After spiking at 15% in 2020, the nation’s unemployment rate has remained below 4%. As a result, many industries are competing for talent and looking for ways to get an edge in hiring.

This is especially true in the construction industry, which is projected to face a labor shortage of nearly one million workers over the next two years – at a time when seven million more homes will be needed to address the nation’s growing housing shortage.

Health Savings Accounts (HSAs) are one way companies in all industries can attract employees. By including an HSA option in a robust employee benefits package (that also might include vacation time, remote work options and education allowances), companies can offer meaningful growth and quality-of- life enhancements to potential hires.

Seventy percent of large businesses now offer HSA health plans. In the United States, there are 28 million HSAs covering 72 million workers.

How HSAs Work

A health savings account is like a 401(k) for healthcare. Employees typically contribute money to their account on a pre-tax basis via payroll deductions, and employers can make matching contributions, similar to 401(k)s. Eight out of 10 businesses that offer an HSA make matching contributions, according to the Plan Sponsor Council of America.

HSAs are offered along with high deductible health plans (HDHPs). These are health insurance plans with relatively high deductibles and low premiums. The minimum HSA deductibles in 2024 are $1,600 for individuals and $3,200 for families, while the maximum out-of-pocket expenses for account holders in 2024 are $8,050 for individuals and $16,100 for families.

HSA funds typically can’t be used to pay health insurance premiums. However, employees can use the money to pay for practically any healthcare expense, including:

• Deductibles, coinsurance, and copays associated with health insurance. Dental and vision care
• Long-term care
• Preventive care, including annual physicals and routine health screenings.
• Physical therapy, rehabilitation, and acupuncture
• Counseling and mental health services
• Prescription and over-the-counter medications
• Medical equipment including wheelchairs, braces, bandages, and crutches
• Feminine hygiene products

HSA funds can also be used by retirees to pay Medicare Part B and Part D premiums, as well as premiums for employer-sponsored health insurance purchased by retirees 65 years or older. And participants can use the money to pay healthcare expenses for their spouses and dependents.

HSAs and Cafeteria Plans

Health savings accounts are typically offered as part of a Section 125 cafeteria plan. These plans enable employees to contribute tax-deferred money to their HSA via payroll deductions. Employers choose the HSA provider (usually a financial institution such as a bank or credit union) and manage employees’ accounts, including verifying their participation eligibility.

Employees enrolled in an HDHP cannot be enrolled in any other type of health plan (including Medicare) and cannot be claimed as a dependent on anyone else’s tax return. While HSA contributions are no longer allowed once individuals enroll in Medicare, funds can be withdrawn by enrollees to pay qualified healthcare expenses that Medicare doesn’t cover.

Total annual HSA contributions (employee and employer combined) in 2024 are limited to $4,150 for individuals and $8,300 for families, with a special $1,000 catch-up contribution allowed for employees who are 55 years or older. Spouses working for the same company can open and contribute to separate HSAs and use money in each other’s accounts for medical expenses.

Tax and Financial Benefits of HSAs

HSAs offer a number of benefits to businesses and employees. For starters, they can be a powerful recruiting and retention tool for businesses since many employees today want to work for companies that offer this kind of health coverage. Also, employers’ contributions are tax-deductible as a business expense, and companies avoid paying federal income, Social Security, Medicare, and unemployment taxes on contributions.

One of the biggest HSA advantages for employees is the triple tax benefits mentioned above: Pre-tax contributions, which lower current taxable income, along with tax-free earnings and withdrawals if funds are used to pay for qualifying medical expenses.

Also, HSA savings are portable, allowing employees to take the money with them if they change jobs or retire. And unlike traditional 401(k)s, there are no required minimum distributions (RMDs) for HSAs. Employees use a debit card to pay for medical expenses, so tapping account funds is fast and easy.
HSA funds can be invested to earn market returns, just like 401(k) funds. This can help employees accumulate a sizable account they can use to pay out-of-pocket medical expenses in retirement that aren’t covered by Medicare.

Studies have determined that many Americans aren’t saving enough money to retire comfortably. HSAs could play a vital role in helping plug the retirement gap. Unlike flexible spending accounts (FSAs), unused HSA funds roll over from one year to the next so there are no “use it or lose it” consequences for employees. As a result, employees can build up a healthy nest egg over time for healthcare expenses in retirement.

Dembo Jones regularly works with clients to explore employee benefit options. To learn more about HSAs and whether offering them to your employees is worthwhile, get in touch with us today.