As more employers seek higher participation in high-deductible health plans (HDHP)s with health savings accounts (HSA)s, educating employees about all the benefits and ways to manage HSAs can be extremely valuable.

When employees have a better understanding of an HSA’s value, it can have a positive impact on their experience with a high-deductible plan and they’re more likely to open and use their HSAs. When more employees use HSAs, both employees and employers reap tax savings and additional satisfaction.

But education around HSA management methods needs dramatic and thoughtful improvement. Most employers, brokers and carriers focus employee education around how to use HSAs like checking accounts for tax-free payments of medical expenses because it is the method they’re most familiar with. This is a valid yet narrow view of how to manage HSAs that can be categorized as the “low-balance” or “yearly planner” HSA management model. It works well for employees who have a good understanding of their yearly medical spending, have the ability to set money aside, and want to reap immediate tax savings on their planned health expenses – but that only covers about a third of the HDHP-enrolled population.

Besides this method, there are two additional ways HSAs can be managed that deserve much more attention than they get. These two methods are categorized as the “long-term investment” and “as-needed” models. These strategies appeal, respectively, to employees who want to reap long-haul tax benefits or those who need to maximize cash flow from each paycheck.

Employers and benefits specialists should familiarize themselves with each method and educate employees about them. Doing so will help HSA-eligible employees understand that regardless of their financial situation or goal, simply opening an HSA is in their best interest.  It also will help more of the employee population to find personal relevance in HSAs, thus increasing participation and engagement.

Below is an overview of these three common ways HSAs can be managed by employees, along with the goals of each model and the type of employees who use it. Each method has unique benefits. All enable users to save on taxes.

Long-term Investment Account - Similar to 401(k)

Employees who use their HSAs as long-term investment accounts are “Savers.” They pay for health expenses outside of their HSA using after-tax dollars and may reimburse themselves tax-free at any time (even years later) from their HSA. They often contribute the maximum allowed by the IRS. They care most about taking advantage of the long-term financial benefits HSAs provide, which include growing contributions (theirs and their employer’s) tax-deferred with tax-free interest and withdrawing money tax-free any time prior to age 65 if needed to pay for health expenses.

Low-balance Account – Money In Equals Money Out

Employees who maintain low-balance accounts can be categorized as “Yearly Planners.” As mentioned earlier, this HSA management model is the one most people are familiar with. They have a good understanding of how much they typically spend on health care each year, and they contribute only as much money as they anticipate needing, factoring in any contribution from their employer in addition to their own. This method allows them to immediately pay for planned medical expenses with tax-free dollars, saving 25 to 35 percent. Any HSA funds not used in a given year can be saved and rolled over to the next year.

As-needed Account – Safety Net for Tax-Savings on Unexpected Medical Expenses

Employees who use their HSA as-needed are considered “Non-planners.” They open their HSA, but contribute no money to it. Their primary concern is maximizing cash flow from every paycheck. While they are called “Non-planners,” there is a little planning in their HSA management method – they have understood enough about HSAs to foresee that by simply opening the account they can take advantage of future benefits. When a medical expense occurs, they can add money to their account and reimburse themselves, providing a retroactive discount of 25 to 35 percent tax savings on all medical expenses.  Many employees don’t know of this convenient method for recovering all of the income and payroll tax dollars on their health care spending with no upfront planning or cash commitment. Once they take advantage of this model, they save taxes and their employer does too, since the employer recovers their FICA at the same time.

A Win-win Situation

When employers help employees understand there is a way to manage and get value from an HSA regardless of their financial goals, it increases employee participation in HSAs, raises satisfaction with HDHPs and leads to greater tax savings for both parties.

Duncan Van Dusen

Duncan Van Dusen is CEO and co-founder of Austin-based Tango Health, a provider of health savings account (HSA) management software and services. The company offers the only HSA management solution serving the needs of an employer's entire population of HSA-eligible employees, which ensures employers get the maximum HSA usage and tax benefits for themselves and their employees.  Tango sells directly to employers, and partners with the nation’s top custodial banks, insurance brokers, consultants and insurance carriers to enhance their offerings. Van Dusen holds a Masters in Public Health from the University of Texas. He can be reached at dvd@tangohealth.com.