers used to contribute to HSAs through seed funding, a one-time payment at the beginning of the year to their employees. Employees were then free to spend the money for their health during the year or invest those dollars for their future retirement.

Today, the new way to incentivize employees is to offer a company match, similar to a 401(k) plan. This benefit motivates employees to contribute their money into the account, learn how it works, and take advantage of HSA investing. It’s a win-win for both sides.

Employers receive the FICA tax savings. Employees take an active role in their health and financial wellness. As they shop around for a healthcare plan that works for their individual needs, employees reduce dependency on the company-sponsored health insurance plan. Furthermore, employees are encouraged to spend time researching and making price comparisons on services, which leads to less time and money spent on unnecessary doctor’s appointments and procedures.

Simple Administration

Today, HSA administration is easier than ever. Integrations with payroll providers make it simple to transmit eligible employee census data and contributions information to the HSA provider for each pay period. Compared to the 401(k), there are minimal compliance requirements to offer the plan.

Your HSA provider will also partner with you to create an effective communication plan to help ease the fear of the higher deductible health plan and educate your employees about this option’s excellent features.

Over the last decade, the gap between the deductibles for traditional health plans and HDHPs, or lower-premium plans, has dramatically decreased. Since there are premium savings for both the employer and the employee, it’s well worth the time to explore the HDHP/HSA as one of your health plan options. Over time, you will see that many employees will see the value of the lower premium plan and gravitate towards it. Especially as they begin to understand the advantages of the HSA with its tax benefits, freedom for getting healthcare where and when they want it, the ability to invest their funds for retirement, and the compounding effect of employer contributions.

 

About SavingsOak

SavingsOak is a Silicon Valley-based HSA provider with a consumer-centric approach to increasing employee participation and encouraging them to invest in their savings for long-term healthcare needs. The diverse team at SavingsOak has decades of experience in the technology, human resources, and retirement verticals. By partnering with small to mid-sized businesses, we enable these companies to offer their employees an HSA program that is more innovative than that provided by many of America’s biggest employers. For more information, please visit www.savingsoak.com.