Employees perplexed by HSAs? Using targeted messaging is key to enrollment

One of the most attractive and misunderstood types of savings account is the health savings account or HSA, which can be used to save employees money on a lifetime of medical expenses.

An HSA is a triple tax-advantaged savings account attached to a High Deductible Health Plan (HDHP). Employees with HDHPs that meet eligibility requirements may:

• Contribute to an HSA on a pre-tax basis. This means reducing taxable income which means reducing taxes. In 2023 employees may contribute up to $3,850 for individuals or $7,750 for a family plus an additional $1,000 in “catch up” contributions if age 55 or older.
• Withdraw funds from their HSA to pay for eligible health care expenses tax-free or save for future eligible healthcare expenses, including those incurred in retirement.
• Invest the money that accumulates in their HSA.
• Earn tax-free interest on their HSA’s cash balance and tax-free earnings on any HSA invested funds.

Next, let’s consider what an HSA can be used for. Which expenses are eligible for reimbursement? Employees can use their HSA to pay for many different types of health care expenses, including:

• Medical, dental and vision coinsurance, deductibles, and copays
• Hearing aids, smoking cessation programs, wheelchairs, organ transplants and certain long-term care insurance premiums
• COBRA continuation health coverage premiums and Medicare premiums (excluding Medicare supplement plans) for HSA holders aged 65 or older

Now for the fun part, how can employees save money with an HSA? Any medical expense that’s run through an HSA enjoys, on average, a 30% discount. The way this works is an employee makes a contribution to their HSA through their paycheck and then simply pays for an eligible out-of-pocket medical expense using their HSA funds. The savings occurs by virtue of those HSA contributions being pre-tax, which really means tax-free, and the savings is realized immediately.

There is a common misunderstanding that HSAs are only for the wealthy. With the increase in medical costs, saving on medical spend can help all employees. In fact, almost four out of five HSA holders have a household income of less than $100k. Oftentimes people will clip coupons and spend exorbitant amounts of time trying to save money in all parts of their lives, so don’t forget to remind them the HSA is a terrific way to save on medical spend today!

Communicating the value of an HSA

Finally, here are tips on how to communicate the value of an HSA to employees. We recommend employers use targeted communications to address employees’ specific needs. Early career employees have different needs than an executive getting ready to retire. Employers should group their population by HSA ability levels with the goal of helping their employees’ level up their HSA behavior over time.

The first group could be comprised of employees who elect a HDHP and skip HSA enrollment completely. These employees may not be aware of what an HSA is, and this lack of knowledge will cost them in lost savings. Many employers even provide employees with a seed of $500 or more just for enrolling, and these employees miss out on that too. Messaging to this group could be delivered any time during the year, even outside the annual enrollment process, because employees may open an HSA at any time. Help them to level up by reminding them to enroll in HSA.

The next group of employees have taken action to enroll in the HSA, and they should be congratulated for accomplishing the first step! Now they need to consider how much they should put in their HSA. An easy goal for them could be to contribute a small amount per paycheck. Many account holders do not even do that. According to Devenir, halfway through 2022 almost 19% of all accounts were unfunded, up from 18% a year ago. These individuals opened an HSA but are not contributing at all and therefore are missing out on discounts for medical expenses they likely have. An impactful communication about what they are missing out on may move them to contribute.

Once employees have made it past the level of contributing a small amount per paycheck, they will want to consider contributing more to level up. There are two tips for this group that are easy to remember and plan for. One would be to contribute the amount of their medical plan deductible. This will give them protection against a large expense. A second tip would be to determine their contribution amount based on their past medical claims experience. Many enrollment sites will show employees what they spent on health care in the past year and may even go back multiple years. Contributing what you expect to spend will mean that the HSA can cover all of your expenses for the year. If you have an extra healthy year and do not have the expenses the funds are still yours to keep.

The next group of employees are those with more disposable income. This group has the ultimate flexibility with their finances, and employers will want to communicate the benefits of using the HSA as a retirement account. The ability to earn tax-free interest and investment returns is of particular interest to this group. In addition, if they are 55 or older, they also can contribute an extra $1,000 per year to their HSA.

Another strategy this group may want to consider is called “banking receipts.” This strategy calls for paying for medical expenses with personal funds (i.e., not using their HSA) and saving or “banking” the receipts. Each receipt they have banked can be used for a future tax-free withdrawal for any purchase. For example, the $3,000 an employee paid out of pocket for knee surgery remained in the HSA, earned tax-free interest and investment gains, and can years later be withdrawn tax-free from the HSA for a down payment on a boat!

Related: HSAs: An important tool to combat economic uncertainty

Inflation is high, and employees are looking to save wherever possible. Now is a wonderful time for employers to spread the news about the tax and savings benefits of an HSA. Help employees to level up their HSA behavior. We recommend using multiple channels and methods, targeting messages to employees based on their needs and ability to contribute, and acknowledging progress as employees step up their contributions.

Steve Durso is Associate Director, Benefits Accounts at WTW.