Health savings accounts or HSAs are tax-advantaged savings accounts that can be used to cover many out-of-pocket medical costs. These consumer-driven health plans were authorized by Congress in 2003. According to information released last year, two thirds of employees in the U.S. are now covered by HSAs or health reimbursement arrangements.
There are good reasons for the growing popularity of HSAs, which can offer a number of advantages to employers. As a small business owner, determine whether this type of employee benefit is desirable for your company.
Why do it?
HSAs offer a triple tax benefit: contributions are tax deductible, earnings grow tax deferred, and withdrawals to pay qualified medical costs are tax free. If employers make the contributions, then the employer takes the deduction. If employees make their own contributions, they take the deductions.
Contributions made by the employer are not treated as compensation for FICA taxes, saving taxes for both employers and employees. Also, employers don’t have to monitor withdrawals. It’s up to employees to determine whether withdrawals are tax free (for qualified medical expenses) or taxable.
To be eligible to make tax-deductible contributions to HSAs, employees must be covered by a high-deductible health plan (HDHP). This is defined annually by the IRS. For example, in 2016, it is coverage with an annual deductible of not less than $1,300 for self-only coverage, or $2,600 for family coverage. Increasingly employers are offering the least costly minimum essential health coverage that meets Affordable Care Act (ACA) requirements. This meshes with the HSA requirement because such insurance under ACA is a “bronze” level plan.
How to do it
If you decide to contribute to employees’ HSAs, there are a couple of ways to handle this.
- Contribute through a cafeteria (Section 125) plan. Employer contributions must be nondiscriminatory (i.e., they cannot favor owners and managers over rank-and-file employees).
- Contribute without using a Section125 plan. Contributions in this case must meet comparability rules, which means you make the same dollar contribution or the same percentage of an employee’s deductible with the same category of coverage (self-only or family coverage).
Employers can contribute the full amount desired for the year (up to set limits) at the start of the year or over the course of the year.
Getting employer contributions back
There are certain circumstances under which you can recoup erroneous employer contributions after they’ve been made. An IRS notice in 2008 said recoupment is permissible if:
- The employee is ineligible for an HSA (e.g., he/she is 65 or older)
- Contributions exceed the maximum limit set annually (e.g., in 2016, $3,350 for self-only coverage; $6,750 for family coverage; an additional $1,000 for someone age 55 or older)
- The employee ceases to be an eligible employee during the year
These aren’t the only situations in which you can get your contributions back. In an informal communication, the IRS also said (Letter to Executive Director of the ABA HSA Council of the American Bankers Association, 9/9/15, which appeared in Tax Analysts on April 8, 2016) employer contributions can be corrected under the following circumstances:
- An amount withheld and deposited in an employee’s HSA for a pay period that is greater than the amount shown on the employee’s HSA salary reduction election.
- An amount that an employee receives as an employer contribution that the employer did not intend to contribute but was transmitted because an incorrect spreadsheet is accessed or because employees with similar names are confused with each other.
- An amount that an employee receives as an HSA contribution because it is incorrectly entered by a payroll administrator (whether in-house or third-party) causing the incorrect amount to be withheld and contributed.
- An amount that an employee receives as a second HSA contribution because duplicate payroll files are transmitted.
- An amount that an employee receives as an HSA contribution because a change in employee payroll elections is not processed timely so that amounts withheld and contributed are greater than (or less than) the employee elected.
- An amount that an employee receives because an HSA contribution amount is calculated incorrectly, such as a case in which an employee elects a total amount for the year that is allocated by the system over an incorrect number of pay periods.
- An amount that an employee receives as an HSA contribution because the decimal position is set incorrectly resulting in a contribution greater than intended.
The trend is clear: small businesses are increasingly adding HSAs to their employee benefit offerings. Find more details about HSAs: