Contributing to employees’ Health Savings Accounts (HSA) is an added benefit that many employers are choosing to provide to their people. Due to certain regulations employers must follow, however, this perk can be challenging to manage, which is yet another reason it makes sense to find a partner who can offer true tax expertise, not just technology. This article has been updated with the latest HAS contribution limits, accurate for 2021.
What is an HSA?
A Health Savings Account (HSA) is a tax savings benefit for employees that lets them elect to have a specific amount of their pre-tax salary deducted into the account. The funds that accrue in the plan can be used to pay for approved health care expenses, including vision and dental care, prescriptions and insurance deductibles. HSAs are commonly paired with a High Deductible Health Plan (HDHP).
How does an employer contribute funds to an HSA?
HSA employer contributions are made in one of two ways: with a Section 125 plan or without a Section 125 plan.
An IRS Section 125 plan, often called a “cafeteria plan,” is a program that is similar to a menu of benefits that your employees can choose from. They can also choose not to select any benefits at all and receive the same amount in cash.
Per the IRS, the plan must include at least one taxable benefits option, meaning the IRS considers it part of the employee’s salary. The plan must also include a minimum of one qualified benefit, meaning that it’s excluded from the employee’s gross income, also known as “pre-tax.” Qualified benefits include:
- Health insurance
- 401(k) or IRA retirement plans
You can choose to make your contribution in a lump sum at the beginning of the year or flat contributions per pay period. While making the lump sum contribution sounds like it would be easier, you have to consider the money you’ll lose if employees quit after receiving and spending that money. It’s somewhat more complicated to contribute per pay period, especially if you’re managing payroll in-house, but flat contributions make it easier to control your company cash flow.
In a third, hybrid approach you can deposit part of a lump-sum contribution (40- 50%) at the beginning of the year. The remaining contribution is deposited per pay period.
Another option lets you make contributions at different periods throughout the year, such as quarterly or semi-annually. This method reduces the number of deposits you make while also protecting you from employees who take the lump-sum contribution and then quit.
For companies employing fewer than 500 people, the average contribution is $750 per single employee or $1,200 for an employee plus dependents. Companies that employ more than 500 people generally contribute $500 per single employee or $1,000 for an employee plus dependents.
What are the rules for HSA employer contributions?
HSAs do have limits when it comes to contributions. In 2021, the maximum contribution from both your company and the employee is $3,600 for single employees (an increase of $50 from 2020). For employees with dependents, the contribution is $7,200 (an increase of $100 from 2020). Also, employees who are 55 or older can make an additional $1,000 “catch-up” contribution (no change from 2020).
What information do I need to provide my employees?
Your company must include documentation outlining the specifics of the HSA program in your employee new hire packet. If you are using a Section 125 plan, your documentation must include:
- A plan document
This document outlines which employee benefits are included in the plan, the rules of participation, annual limits, eligibility and your company’s contribution. It also defines the plan year.
- A summary plan description (SPD)
The SPD goes more in-depth into the plan, detailing the claim filing process, and providing information regarding plan sponsorship and administration. In addition to distributing the SPD to your employees, you must also file it with the Department of Labor within 120 days of your plan’s effective date.
- Ongoing compliance
Federal law requires that section 125 plans can’t discriminate as to eligibility and benefits being provided. The comparability rule lets you place your employees into up to three classes: full-time, part-time and former. Within these classes, you can offer different contribution levels, including zero. However, you must treat all employees equally and not be biased toward the higher earners at your company. If you don’t follow this rule, you will be penalized with an excise tax.
What are the pros and cons of providing an HSA?
When you provide an HSA, your company will realize a tax savings because your payroll taxes will be reduced. FICA, FUTA, SUTA, and Workers’ Compensation rates will also be reduced since your employees’ taxes are being lowered. Additionally, because of the reduction in payroll taxes, your cost of administering plan can be offset.
The main drawback to a cafeteria plan, however, is that it can be pretty complicated to set-up and administer. The paperwork you’re required to submit is intense, and small errors in your documentation can result in the IRS treating the plan as if it never existed. This would result in the IRS imposing employment tax withholding liability and penalties for all employee pre-tax and elective employer contributions.
As you can see, non-compliance can be costly. Payroll is already time-consuming enough, so working with an HCM partner who can help not only with benefits administration but also keep you on track with regulations and the tax code is a big help.
Ready to take the next step?
Paycor has the expertise and solutions to streamline your HCM processes and manage compliance, so you can focus on what is most important: finding the best mix of benefits for your employees.