Communicating HSA Rules to Employees

As part of the open enrollment process, employers that offer HSA-compatible HDHPs should help their employees understand the benefits of opening an HSA and making tax-free contributions. Employees may be confused about the rules surrounding HSAs and may not realize all the advantages associated with these accounts.

CMR Risk & Insurance Services, Inc. can provide sample resources for communicating the HSA rules to employees.

HSA Advantages

Open enrollment is an ideal time for employers to highlight to eligible employees the advantages of selecting an HDHP/HSA coverage option. These advantages include the following:

• Lower premiums: HDHPs typically have lower monthly premiums than health plans with lower deductibles, which makes them a cost-effective option for many employees. Employees who enroll in HDHPs can contribute to an HSA to help offset the higher deductible.
• Tax savings: HSAs have three levels of tax savings: (1) HSA contributions can be deducted from employee’s pay on a pre-tax basis, which means they are not subject to federal income and employment taxes; (2) HSA funds grow tax-free; and (3) HSA withdrawals are nontaxable if they are used for qualified medical expenses.
• Employee ownership: HSAs provide more flexibility than other medical savings accounts because they are individually owned accounts. For example, employees keep their HSAs even if they switch jobs. Also, employees can continue to use their HSA money on a tax-free basis to pay for medical expenses even when they no longer meet the eligibility criteria for making HSA contributions.
• Savings opportunity: There is no deadline for employees to use their HSA money. Unused HSA funds roll over from year to year, allowing employees to save for future medical expenses.
• Ease of use: HSA funds can be used on a tax-free basis to pay for a broad range of medical expenses, including over-the-counter medicine and drugs. In addition to their own medical expenses, employees can use their HSAs to pay medical expenses incurred by their spouses and dependent children.
• Open at any time: During open enrollment, employers should encourage their HSA-eligible employees to set up an HSA if they have not done so already. However, an eligible employee can set up an HSA at any time, not just during open enrollment. Also, employees can generally elect to start making pre-tax contributions to their HSAs at any time during the plan year, even if they did not elect HSA contributions during open enrollment. This is an exception to the irrevocability (or “election lock”) rule that applies to most other pre-tax benefits.

HSA Eligibility

Employers should help employees understand the eligibility rules for HSAs so they can make an informed decision about their health coverage during open enrollment. There are strict rules for HSA eligibility that employees should consider before electing coverage under an HDHP and setting up an HSA. To be eligible for an HSA, an employee must:

• Be covered by an HDHP;
• Not be covered by other health coverage that is not an HDHP, including coverage under a traditional health flexible spending account (FSA) or health reimbursement arrangement (HRA), with certain limited exceptions;
• Not be enrolled in Medicare; and
• Not be eligible to be claimed as a dependent on another person’s tax return.

HSA Contribution Limits

At open enrollment time, employers should communicate the HSA contribution limits to employees. These limits are adjusted for inflation each year and vary based on whether an employee has self-only or family coverage under an HDHP. Self-only HDHP coverage is HDHP coverage for only one HSA-eligible individual. Family HDHP coverage is HDHP coverage for one HSA-eligible individual and at least one other individual (regardless of whether the other individual is HSA-eligible).

Effective Jan. 1, 2025, the annual HSA contribution limits are:

• $4,300 for individuals with self-only HDHP coverage; and
• $8,550 for individuals with family HDHP coverage.   

In addition, individuals who are age 55 or older by the end of the year are permitted to make additional HSA contributions, called “catch-up contributions.” The maximum annual catch-up contribution is $1,000. The catch-up contribution limit is not adjusted for inflation, which means it remains the same year after year.

In general, all HSA contributions made by or on behalf of an HSA-eligible individual are aggregated for purposes of applying the maximum contribution limit.

Contact us for more information

Article Published By: Zywave, Inc.