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How employers can help participants optimize their HSAs

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Health Savings Accounts (HSAs) have become popular employer-sponsored fringe benefits. How popular? According to the most recent data from the U.S. Bureau of Labor Statistics, 51% of private industry workers in 2023 had access to the high-deductible health plans (HDHPs) that must be sponsored in conjunction with HSAs.

The funny thing about HSAs is, though widely offered, they’re often suboptimally used. If your organization sponsors an HDHP with HSAs, you can help participants get more from their accounts. And if it doesn’t, read on for some insights into this potentially valuable fringe benefit.

More than meets the eye 

HSAs are participant-owned, tax-advantaged accounts used to accumulate funds for eligible medical expenses. As mentioned, an HSA must be offered along with an HDHP, which is defined in 2025 as a plan with at least a $1,650 deductible for self-only coverage or $3,300 for family coverage. Also in 2025, participants can contribute pretax income of up to $4,300 for self-only coverage and $8,550 for family coverage.

Account holders generally fail at “optimal utilization” in a couple of ways. First, some simply don’t contribute enough funds to fully cover medical expenses throughout the year. This may be because of financial constraints, unexpectedly high health care costs or a lack of understanding of how HSAs work.

Second, many participants overlook the fact that HSAs are not only medical savings accounts, but also retirement savings accounts. That’s right; employers can set up accounts to include investment options that can generate interest on designated account funds. And because participants own their accounts, they can keep building their balances no matter where or whether they work.

Under traditional qualified retirement plans, such as 401(k)s and IRAs, contributions and accumulated investment returns are taxable upon withdrawal. HSA distributions, however, are nontaxable so long as funds are used for qualified expenses, which are surprisingly broad. Plus, as is also the case with employer-sponsored traditional 401(k)s and IRAs, HSA contributions occur pretax via paycheck deferrals.

When HSA distributions are used for ineligible expenses, they’re subject to a 20% tax penalty plus federal income taxes at the account holder’s ordinary rate. That 20% penalty, however, disappears when account holders turn 65, though nonmedical expenses from age 65 onward remain subject to regular federal income tax.

Even when compared with Roth 401(k)s or Roth IRAs, HSAs land in a favorable light. Although Roth distributions are tax-free at the federal level, Roth contributions aren’t tax-deductible. Direct HSA contributions are deductible and, again, paycheck deferrals happen pretax — lowering participants’ taxable income.

3 ways to help 

Employers may use various approaches to help HSA participants get more from their accounts. These include:

1. Providing basic education and reminders. Be sure your benefits materials and communications are accurate, thorough and clearly written. Employees should have access to a reader-friendly description of what an HSA is and how it works. Throughout the year, issue regular reminders about using the accounts and recognizing their value as savings vehicles.

2. Considering matching strategies. Just as employers can match 401(k) contributions, they may match HSA contributions. And there are some creative ways to do so. For example, you could amend your 401(k) plan so participants get a 50% match on their combined 401(k)-HSA deferrals. However, consult a qualified benefits advisor before making any plan design changes.

3. Adding or updating investment options. If your current HSAs don’t have investment options, explore adding them. Examples include money market funds, stocks and mutual funds, and bonds or bond funds. You may need to update your investment options periodically. Again, work with a qualified advisor when undertaking these steps.

Costs, risks and upsides

The HDHP plus HSAs model is popular because it offers advantages for both employers and participants. However, that doesn’t mean it’s right for every organization. Contact us for help identifying and assessing the costs, risks and potential upsides of any fringe benefits you’re administering or considering.

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