5 Things You May Not Know About HSAs
Odds are that you’ve heard that health savings accounts, or HSAs, offer individuals a “triple tax advantage” — but here are five things you may not know about HSAs.
A recent survey by Mercer found that 25% of employers with 10-499 employees and 61% of employers with 500 or more employees offered an HSA-eligible health plan or health reimbursement arrangement (HRA) in 2016, while by 2019, 34% of employers with 10-499 employees and nearly three-fourths (72%) of employers with 500 or more employees say they are very likely to offer such a health plan.
HSAs provide a triple tax advantage for savers in that:
1. Contributions reduce taxable income.
2. Earnings on the account build up tax free.
3. Distributions for qualified expenses from the account are not subject to taxation.
Because of this, an HSA could prove to be more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan.
Legislation has been introduced in the both the U.S. Senate and House that is designed to give HSAs a boost, including doubling the current HSA limits (which in 2017 are $6,550 for individuals and $13,100 for families). But here are some things you — or your plan sponsor clients — may not know.HSAs Can Invest in More than Money Market Funds
In fact, HSAs can be invested in the same investment options that have been approved for IRAs — i.e., bank accounts, certificates of deposit, money market funds, stocks, bonds and mutual funds. Many HSA custodians, however, require that an HSA have at least a minimum balance in order to invest HSA funds in options beyond cash or cash equivalents.You Can Withdraw Funds from the HSA at Any Time
An individual may take distributions from an HSA at any time, but they are excluded from an individual’s taxable income only if they are used to pay for qualified medical expenses. Otherwise, they are treated as taxable income (and, if the individual is under age 65, subject to a 20% penalty).You Won’t Lose it if You Don’t Use it
There is no use-it-or-lose-it rule associated with an HSA, as any money left in the account at the end of the year automatically rolls over and is available in the future. HSAs are often confused with flexible spending accounts (FSAs), which DO have a use-it-or-lose-it provision.Normally HSAs Are Not Subject to ERISA
In Field Assistance Bulletin 2004-1
, the Department of Labor’s (DOL) Employee Benefit Security Administration (EBSA) said it “would not find that employer contributions to HSAs give rise to an ERISA-covered plan where the establishment of the HSAs is completely voluntary on the part of the employees and the employer does not: (i) limit the ability of eligible individuals to move their funds to another HSA beyond restrictions imposed by the Code; (ii) impose conditions on utilization of HSA funds beyond those permitted under the Code; (iii) make or influence the investment decisions with respect to funds contributed to an HSA; (iv) represent that the HSAs are an employee welfare benefit plan established or maintained by the employer; or (v) receive any payment or compensation in connection with an HSA.”
Said another way, HSAs are not subject to ERISA when the employer does not contribute to the HSA, or when the establishment of the HSA is completely voluntary on the part of the employee.The Fiduciary Rule Has an Impact
While HSAs aren’t normally thought of as a retirement vehicle, the recently finalized DOL fiduciary rule extends to HSAs.
As a result, employers could be impacted by the rule if they provide more than general investment education.