The Inner Workings of HSAs

Speaking during the virtual PLANSPONSOR 2021 HSA Conference on Tuesday, Roy Ramthun, founder and president of HSA Consulting Services LLC, said the best way to understand a health savings account (HSA) is to think of it as a bank account that is typically paired with a high-deductible health plan (HDHP), or an HSA-qualified health plan.

He said HSAs are paired with such plans to help participants in HDHPs meet the expenses that come with the plans and to provide them with tax savings during the process.

“Anyone covered by a high-deductible health plan can participate in an HSA,” he said. “The only people who may be covered by that type of plan who cannot participate are tax dependents; anyone enrolled in Medicare, Medicaid or Tricare; or anyone participating in health FSAs [flexible spending accounts] or HRAs [health reimbursement arrangements]; or anyone covered by other insurance with no or low deductibles.” In 2021, the minimum deductible is $1,400 for an individual and $2,800 for a family, Ramthun said.

Other than their triple tax advantages—contributions are tax-free, profits on investments are tax-free and withdrawals used for qualified medical expenses are tax-free—there are two other main benefits of HSAs, Ramthun said.

“Lower premiums help fund HSAs; in general, a high-deductible health plan tends to bring your premiums down, and that money is then available to help you fund your HSA account,” he said.  “Also, account holders get free preventative health care below the deductible.”

Ramthun added that HSA-compatible insurance and coverage extend to a wide variety of medical needs, including preventive care, dental coverage, vision coverage, cancer and other specific illness insurance, hospital indemnity insurance, accident insurance, medical liability insurance and discount cards.

Zack Hoffmann-Richards, an associate with Groom Law Group, said he favors HSAs, particularly because of their triple tax advantages, lack of income minimums or limits, and additional catch-up contributions permitted at age 55.

“They also decrease employer and employee income and payroll taxes,” Hoffmann-Richards said. “Employer contributions are exempt from federal income and employment taxes, and, unlike FSAs and HRAs, employers are not required to determine if employees use their HSA contributions for qualified medical expenses because the account is the property of the account holder, who is responsible for its management. If the account holder distributes money from the account for non-medical expenses under the age of 65, that money will be subject to income tax and a 20% penalty. Only if the account holder is disabled or 65 and older will those fees not apply.”

The IRS also permits HSA holders to make a one-time transfer from a traditional individual retirement account (IRA) or a Roth IRA to an HSA, Hoffmann-Richards continued. “However, both accounts must be owned by the same individual, and they must be eligible to contribute to an HSA for that year.”

Hoffmann-Richards said IRS Publication 502 contains all the details about what medical expenses an HSA can cover. Recent changes the IRS made now allow for HSAs to cover COVID-19 testing and treatment, telehealth services and over-the-counter (OTC) drugs and medicines, even if they are not prescribed, as well as menstrual care products and insurance premiums, he said.

He said the accounts can cover the account holder, their spouse and any qualifying children or relatives whom the account holder claims as dependents on their taxes.

HSAs are user-friendly because they typically are tied to a debit card or online bill payment system, said Jamie Greenleaf, lead adviser and principal at Cafaro Greenleaf. “The money rolls over year after year, and, if invested, can grow substantially.”

The IRS also permits employers to automatically enroll their workers in an HSA as long as it includes an opt-out provision, she said.

“We think automatically enrolling workers in HSAs is a best practice because it helps participants drive their success in building dollars for medical equity throughout their lifetime,” Greenleaf said.

Finally, Hoffmann-Richards noted that HSAs are generally not subject to the Employee Retirement Income Security Act (ERISA). “The DOL [Department of Labor] issued two Field Assistance Bulletins granting sponsors safe harbor from ERISA if the establishment of the HSA is completely voluntary,” he said.