Employers offering a high deductible health plan (HDHP) have several ways to offset the higher out-of-pocket costs and make the benefit more meaningful for employees.
One way is to offer a health savings account (HSA) alongside the HDHP.
An HDHP combined with an HSA gives you traditional health insurance with triple tax advantages, which helps you save for future medical expenses and provides greater flexibility and customization over how you use your healthcare benefits.
So how do you know if your HDHP is HSA-qualified? In this article, we’ll go over the ins and outs of HSAs, including eligibility, contribution limits, and how they can work with a health reimbursement arrangement (HRA) to help supplement your HDHP even more.
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- What is a health savings account (HSA)?
- What qualifies a HDHP for an HSA?
- How to tell if your plan is HSA eligible
- Other HSA requirements
- Contributions and out-of-pocket limits for HSAs and HDHPs
- HSAs and HRAs
What is a health savings account (HSA)?
An HSA is a savings account that lets you set aside pre-tax money to pay for qualified medical expenses such as deductibles, copayments, coinsurance, and other expenses.
HSAs have become a popular option for those who want individual health insurance while lowering their overall health care costs. Plan holders can use their HSA to pay for 200+ eligible expenses, as outlined in IRS Publication 502.
There are many advantages of an HSA:
- You receive tax-free withdrawals, earnings, and contributions
- In many cases, employers also contribute a matching dollar amount to the account
- You can save for retirement
- At age 65, you can use the funds for any purpose without a penalty
- You have the option to invest a portion of the funds
- You can typically invest a portion of your balance in mutual funds, stocks, and bonds when you maintain a certain account balance
- Your funds will never expire
- Balances roll over from year to year, even if you leave your employer
Keep in mind that before you can contribute to your HSA, you must be enrolled in an HDHP. HDHPs have a higher deductible than traditional insurance plans, however, they have lower monthly premiums, which makes them attractive to both employers and individuals.
What qualifies a HDHP for an HSA?
Many people don’t realize that just having a HDHP on its own doesn’t necessarily make it HSA-qualified. There are three important criteria the health plan must meet to make your plan eligible.
According to the IRS, HSA qualified HDHPs must have:
- A higher deductible than typical individual health insurance plans.
- A maximum limit on the annual deductible and medical expense costs, including copays and other items.
- No insurance coverage until the deductible is met, except for the following expenses:
- Health insurance premiums
- Long-term care premiums
- Dental expenses
- Vision expenses
How to tell if your plan is HSA-eligible
If you’re new to HDHPs and HSAs, understanding the many requirements can be difficult to navigate. It helps to know that the federal marketplace and state insurance carriers label their plans as HSA-eligible so you can guarantee your selecting the right plan before you purchase.
If you’re interested in shopping for an HSA-compatible HDHP, meeting with a local insurance broker can help you find one that meets your needs and answer your questions.
Other HSA requirements
In addition to having an HSA-qualified insurance policy, the IRS has other strict guidelines for those looking to open and contribute to an HSA.
These are the other requirements to participate to your HSA:
- You must be covered under an HDHP
- You must have no other health coverage, with the exception of several types of ancillary coverage. You must not be enrolled in Medicare, TRICARE or TRICARE for Life
- You cannot be claimed as a dependent on someone else's tax return
Contributions and out-of-pocket limits for HSAs and HDHPs
The IRS publishes minimum deductible and maximum medical expense limits annually. These terms apply to the amount you can contribute to an HSA for the year, the minimum deductible for your health insurance plan, and your annual out-of-pocket expenses.
Check out the chart below for the annual HSA contribution limits and the HDHP minimum required deductibles for 2022.
HSA contribution limit
(company + employee)
HSA catch up contributions
HDHP minimum deductible
HDHP maximum out-of-pocket amount
*Catch-up contributions can be made at any time in the year the participant turns 55.
HSAs and HRAs
One frequently asked question is “What’s the difference between an HSA and an HRA?” In contrast to what we learned about HSAs, with an HRA, a fixed allowance is provided by the employer to reimburse their employees tax-free for medical expenses.
Employees don’t contribute any of their own money to the HRA and employers only pay out when an expense is incurred up to the defined allowance amount. HRAs also stay with the employer when an employee leaves instead of going with the employee and never expiring.
But you now may ask, “Can I have an HRA and an HSA at the same time?” The answer is yes! You can boost your HSA and provide more value to your employees by offering it with an HRA. However, there are specific rules that have to be followed in order to use both at the same time.
The easiest way to incorporate an HRA is with a limited-purpose HRA which allows your employees to save for future medical expenses. But it can’t reimburse any costs associated with the employee’s HDHP deductible. For example, a qualified small employer HRA (QSEHRA) is compatible with an HSA, but only if it’s a premium-only QSEHRA.
Similarly, an individual coverage HRA (ICHRA) can be compatible with an HSA, but only if you have individual insurance not purchased through an exchange plus the ICHRA can only reimburse premiums and not medical expenses, though employees can fund the HSA simultaneously.
HSAs are an increasingly popular choice for people looking to manage the rising cost of group health insurance. If you are enrolled in an HDHP, the tax advantages of an HSA and the ability to roll over unspent money from year to year are attractive. But an even more complete option could be merging your HSA with an HRA.
While HRAs and HSAs both help keep the costs of healthcare low, they work very differently. If you have questions about aligning your HSA with an HRA, PeopleKeep can help! Simply schedule a call and we’ll get you started.
This article was originally published on May 21, 2020. It was last updated October 29, 2021.