An HSA is an employee-owned account that allows participants to set aside funds to pay for the same expenses that are eligible under a Health FSA. Also like an FSA, these accounts can be offered under a cafeteria plan, so that participants may fund their accounts through pre-tax salary reductions.
- HSAs are “triple-tax advantaged.” Because of this, the contributions are tax-free, the funds are not taxed if paid for eligible expenses, and any gains on the funds (interest, dividends) are also tax-free
- HSAs are portable, employee-owned, interest-bearing bank accounts; the account remains with the employees even if they leave the company
- Certain HSAs allow participants to invest a portion of the balance into mutual funds. Any earnings on these investments are non-taxable
- Upon retiring, participants can use any remaining HSA funds to pay for any expense without a tax penalty (though ordinary taxes are required for non-qualified fees). Not only that, but retirees can use the funds tax-free to pay premiums on any supplemental Medicare coverage. This feature allows HSAs to operate as a secondary retirement fund
- There is no use-it-or-lose-it with HSAs; all funds employees contribute to their accounts and remain theirs in perpetuity. Also, participants may alter their deduction amounts at any time
- Like FSAs, employers can allow the HSA to be entirely employee-funded, or they may choose to make contributions to their employees’ HSA accounts
- Even though they offered under a cafeteria plan, HSAs do not carry the same non-discrimination requirements as an FSA. Moreover, there is a less administrative burden for the employer as the employees take the liability for their accounts
Eligibility requires an employee that is covered by a qualifying high deductible health plan.
- Moreover, they cannot have coverage by any other health coverage (a spouse’s health insurance, an FSA (unless limited), or otherwise)
- Participants are limited to reimburse what they have contributed—there is no “front-loading” like with an FSA
- Participant contributions to an HSA also have an annual limit. For 2018, that limit is $3,450 for an employee with single coverage and $6,900 for an employee with family coverage (participants over 55 can add $1,000. Also, remember there is no total account limit)
- Participation in an HSA precludes participation in any other benefit that provides health coverage. Meaning, employees with an HSA cannot participate in either an FSA or an HRA. Employers can work around this by offering, a particular limited FSA or HRA that only reimburses dental and vision benefits, meets specific deductible requirements, or both
- HSAs as bank accounts for legal purposes, so they are subject to many of the same laws that govern bank accounts, like the Patriot Act. Participants are often required to verify their identity to open an HSA, an administrative burden that does not apply to either an FSA or an HRA