As an employer, you have a lot to think about when designing a health savings account (HSA) for your workforce. You care about your employees’ health today, but you also care about their readiness for retirement tomorrow. It’s important to understand how to set up a plan that will meet your employees’ wealth and health needs now and in the future, as well as how to avoid designing a plan that confuses employees or is subject to ERISA requirements. Read on for answers to some frequently asked questions so that you’re prepared to set up an HSA for your employees correctly.
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The first (and most efficient) thing you can do is partner with an experienced administrator. An administrator will make decisions for your HSA that can avoid making it subject to ERISA. Plans that are subject to ERISA can have multiple extra requirements — such as COBRA, Form 5500, and a written plan document — that make HSA administration more complicated and costly.
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Many employers consider automatically enrolling employees in their HSAs because they have had success with automatic enrollment for their 401(k) plans. But beware: Automatically enrolling employees could cause a plan to be subject to ERISA. Auto-enrollment can also create a tax problem for employees if enrollment happens without first confirming they are eligible for an HSA. This can happen if, for instance, a spouse has a full-purpose flexible spending account (FSA) with another employer and the employer auto-enrolling does not have that information.
Smaller employers may be more inclined to consider auto-enrollment if they have a close relationship with their employees and can confirm eligibility directly. According to the 2021 Plan Sponsor Council of America’s Benchmarking Survey of Health Savings Accounts, auto-enrollment does seem to be more popular with smaller employers; 62% of companies with one to 49 employees are likely to auto-enroll, versus only 25% of companies with more than 5,000 employees.
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Making contributions to your employees’ HSA can be a great way to get employees started by giving them a seed amount at the beginning of the year. You can also split the seed amount into multiple contributions throughout the year to reward your employees. Or, you may prefer to require that employees take action to get funds added to their HSA. If you are interested in this option, adding incentive funds to an HSA for employee participation in wellbeing activities is one common and effective strategy.
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You are not required to offer investments within an HSA; however, almost all employers do because it’s a tremendous benefit for employees. Account types that offer tax-free growth on investment earnings are uncommon, with HSAs being an important exception — as long as earnings are used on qualifying medical expenses.
As far as structuring an HSA investment menu, there are a number of things to keep in mind. You want to have a good mix of funds that target different levels of risk. Some investors will be closer to retirement and more risk averse, whereas others may want to focus on more growth-oriented options. Be careful not to overwhelm your employees; you could set up a plan with hundreds of fund options, but this will make choosing the right options difficult for them. As noted in Devenir’s 2021 Year-End HSA Research Report, the average plan offers 27 different mutual fund choices, and the average investor has positions in three funds. An executive summary of this report can be found on Devenir's research page.
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Historically, education around HSAs and benefits in general has involved putting everything employees need to know into a summary document. This approach has not been especially effective for HSAs, which require understanding a large amount of complex information. Fortunately, employers can work with their HSA administrator on a more targeted approach.
A targeted approach provides employees with short, simple educational messaging on specific benefits of an HSA. Information can be delivered in a targeted email, a banner in the enrollment system, a callout in the employer's quarterly newsletter or a handout at a benefits fair. This simple messaging can be targeted to reach participants based on their past experience. For example, an employee who is contributing a small amount to their HSA might receive a message about the impact of contributing a little more. Or an employee who has reached the threshold to invest might receive information about the benefits of investing HSA dollars.
The value and benefits of HSAs make them an attractive option to offer employees — but simply offering an HSA is not enough. The HSA needs to be structured so that it’s easy for employees to take advantage of its benefits. Thoughtful employers will take the time to set up the plan carefully and then develop an ongoing educational campaign for employees to keep the value of their HSAs top of mind.
