What HSA employer contribution rules do you need to know about? With the rising costs of healthcare, health savings accounts (HSAs) are growing in popularity among employers and employees alike. Typically paired with a high deductible health insurance plan under a Section 125 Cafeteria Plan, HSAs 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.
HSA Employer Contribution Rules
One of the main reasons employers love HSAs so much is that their contributions to the HSAs of eligible employees (typically those with high deductible insurance who do not have other first-dollar coverage) are excludable from an employee’s income and not subject to federal income tax, Social Security or Medicare taxes — a triple tax advantage. Furthermore, employer contributions to employee HSAs are tax deductible as a business expense for the organization. Add to this the lower costs associated with a reduced administrative burden and higher deductible health plans, and it is easy to see why HSAs are so popular with employers.
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 holds 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, must utilize the plan fairly evenly across income levels and you 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 excluded from nondiscrimination testing!
HSA employer contribution caps
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 counter as taxable income for the employee. Individuals will use Form 8889 to delineate HSA contributions.
For 2018, the total amount that can be contributed to an HSA for an individual is $3,450, while families are looking at a cap of $6,900. 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.” In that case, total HSA contribution limits would increase by $1,000.
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 — an asset they can take with them if and when they leave the company.
Exceptions might be 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 probably scenario, contact an accounting professional immediately to figure out the best course of action. While these situations are rare, they can also be complicated and it is best to proceed with any action to recoup HSA contributions under the advisement of a licensed professional who can accurately assess the viability of the employer’s claim.
Do HSA employer contributions have to be uniform?
Not at all! Employers make all sorts of arrangements for their HSA contributions depending on what works best for them. Some 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. Still other 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. 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.
Do you have more questions about an existing HSA plan within your company or are you looking to implement a new one? Be sure to give us a call for a free consultation. This is a highly underutilized healthcare solution and is especially beneficial to small business owners. We would be happy to help you take full advantage!