Unlocking the Full Potential of HSAs: Understanding the Benefits

Posted on:

June 5, 2023

According to the Employee Benefits Research Institute (EBRI), many individuals with Health Savings Accounts (HSAs) fail to fully utilize the tax benefits associated with their accounts. The IRS announced that for the year 2024, employees will be allowed to contribute up to $4,150 to an individual HSA, while the limit for families will be $8,300. These figures represent an increase due to inflation compared to 2023, when the limits were $3,850 for individuals and $7,750 for families.

In addition, the IRS defined high-deductible health plans as those with an annual deductible of at least $1,600 for individuals or $3,200 for families. The plans should also have annual out-of-pocket expenses not exceeding $8,050 for individuals or $16,100 for families. Furthermore, the maximum amount that may be newly available for the plan year for an excepted benefit Health Reimbursement Arrangement (HRA) is $2,100.

According to EBRI, HSAs offer a triple tax advantage to accountholders, enabling them to stretch money earmarked for health care expenses further than they otherwise could. HSA contributions are made on a pre-tax basis, allowing employees to deduct the amounts contributed to their HSA on their tax returns, regardless of whether they itemize their deductions. Moreover, individuals are not required to include any contributions made by their employer in their gross income. Contributions can be made conveniently through pre-tax payroll deductions or claimed as deductions on the tax return if made after tax.

In addition to the income tax advantages, HSAs also enjoy exemption from payroll taxes, commonly referred to as FICA taxes. This means that by maximizing their HSA contributions, individuals can further lower their taxable income, especially when combined with maxed-out 401(k) contributions.

EBRI’s research revealed that the average HSA accountholder tends to have a modest balance, contributes less than the maximum allowed, and does not invest in their HSA. Surveys have shown that employees often have a limited understanding of their benefits and how to utilize them, which may explain the low investment rates. Only 12% of account holders invested in assets other than cash, and this percentage has been gradually increasing over the years.

Paul Fronstin, the director of health benefits research at EBRI, stated that accountholders appear to treat HSAs more like specialized checking accounts rather than investment accounts. However, their behavior tends to change over time, with longer-term HSA owners being more likely to invest in assets other than cash, contribute more on average, and have higher account balances.

During a time when employees are actively seeking financial stability, these benefits could enhance recruitment and retention efforts.