Smart money moves: Maximizing the tax value of an HSA

The 2023 tax filing season is officially underway. As expiring pandemic relief is expected to result in smaller refunds, consumers will be looking for ways to reduce their 2022 tax burden in the coming weeks. Enter the health savings account (HSA).

If your organization offers an HSA as an employee benefit, your HR team should consider educating employees about the tax advantages of this special account and how to save money by using their HSA for everyday health and wellness products and services. 

According to the Federal Reserve, 68% of people in 2021 said they wouldn’t be able to cover an unexpected household expense of $400. When it comes to healthcare expenses, the situation becomes even more urgent, considering that the average unexpected healthcare expense in 2021 was between $1,000 and $1,999.

By providing employees with savings tools like an HSA and educating them about how to use the account to fit their current personal needs and financial situation, your organization can support financial literacy and help employees protect their health and their financial future.

When it comes to reducing taxable income and providing financial tools for employees, it’s likely that you offer a 401(k) and insurance products that will protect an employee’s net worth in the event of death, disability or long-term illness. While these are all valuable options for your workforce, the benefit is deferred until later in life. Meanwhile, the HSA provides immediate financial benefits for employees.

The HSA is one of the more nimble and accessible financial tools you can offer because it delivers immediate savings each year in the form of less taxable income for employees. But this is just one part of the triple tax benefit of the HSA. When employees use the HSA to pay for eligible expenses, they pay no taxes on the withdrawals – even in retirement. In fact, it’s estimated that HSA users can save 30% or more (depending on their tax bracket) when they use the HSA for eligible expenses.

5 things employees should know about HSAs

1. The account can be set up at any time by the employee or the employer. If your organization sets up or contributes to employee HSAs, be sure to communicate this clearly and often to employees.
2. Employees can fund and reimburse themselves as needed throughout the year. This makes it easier to integrate their HSA into their financial strategy and make use of available income throughout the year.
3. The account always belongs to the employee, giving them a life-long savings tool, regardless of where they work or how their life situation changes.
4. The HSA can be used and funded retroactively. For example, an employee establishes an HSA in 2022, but is unable to fully fund the account. It’s now February 2023 and the employee has more disposable income. They review their 2022 expenses and contribute as much as they are able to the HSA to match these expenses and immediately reimburse themselves. By doing this the employee has reduced their 2022 taxable income and has not decreased their disposable income because they already reimbursed themselves from the HSA.
5. The HSA supports saving for retirement. Recent data shows that consumers are saving less for retirement than in previous years. Meanwhile, the average retired couple at age 65 can expect to spend $315,000 on healthcare expenses in retirement. An HSA can help alleviate this expense because the money in the account rolls over from year to year and is available for the account holder to spend with no penalty or tax, even in retirement.

HSA tax tips for employees

As April 18 draws near, you can help alleviate stress for employees and potentially improve their financial position by educating them on how to use their HSA to save money on taxes now and throughout the remainder of 2023.

• Make a 2022 contribution to your HSA. If employees haven’t contributed to or haven’t maxed out their HSA for 2022, they can make contributions until April 18, 2023. The maximum contribution for an individual HSA in 2022 was $3,650, while the contribution limit for a family HSA was $7,300.
• Evaluate your 2023 contribution plan. Now that the holidays have passed and the new year is firmly underway, take a breath and evaluate your HSA contribution goal for 2023. Be sure to account for changes in your health needs and income that could influence how you use or save your HSA dollars.
• Reimburse yourself for 2022 expenses. If you’re still feeling the financial pinch from the holidays, reimburse yourself from your HSA balance for 2022 expenses. Give yourself a little financial wiggle room without incurring additional tax or penalties.
• Get organized for tax season. The last thing anyone wants is to be audited by the IRS, but it does happen. Educate employees on the tax implications of their HSA and give them access to hands-on tools that help them budget for upcoming healthcare needs and track HSA purchases. This will help them make better use of their healthcare dollars and make life easier in the event of an audit.

Workforce demographics

Committing time and resources to educate employees about their HSA throughout the year can improve employee adoption, increase utilization and satisfaction, and reduce calls and inquiries to your benefits team. When planning your HSA communications strategy, be sure to think about your workforce demographics, as an employee’s age and stage of life will directly influence their HSA strategy.

For example, if your workforce is primarily young, single people with few healthcare needs, you may want to emphasize the savings and investment potential, as well as the ability to retroactively fund the account and immediately reimburse yourself from the HSA for past eligible expenses. If most of your employees are parents, educate them on the breadth of HSA eligibility so they understand all the ways they can use their account to protect their everyday health. And be sure they understand the benefits of giving college-aged kids an HSA debit card to pay for unexpected health needs while they are living on campus.

While the stress of tax time and managing personal finances during times of high inflation can take a toll on the mental health and productivity for your employees, the HSA can be a strategic tool to help your HR team support workplace health and well-being, while helping employees manage healthcare spending and improve financial wellbeing.