Health Savings Accounts (HSAs) are individually-owned assets dedicated to health care expenses. HSAs allow employees to take control of their health care spending in the event of illness or an accident. These accounts follow employees throughout their lives and through different jobs, so it is important they know how to maximize their benefits. Here is what you need to know to help your employees make the most of their HSAs.
1. Explain eligibility.
To qualify for an HSA, employees must be enrolled in a high-deductible health plan. If the employee is enrolled in Medicaid, they are ineligible. Eligibility is also affected if the employee:
- Claims as a dependent.
- Has a spouse enrolled in a flexible spending account or health reimbursement arrangement that automatically covers the employee.
- Receives VA or Tricare benefits and Medicare “look back periods.”
- Has other coverage that deems them ineligible.
2. Inform them of the tax benefits.
Employees can make tax-deductible contributions to their HSA. Generally, any contribution made through an employer is tax-free and individual contributions are typically reported as an “above the line” deduction on taxes. Individuals must report HSAs on their taxes, with custodians providing 1099-SA and 5498-SA forms. If your employees are looking to save money on medical expenses, HSAs are a great way to do so.
3. Know the IRS’ regulations.
With tax advantages come IRS regulations. Educate your employees on specific IRS rules to avoid penalties, like over-contribution or spending funds on non-qualified expenses. Also, limits on annual contribution limits, minimum deduction requirements and maximum out-of-pocket requirements are set no later than June 1 each year. Health plans that qualify must meet certain requirements like inclusion of prescription cost in plan limits and no expenses can be paid until the deductible is met (except for preventive care).
4. Funds roll over.
HSAs are unique because funds roll over year to year. There is no time limit on when expenses must be withdrawn, and withdrawals can be taken any time after the account is set up. Participants can use their funds for any qualified medical expenses, like vision and dental, but also can use funds on non-medical expenses with a tax penalty.
5. Take record.
As is any tax deductible account, you will need to ensure accurate and thorough records are kept. This will be extremely helpful for the employee during tax season but it will also help them avoid expensive errors in the long run. Encourage them to track and report every expense and keep their files in a safe place.
If you are interested in learning more about Health Savings Accounts and how to set one up for your employees, our team at CanopyNation will be glad to assist.