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5 Important HSA Employer Contribution Rules Every Business Owner Should Know

Posted On: 07/19/2024 / Payroll Services
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There Are Many Rules & Regulations Surrounding HSA Contributions

With the rising cost of healthcare, the health savings account (HSA) option is growing in popularity among employers and employees alike. HSA’s are typically paired with a high deductible health insurance plan under a Section 125 Cafeteria Plan. They provide numerous tax benefits in addition to flexibility for those using them to pay for health coverage. However, there are specific rules employers must follow when making contributions to employee HSAs.

So what HSA employer contribution rules do you need to know about to provide the best opportunity for your business and employees alike? We’ll detail five options that can provide value.

HSA Employer Contribution Rules

There are a few main reasons employers love HSAs so much.

  • Contributions to the HSAs of eligible individuals (typically those with high-deductible insurance who do not have other first-dollar coverage) are excluded from an employee’s income and not subject to federal income tax, Social Security, or Medicare taxes — a triple tax advantage.
  • Similarly, employer contributions to employee HSAs are tax-deductible as a business expense for the organization.
  • There are lower costs associated with a reduced administrative burden and higher deductible health plans.

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HSA employer contributions are subject to Section 125 nondiscrimination testing

We have written recently about Subject 125 Cafeteria Plans. The nondiscrimination component of Section 125 states that plans cannot unfairly benefit your highly-compensated employees.

In a nutshell:

  • Employees must have the plans available to them at a range of salary levels.
  • Employees must utilize the plan fairly evenly across income levels.
  • Employers cannot offer more or better benefits to your highly paid employees exclusively.
  • No more than 25 percent of non-aggregate of non-taxable benefits can be provided to key or highly compensated employees.
  • No employers are exempt from nondiscrimination testing.

HSA employer contribution caps for 2020

The maximum HSA company contribution generally increases a small amount yearly. In 2020 the caps are as follows:

    For individuals: $3,550

    For families: $7,100

    Catch-up contributions: $1,000*

    *If the employee is older than the age of 55 years, they may qualify for additional tax-preferred HSA contributions known as “catch-up contributions.”

While employers may choose to either contribute to their employees’ HSAs a set amount or a match against employee contributions, the IRS does set annual limits on the amounts that are tax-deductible. Keeping total contributions from employees and employers is crucial to maximizing the financial advantages of the HSA. Contributions above those limits may be counted as taxable income for the employee. Individuals should use Form 8889 to delineate HSA contributions.

While there is a cap for HSA employer contributions, there is not a legal set amount for any employee under this cap. It is important to have a discussion about what an employer is willing to contribute, especially as their portion is also tax-deductible at the end of each year.

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What happens if an employee with an HSA leaves the company?

With very few exceptions, HSA contributions vest immediately, making them the property of the individual. This makes them an asset they can take with them if they leave a company.

Exceptions might include if the employer contributed funds to the HSA in excess of the employee’s statutory limit for the calendar year when they left, or if the employee was never actually HSA eligible. If you think either is a probable scenario, contact an accounting professional immediately to figure out the best course of action. While these situations are rare, they can also be complicated. It is best to proceed with any action to recoup HSA contributions under the advice of a licensed professional who can accurately assess the viability of the employer’s claim.

Do HSA employer contributions have to be uniform?

HSA contributions and match rates do not have to be the same from employee-to-employee. Employers should manage their HSA contributions depending on what works best for them. Some might opt for lump-sum payments that can happen once a month, once a pay period or even once a year. Others match their contributions to an employee’s.

Often, employees choose to do a combination of periodic lump sums and regular flat contributions. This is one element of versatility that allows employers to be strategic about HSA contributions to maximize their utility. Additionally, some companies will opt for an HRA in lieu of an HSA, or even have combined contributions.

From an employer standpoint, the full control of HRA contributions might seem preferable to the HSA. HSAs end up being used as broad contributions with the implication that it will be utilized for medical bills. However, HRAs must be managed and applied to actual medical or insurance payments, making them unwieldy for certain business structures.

Be sure to ask us about how your company can best structure your HSA contributions for employees to get the most benefit for both you and your employees.

How do I report HSA employer contributions?

If you are using a Section 125 plan, both employee pre-payroll contributions and employer contributions are classified as employer contributions, reported on the W-2 form as a single number in Box 12. Additionally, HSA administrators must issue Form 5498-SA by May 31 of each year (this is because you can contribute to your HSA for a tax year up to the due date of your personal income tax return without filing an extension.

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Expert HR advice at Paytech

Do you have more questions about an existing HSA plan within your company or are you looking to implement a new one? Pay-tech has decades of experience in helping people take advantage of this under-utilized healthcare solution.

Reach out today to start a conversation about outsourcing your HR and how we can benefit you and your employees.