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What in the World is an HSA?
By VICKY BROWN
Hey – I bet you’ve heard about it. Those employee benefit programs that aren’t medical, dental, vision or life insurance. And they have those weird names – FSA, HRA, HSA.
Well in this episode, I’m going to give you the skinny on one that has been coming up a lot with clients lately – the HSA.
An HSA, or health savings account, is a plan where an individual can put aside pre-tax dollars to use on qualifying medical expenses, like copays, prescribed medicine, and medical equipment.
In English – it allows your employee to do just what it sounds like – they can set up a savings account (at a regular bank) and use it to basically reimburse themselves for out of pocket medical costs.
So, if I have an HSA, and I pay say $35 for my doctor visit – I can submit a claim and reimburse myself from the money I put in my HSA.
OK, I can hear you saying – but what is the good of reimbursing yourself with your own money. Well, that’s because when you put that money in the account, it came out of your paycheck BEFORE taxes. Yep, that’s right – you aren’t taxed on the money you put in your HSA. So, you can imagine how much that might help if you have large medical bills – or even small medical bills. Because when it comes to taxes, every little bit helps – right?
Now, because there are tax savings – you know that means the IRS is involved. And when the IRS is involved, there are guidelines. So, here are some guidelines: You have to be enrolled in a high-deductible health plan to open an HSA and you’re only allowed to contribute up to a certain amount.
As I mentioned earlier – in order to take advantage of a Health Savings Account, it has to be paired with an eligible medical plan.
And not all medical plans are HSA eligible. The ones that are usually have HSA in the name – Like Anthem PPO HSA or Aetna HSA plan xyz.
HSA plans generally have higher deductibles than other plan offerings, and you’ll generally pay more for care.
But the reason they’re designed that way is because of how a Health Savings Account is used.
“…An HSA, or health savings account,…allows your employee to do just what it sounds like – they can set up a savings account (at a regular bank) and use it to basically reimburse themselves for out of pocket medical costs.“
Alright – let’s dive into how an HSA works.
Now, keep in mind that different companies may have slightly different plans; some have a company contribution component and some don’t; some have a specific bank or financial institution they want you to set your plan up with, and some let you use whatever bank you choose. So remember, this is just an example.
Alright – first the employee has to be enrolled in an HSA eligible medical plan.
Then they would go to any financial institution of their choice to set up a Health Savings Account.
For instance, if they wanted to use Bank of America – they actually have an application form online that the employee can use to start the HSA process. And I’m sure it works much the same way with most financial institutions.
Once they have set up their account, then they have to notify the payroll department so they can make the proper deduction from the employee’s paycheck. Kind of like a direct deposit.
Then as the employee incurs HSA eligible expenses, they can file a claim with the bank, against their Health Savings Account.
Now, different banks may handle things a bit differently, some may let you write the employee a check or transfer money directly from their Health Savings Account
The critical piece to remember here is that
- the employee is responsible for making sure the service they’re getting reimbursed for is actually HSA eligible (if it isn’t, the IRS may deny them when the person does their taxes)
- the employee is also responsible to make sure they don’t go over the contribution limits. And because the contribution limit looks at married couples as a single tax unit, it’s a good idea for them to review things with their accountant so they can be sure they aren’t going over the limit.
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Alright – all these letters can get confusing. HSA, HRA, FSA…what does it all mean. Well, let’s tackle the FSA or Flexible Spending Account – is it the same as an FSA?
Sometimes people get Flexible Spending Accounts (or FSAs) confused with Health Spending Accounts (HSAs).
They can both provide reimbursement for medical and medically related expenses. But they have some crucial differences.
First off – the employee owns their Health Spending Account. The funds, and the account move with them from job to job. With FSAs they are employer specific, and if the person were to leave that position, after a runoff period, the funds are no longer available to them.
Next, employees can change their HSA contribution amount at any time during the year. That is not the case with FSAs. Once they have selected their contribution level, it can’t go up or down until the next enrollment period.
With HSAs employees have an unlimited amount of time to reimburse themselves. They can with draw the money for eligible expenses at any time. However, with FSAs they have to submit reimbursement receipts by a specific deadline – it’s a use it or lose it account.
And importantly (particularly for smaller businesses) the money that is pledged to an FSA, has to be immediately available to that employee. Meaning that if I say I am going to contribute $5,000 to my FSA; but in February I have major surgery – even though I haven’t had enough time in the year to contribute the full $5,000 to the account, I have to be able to withdraw it immediately – all of it. And I’ll give you a guess as to who is covering the uncontributed balance – yep, the employer has to cover. So if the employee has only contributed $300 so far, the employer has to put up the remaining $4,700.
Now, on the flip side – if the employee pledges $5,000 to the plan, and they only use $3,000 that year, then they lose the remaining $2,000 to the plan.
So, FSAs are use it or lose it in the strongest sense of the phrase.
Hopefully that helped crack the surface of what a Health Savings Account is and how you use one.
Now, as with all the plans we’ve mentioned – just check with your insurance benefits broker. They will guide you through the maze and help get everything set up.
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