What is an HSA?
HSA is a Health Savings Account, a tax-exempt account funded by the employee or the employer to cover the employee’s out-of-pocket medical expenses. HSAs must accompany a corresponding High Deductible Health Plan (HDHP). A Limited Purpose FSA to cover dental and vision coverage expenses may be combined with HSA, but not an FSA Health.
An HDHP has a higher annual deductible than regular health plans. An HDHP deductible would be of an ‘aggregate’ type unlike the ‘embedded’ deductible of a regular plan. In the case of aggregate deductible, when there is more than one family member, it is the family deductible amount that counts. Individual deductible has relevance only if the enrollee is taking a single coverage.
For all others, until the family deductible is entirely met, an HDHP plan with an aggregate deductible, will not pay for covered services. It will be the responsibility of the consumer to pay those at the rates contracted by the health plan. The only exception to this would be preventative care under the ACA. Preventative care must be provided without the use of a deductible at no cost. Prescription drugs for chronic conditions are generally considered not as part of preventative care and hence they require deductibles are met first before they are paid. However, there may be exceptions to this with certain plans.
The following shows the minimum deductible and out-of-pocket expense limit for an HDHP plan, as designated by the IRS for the year 2022.
| 2022 HDHP Plan Limits | Individual or Single Enrollee | Enrollee with more than one covered member |
| Minimum annual deductible | ||
| Maximum out-of-pocket expense limit | ||
| Total contribution amount limit |
The contribution amount to an HSA is limited by the IRS. This includes the total amount contributed by the employee and any amount contributed by the employer as well.
HSA accounts provide a debit card that the member can use at the point-of-service (e.g. provider’s office, pharmacies, etc.) location to pay their out-of-pocket expenses. The HSA account will automatically check for the use of qualified expenses. HSA account funds may not be used to pay insurance premiums unless the employee is a COBRA employee or pays long-term insurance. Any distribution from the account if not used for qualified medical expenses will be subject to taxes and penalties.
How does it benefit the employer?
HSAs have been found to save costs in the long term due to their design-emphasis of consumer accountability and responsibility for the right use of care. This can help contain the premium inflation.
How does it benefit the employee?
HSA provides a triple tax advantage to the employees. By reducing employees’ contributions into the account, the taxable income reduces. This reduces employees’ federal income tax, state income tax, and employee’s portion of the FICA (payroll taxes).
Certain accounts based on reaching certain threshold amounts may allow investing the funds in the HSA account in mutual funds.
The employee owns the account. The account remains with the employee, even if the employee leaves the current employer. Any amount remaining at the end of the year rolls over to the next year.
Example Scenarios of Applications
- An employer may contribute to an HSA plan funds to promote the employees’ enrollment into a High Deductible Health Plan. By having more of the employees enroll in an HDHP, employers create a sense of shared accountability by the employees on their healthcare decisions and usage. In the long run, this can lead to cost containment due to improved or optimal utilization of care.
- An employer may not contribute to an employee’s HSA account. However, provide an HDHP as a competing plan with a significantly reduced premium to a traditional and richer plan with embedded deductible and very low copays. The employee may prefer the HDHP option by investing into an HSA fund the differential amount that comes as a premium advantage of the HDHP plan that is eligible for HSA.
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