Is your business taking utlizing HSAs to their full advantage?

Inflation has been a hot topic in the news for months, which has caused growing concerns within the business industry. Most business owners are keeping a close eye on costs. Costs that are related to mission-critical functions such as overhead and materials can be difficult to control.

However, you might find some budge room in employee benefits.

Many companies have lowered their benefits costs by offering a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). The phrase “high-deductible” may throw some red flags in the eyes of employees, so if you decide to offer an HSA, you’ll want to devise a strategy for the plan’s advantages.

The basics
An HSA is a tax-advantaged savings account funded with pretax dollars. Funds can be withdrawn tax-free to pay for a wide range of qualified medical expenses. As mentioned, to provide these benefits, an HSA must be coupled with an HDHP. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage).

In 2023, the annual contribution limit for HSAs is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the business and the participant can make contributions. However, the limit is a combined one, not per-payer. Thus, if your company contributed $4,000 to an employee’s family-coverage account, that participant could contribute only $3,750.

Another requirement for HSA contributions is that an account holder can’t be enrolled in Medicare or covered by any non-HDHP insurance (such as a spouse’s plan). Once someone enrolls in Medicare, the person becomes ineligible to contribute to an HSA — though the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.

3 major advantages
There are three major advantages to an HSA to clearly communicate to employees:

1. Lower premiums. Some employees might scowl at having a high deductible, but you may be able to turn that frown upside down by informing them that HDHP premiums — that is, the monthly cost to retain coverage — tend to be substantially lower than those of other plan types.

2. Tax advantages times three. An HSA presents a “triple threat” to an account holder’s tax liability. First, contributions are made pretax, which lowers one’s taxable income. Second, funds in the account grow tax-free. And third, distributions are tax-free if the withdrawals are used for eligible expenses.

3. Retirement and estate planning pluses. There’s no “use it or lose it” clause with an HSA; participants own their accounts. Thus, funds may be carried over year to year — continuing to grow tax-deferred indefinitely. Upon turning age 65, account holders can withdraw funds penalty-free for any purpose, though funds that aren’t used for qualified medical expenses are taxable.

An HSA can even be included in an account holder’s estate plan. However, the tax implications of inheriting an HSA differ significantly depending on the recipient, so it’s important to carefully consider beneficiary designation.

Explain the upsides
Indeed, an HDHP+HSA pairing can be a win-win for your business and its employees. While participants are enjoying the advantages noted above, you’ll appreciate lower payroll costs, a federal tax deduction and reduced administrative burden. Just be prepared to explain the upsides. Contact your Rudler, PSC advisor at 859-331-1717 for help evaluating the concept and assessing the costs of health care benefits.

RUDLER, PSC CPAs and Business Advisors

This week's Rudler Review is presented by James Ray, CPA.

If you would like to discuss your particular situation, contact James at 859-331-1717.

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