Common Misconceptions About HSAs (and the hard facts)

By Tom Torre

As 2019 comes to an end – and the open enrollment period with it, many employees have already made their choices when it comes to which health plans they’ll be utilizing over the course of the new year. Although the open enrollment period is a time for employees to identify which plans are right for them, understanding and comparing plans is a tedious process that requires an abundance of knowledge on tax benefits. 

These barriers to choosing a health plan can often create scenarios where employees are enrolled in programs that they’re uneducated on, or they have misconceptions about what they can and cannot do with their benefits. 

One benefit where such misconceptions are prevalent is health savings accounts (HSAs). In fact, it is estimated that over 80% of healthcare out-of-pocket payments – particularly dental, vision, and medication – that are tax deductible go unclaimed because employees don’t know that their HSAs provide tax breaks on them. 

In order to ensure employees are making the most out of their benefits this year, here’s a list of the top four myths about HSAs, along with the cold, hard facts: 

• Myth: The most common misconception is that HSAs are much like flexible spending accounts (FSAs) in that any funds not spent at the end of the calendar year or grace period are lost. 

• Fact: Actually, because HSAs are owned by the employee, all of the funds in the HSA remain the property of that employee regardless of whether they are spent or not, and regardless of whether they remain with their current employer or not.

• Myth: HSAs can only be used to pay for doctor and hospital visits. 

• Fact: The truth is, HSAs can be used to pay for qualified medical, dental, vision and medication expenses. The IRS publishes an entire list of eligible medical expenses that can be paid with HSA funds. 

• Myth: Employees and even some HR practitioners believe that HSAs are to be used in the same way FSAs are – as spending accounts. 

• Fact: All you need to do is look at the name of the accounts—flexible spending account and health savings account—to see the difference. The HSA is meant to save for medical expenses. Some years, accountholders may feel like they’re spending more than they’re saving, and other years they’ll be saving more than they’re spending. We believe there are four types of accountholders: non-funders, spenders, savers and investors. Each type of accountholder uses the HSA in different ways and an accountholder can change from one type to another at any given time.  The greatest service that can be provided to employees is to educate them as to the powerful long-term savings aspect of health savings accounts.

• Myth: HSAs are really only useful for the ‘young and healthy’ or the ‘old and wealthy.’ 

• Fact: Nothing is further from the truth. HSAs have benefits for everyone and should be considered by all employees. In fact, every employee can benefit from triple tax advantages, meaning:

1. Contributions made by either the employee or employer are made pre-tax, lowering income and FICA taxes. 
2. The funds that carry over also grow tax free while they remain part of the account. 
3. Funds that are used for HSA-qualified expenses are withdrawn tax free. What’s more, funds that are withdrawn for any reason after 65 incur no penalty, though if the funds are not used for HSA-qualified expenses, income taxes must be paid at your then income tax rate, which (to your benefit) may be lower than it is today.

Whether you’ve enrolled in an HSA, HDHP, or traditional health plan, it’s difficult to overstate the importance of understanding how to leverage your tax benefits in the new year. If you’re unsure of how to leverage your benefits, make time to meet with your employer or perhaps a personal tax advisor or accountant to sit down and talk through how to maximize your money, savings, and overall health. 

Tom Torre is with Bend Financial.