What is an HSA?
Essentially, an HSA is a unique bank account in which you and your employees place funds for partial coverage of their eligible health needs. Employees can place their own money into their HSA account as part of their pretax payroll deductions or through transfers and deposits. Your business can offer matching funds to do the same for business payroll tax reductions.
The HSA’s funds are available at all times for your employees to keep growing them or to spend them on their health care costs. An employee’s HSA account is theirs to keep, and accumulated funds roll over year after year with interest accumulation. Your employees also keep the account and all funds that it contains if they switch to another job.
The pros and cons of providing HSA coverage
Aside from the health coverage and tax benefits that accrue to employees with an HSA, your business can benefit in a number of ways by offering HSA programs. However, there are also downsides to handling them. Key pros and cons to keep in mind are:
Pros
Tax benefits: Any funds up to the legal limit that you contribute toward an employee’s HSA can be deducted from your payroll taxes, which means a lower overall tax burden for your business. A federal tax deduction is also available for businesses that fund HSA accounts with their employees.
Transfer of health care responsibility: By offering your employees an HSA, you’re also giving them partial responsibility in paying for and handling their health care costs. You may still need to contribute agreed-upon tax-deductible funds to the account, along with what your employees contribute, but other administrative aspects are removed from your hands.
Hiring incentive: Many potential employees like the idea of having an HSA and the autonomy it provides and working with businesses that offer matching funds programs. This can make working for you especially attractive to them.
Easy transferability: HSAs can be easily transferred around, in case you decide to change your health care benefits provider or insurance plan.
Cons
Compliance complications: Setting up an HSA can involve complicated paperwork, and even small mistakes can cause the IRS to penalize you with an audit or not recognize the plan you’re trying to establish. This also applies to the commonly used IRS Section 125 plans that make up a majority of HSA programs.
Limitations: Not all employees can enroll in the HSA plan you offer or open their own HSA account. Sometimes the specific nature of their healthcare plan or being part of a low deductible plan can make employees unable to join.
Employee preference: While many potential employees might find your offered HSA program attractive, some won’t and might prefer to keep the outlay attached to their paychecks for their own spending. This could make HSA programs with your company unattractive for some prospective staff members.
State tax deduction problems: Not all states recognize HSA funding as deductible from payroll taxes, so check with your specific state’s laws.
How employers contribute funds to an HSA
You can generally contribute to HSAs for your employees in one of two ways: By setting up a Section 125 plan or by working out an alternative plan.
If you set up your HSA employer contribution plan within IRS Section 125 provisions, you’ll be offering your employees a list of benefits options that they can pick and choose from. Any they select themselves will result in you needing to deduct those costs from their pay for HSA contribution. Employees who don’t select additional benefit options will keep the corresponding money in their pay.
These plans must include at least one benefits option that’s taxable as part of an employee’s salary. There also needs to be at least one option that’s a qualified benefit, meaning that it can be excluded from gross or pretax employee income. Your business can either contribute funds in the form of a single lump sum payment per employee at the start of the year, or you can make variable flat payments per pay period throughout the year.
Lump sum contributions are simpler, but they carry the risk of financial losses if an employee quits or is fired later in the same year. Flat contributions per pay period are a bit more complicated to set up in terms of exact amounts and require more rigorous accounting for their handling.
A third, hybrid option also exists in which you contribute 40-50% of an annual lump sum at the beginning of the year and then deliver the remaining contributions per pay period. This can offset possible losses from lump sum payments on employees who later leave while also reducing your accounting paperwork by half on monthly contributions.
Understanding HSA contribution limits
The IRS increased HSA max contribution limits by about 1.5% for 2021. For self-only (single employee without dependents) coverage, they’ve increased by $50 and for family coverage (employee plus dependents) they’ve gone up by $100.
The total employee and employer annual contribution limit for HSA plans is now $3,600 per employee without dependents and $7,200 per employee with family coverage. Of these respective totals, employers can cover up to $750 of the self-only cost and $1,500 of family plan contributions. Employees then cover the remaining outlays depending on their plan.
Employees who are aged 55 or older can also add an extra $1000 catch-up contribution to their plans, just as they could in the previous tax year.
Key aspects of HSA contributions
As an employer, you don’t have a general legal obligation to contribute to your employees’ HSA accounts. However, if you’re offering them as a competitive salary package benefit of working for your company, you’ll probably want to contribute. Doing so can be especially beneficial in terms of both employee retention and payroll tax deductions for your business if the employee continues to work with you for multiple years.
If you decide to establish an HSA option for your employees, you’ll need to draft a new plan document for a Section 125 plan or amend their existing health plans, and you’ll need to provide documentation to the IRS. Some of the paperwork details that should be included are eligibility to participate in the HSA plan, total employer contributions and restrictions that apply to employees.
Employer contributions and pretax deductions from employee payroll deposits to Section 125 HSA plans are reported by both employees and employers on their respective W-2 filings each year. Federal law requires Section 125 HSA plans to be nondiscriminatory in terms of eligibility and benefits provided. This means their rules only let you categorize employees in three different ways: full-time, part-time or former employees.
You can offer different contribution levels between these three categories, but you cannot show bias in favor of higher-earning employees in a given category. Doing so could result in you paying penalty taxes to the IRS.
Information you need to give to your staff
When you introduce an HSA account option for new and existing employees of your company, you’ll have to provide them with a packet of documentation. Under an IRS Section 125 plan the packet will include the following:
Plan overview documentation: This document outlines all employee benefits that the HSA program covers, what the rules of participation are, what the contribution limits are and what you’ll be contributing.
Summary Plan Description: Your SPD delves into deeper details of your HSA plan and specifies the claim filing process, provides information on plan sponsorship and explains what the plan covers or doesn’t cover. SPD documentation should also be filed with the Department of Labor within 120 days of when an HSA plan is formally started.
FAQs about HSA and HSA limits
The following frequently asked questions can provide you with more information about HSAs and HSA limits:
Are HSAs and HDHPs the Same?
No, they’re distinct legal creations. An HSA is the actual account at a financial institution in which funds for health coverage are deposited by employees and employers. A High Deductible Health Plan (HDHP), on the other hand, is a health care plan with a high deductible. With that said, being enrolled in an HDHP is a prerequisite for being able to open an HSA as an employee.
Do the funds in an HSA earn interest?
Yes, employees can earn interest in their HSA accounts and even invest the funds for higher returns. In essence, HSAs work as miniature tax shelters from an employee’s perspective.
Are all my employees eligible for an HSA offer?
While HSAs are highly flexible and open to many current or potential employees, not everyone can open or join them. To be eligible, individuals need to be covered by a high deductible health plan, and they can’t have any other kind of medical coverage without a high deductible.
Having Medicare coverage or access to a general-purpose spending account, also known as an FSA, can also disqualify employees from opening an HSA or joining an HSA program. However, disability insurance and accident insurance aren’t usually a problem with HSA plans under current rules.
How does my employee open an HSA account?
Opening an HSA account is basically the same as opening any other kind of bank account, except for the additional rules around its management. Employees can open one through many different banks or credit unions, or they can use an institution with which their employer already has a working relationship.
Once they’ve picked an institution and opened their HSA account, they can deposit their own contributions into it and withdraw funds for eligible health expenses as needed. Your business can add your matching funds to these same accounts.
Do my HSA contributions have to be the same each month?
Not necessarily. While you will be bound to abide by the HSA plan you’ve contractually agreed to with your employees, your monthly payments can be variable or delivered in decreasing monthly amounts. You can also pay in full or partially in lump sums.
