Employer Guide to Health Savings Accounts

Health Savings Accounts (HSAs) are tax-advantaged accounts that allow employees enrolled in a High Deductible Health Plan (HDHP) to save for qualified medical expenses. For employers, HSAs can reduce health insurance premiums and provide a valuable benefit that employees retain even if they leave the company.

HSA Eligibility Requirements

To contribute to an HSA, an individual must:

• Be covered under an IRS-qualifying High Deductible Health Plan
• Not be enrolled in Medicare
• Not be claimed as a dependent on another person's tax return
• Not be covered under any other health plan that is not an HDHP (including a spouse's non-HDHP plan or a general-purpose health FSA)

The IRS sets annual limits on HDHP deductible minimums, out-of-pocket maximums, and HSA contribution limits. These figures are adjusted annually for inflation.

Employer Contributions

Employers may contribute to employees' HSAs, which provides several advantages:

• Employer contributions are excluded from employees' gross income
• Employer contributions are not subject to FICA taxes for either the employer or employee
• Contributions are tax-deductible as a business expense
• Employer contributions count toward the annual HSA contribution limit

If you make employer contributions, be aware of the comparability rules: if you contribute to any employee's HSA, you must make comparable contributions (same dollar amount or same percentage of the HDHP deductible) to all eligible employees in the same category. Categories include full-time, part-time, and former employees. Alternatively, you can make contributions through a Section 125 cafeteria plan, which allows different contribution amounts.

Advantages for Employers

Offering an HDHP with HSA contributions can benefit the organization:

• HDHP premiums are typically lower than traditional plan premiums
• Employer HSA contributions can offset the higher deductible while still reducing overall costs
• HSA contributions are not subject to FICA, saving the employer 7.65 percent on contribution amounts
• HSAs increase employee satisfaction and financial wellness
• The benefit is portable, which employees value

Employee Education

HSAs are often underutilized because employees do not understand them. Effective education should cover:

• How HDHPs work and how they differ from traditional health plans
• How to open and fund an HSA
• What expenses qualify as HSA-eligible
• The triple tax advantage: contributions are pre-tax, growth is tax-free, and withdrawals for qualified expenses are tax-free
• The ability to invest HSA funds and use the account as a long-term savings vehicle
• The importance of keeping receipts for qualified medical expenses
• Penalty-free withdrawals for any purpose after age 65 (though income tax applies to non-qualified withdrawals)

Compliance Considerations

Employers offering HSAs should be aware of:

• Annual contribution limits set by the IRS
• The catch-up contribution allowance for employees 55 and older
• Comparability rules for employer contributions outside a Section 125 plan
• ERISA considerations if the employer contributes to the HSA or processes contributions through payroll
• COBRA applicability to the HDHP (though not to the HSA itself)
• Nondiscrimination requirements under Section 125 if contributions are made through a cafeteria plan
• State tax treatment of HSAs, which varies (California and New Jersey, for example, do not follow federal HSA tax treatment)