LAST REVIEWED May 02 2020 8 MIN READ
By The Human Interest Team
Employees and employers save money by participating in Health Savings Account (HSA) programs. Employees stretch their salaries by using pre-tax dollars to pay for eligible health care expenses, and employers benefit from lower rates and save on reduced payroll taxes. Although HSA employer contributions aren’t required, many companies do choose to contribute to their employees’ accounts, making the company’s benefit programs more attractive.
What Is an HSA?
Similar to a regular checking account, an HSA account is used to pay for eligible medical expenses. As an employee, you can elect a specified amount of your pre-tax salary to be put into your HSA, as a tax-saving benefit. The pre-tax dollars accrue in your HSA account and you may freely choose how you spend the funds on approved health care expenses. These funds belong to you, not your employer, even if you switch jobs or if your employer makes contributions. Each year the funds in the HSA account roll over to the next year, and savvy investors may earn interest.
The IRS decides which health care expenses are approved. You can read the IRS Publication 502 for a complete list of approved health care expenses. Common approved expenses include deductibles and co-pays, prescriptions and medical supplies, vision and dental care, mental health therapy, and fertility treatments. There are even some more alterative health care expenses that are approved, such as acupuncture, hypnosis, and service animals.
Employee Rules for HSA Contributions
Every year, the IRS sets a maximum annual limit for HSA employee contributions, so you may want to double-check the amount each year. Typically, people aged 55 years and older are allowed to make an extra contribution of up to $1,000 each year. Additionally, if you choose to put post-tax money into your HSA, you can deduct this contribution on your Form 1040 when you do your taxes.
In order for you to benefit from contributing the entire HSA annual limit, you must be an eligible employee for the entire tax year. Usually, this means being eligible starting on December 1, or the first day of the last month of the tax year. If you are not an eligible employee for the entire year, then the maximum limit is based on the number of months that you are considered eligible.
Employer Pros and Cons of Providing HSA Benefits
Providing HSA benefits to your employees has many advantages. Your company’s payroll taxes will decrease, thereby decreasing the overall taxes for your company. Since your employee’s taxes will be lowered, so will your company rates for FUTA, SUTA, FICA, and Workers’ Compensation. If you are concerned about the cost of implementing and providing HSA benefits to your employees, it may help to know that the reduction in payroll taxes often offsets the cost.
There are also some drawbacks to your company providing HSA benefits. The initial setup and implementation can be complicated and overwhelming. There is a large amount of detailed paperwork and intense documentation where even the smallest error can result in the IRS declaring the plan never existed. If this worst-case scenario were to happen, the IRS would likely impose penalties and tax withholding liability for all the pre-tax contributions by your company and its employees.
How Employer HSA Contributions Are Reported
As an employee, you will receive a Form W-2 from your employer no later than January 31 with your contribution amount. Pre-tax HSA employer contributions, as well as pre-tax HSA employee contributions, are reported by a single number in box 12 on Form W-2 as HSA employer contributions.
As an employer, the HSA administrators at your company will also complete Form 5498-A. This form is due by May 31, and it lists the fair market value of the total contributions from all sources. A preliminary Form 5498-A can be completed by January 31 to help you with completing Form 8889 on your personal income tax return. However, the final Form 5498-A isn’t issued until May 31, due to HSA contributions being allowed without extensions up to the April 15 deadline for personal income taxes.
Employer Rules for HSA Contributions
There are two ways for you to make HSA employer contributions: with a Section 125 plan or without a Section 125 plan.
With a section 125 plan, also called a cafeteria plan, your company offers its employees a menu of benefits from which they can choose which one to, or not to, utilize. In order to comply with the IRS guidelines, your company must include at least one taxable benefit that is part of the employee’s salary, such as cash, and at least one qualified benefit that is pre-tax and excluded from the employee’s gross income, such as health insurance, retirement plans, or an HSA.
Without a section 125 plan, the contributions made to the employee’s HSA are considered income, this is due to the contributions not being calculated pre-tax. The employee may then reduce personal income tax by using the HSA contribution amount as a deduction. This is a disadvantage to your company, as you aren’t avoiding payroll taxes on said contributions. This situation is fairly rare, as most companies choose to use a section 125 plan.
How an Employer Contributes Funds
As an employer, you have many options for HSA employer contributions. These options include one initial lump sum, periodic semi-annual or quarterly sums, smaller flat sums each pay period, or any mix of the above. It may sound easier to make a lump sum contribution, especially if you’re the one managing payroll, but you run the risk of losing that money if your employee quits shortly after being hired. It may be a little more complicated, but pay period contributions will protect your investment and help control company cash flow.
Many companies are choosing to offer their employees the added benefit of a Health Savings Account and are successfully using it as a tool to retain and recruit employees. While this perk can be a challenge to start and maintain, your employees will appreciate HSA employer contributions that help with the growing cost of health care. We strongly suggest you find a partner who can offer true tax expertise and help guide you through the process of starting HSA benefits at your company.
The Human Interest Team
We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.