Following Up on HSAs After Open Enrollment

“The best time to engage with employees and educate them about health savings accounts is after open enrollment,” says Steve Neeleman, founder and vice chairman of HealthEquity in Draper, Utah.

The 2019 Bank of America Workplace Benefits Report found 57% of employees say they have a good understanding of health savings accounts (HSAs). However, only 11% of employees were able to correctly identify four basic attributes of HSAs—they offer a “triple” tax advantage, funds in the account can be invested, funds in the account do not expire, and having an HSA requires enrollment in an HDHP.

Lisa Margeson, head of Retirement Client Experience and Communications at Bank of America in Boston, notes that before educating employees, employers themselves have to make sure they are educated about HSAs. The same report shows 65% of employers say they have a good understanding of HSAs, while only 7% correctly identified the four basic attributes.

The Employee Benefit Research Institute (EBRI) reports that one-half of HSA owners contributed to their account in 2018, but 37% of HSAs did not receive any contributions (individual or employer) in 2018.

Margeson suggests plan sponsors focus on two key messages: the cost of health care continues to grow significantly, and the tax advantages of HSAs. “With those two complementary messages, we have seen a good pickup in the enrollment in HSAs,” she says.

“Talk about savings and investing, most people see them as like [flexible spending accounts],” Neeleman says. “Start with three basic messages: HSAs are not use it or lose it accounts, they can be invested and employees can increase how much they put into the account during the year. Light bulbs will go on.”

Margeson notes that HSAs are unlike any other employee benefit when it comes to tax advantages. “Employees’ money goes in pre-tax, grows tax-free and, if pulled out for qualified medical expenses, is tax-free as well. No other savings vehicle gives you that,” she says.

Neeleman says not only will an HSA participant save roughly 8% by avoiding FICA taxes, but the employer will save the same percent. “So, it is important to tell employees to fund their HSAs to take advantage of the tax benefits,” he says, noting that California and New Jersey are exceptions.

Most of the time, however, employees enroll in an HSA as they do with a retirement plan—establishing an amount to be deducted from payroll to put into their account, Margeson points out. Employees need to understand, though, that they can only use HSA funds after they are put into the account; they are not like flexible spending accounts (FSAs), with which the full balance employees elect is available before it is funded.

According to Neeleman, most employers allow HSA participants to change the amount deferred into their accounts during the year. They may only allow participants to do so quarterly or at some regular interval. This way employees can save more if they have a change in medical cost needs, for example, if they have a baby.

Margeson notes that most HSA providers send a welcome package informing participants about the account website and how to sign on and take advantage of the tools, resources and education to manage their accounts. But, Neeleman suggests employers that share messages and education early and often help employees have the most success with their HSAs. “A few months out from open enrollment, hold webinars and/or lunch and learns about the ways participants can use their accounts,” he says.

Since the accounts are not “use-it-or-lose-it,” both Margeson and Neeleman say education about saving and investing HSA accounts for retirement is also important. “Out-of-pocket health care costs continue to rise and will be significant in retirement. Employees can make an intentional decision to not use HSA savings for current medical expenses, if they can afford it, and save and invest their money for future use,” Margeson says.

A report from Devenir says those who invest their HSA accounts have an average total balance six times larger than those who don’t.

Sometimes HSA investment providers only allow employees to invest their funds once they reach a certain amount of savings, Margeson points out. She says that’s why it’s important for employers to educate employees during the year so they will know when they can invest and how to do so.

“Employees may first consider their current health care needs then realize an HSA is incredible savings vehicle for retirement health care expenses. Ask them, ‘Why not maximize HSA contributions if you can?’” Neeleman says. He points out that the IRS allows catch-up contributions to HSAs of $1,000 each for the employee and his spouse after age 55.

“I always believe the icing on the cake with education is to remind people that the longer they keep the money in their HSA, the better it can grow,” Neeleman says. “If an employee can pay for a current medical expense with post-tax dollars, he can leave money in his HSA to grow, and in the future, he can reimburse himself tax-free. There’s no statute of limitations on those reimbursements.”

Margeson says, “When we educate employees about [using HSAs for retirement savings] we actually see an uptick in employees saving their funds for the future versus using them today. Across the industry, about 70% pull money out of HSAs for near-term expenses. Among our client base, it’s about 60%.”