5 Ways Employers Can Contribute to Employees’ HSAs
Health savings accounts, or HSAs, are one of the fastest-growing healthcare plans. Under Section 125 of the Internal Revenue Code, it is now easy to develop a healthcare plan in which employers contribute to their employees’ HSA while also receiving tax deductions and exclusions.
Here are some benefit plans where the employer and employee can contribute to the employee’s HSA:
1. Employee Pre-Tax Deferral
One option from a typical Cafeteria Plan is to allow employees to make HSA contributions through a payroll deferral, or a portion of income that is withheld from an employee’s paycheck for later use. This option reduces tax costs for both the employer and the employee—neither has to pay payroll taxes on the amount contributed to the HAS. In addition, HSA contributions are not considered as income for federal and most state taxes.
2. Direct Employer-funded contributions
A simpler option would be to make direct contributions to your employees’ HSAs. This can be done without a Section 125 plan if payments are made directly and are comparable to options from an HDHP plan. The direct contribution is not taxable to the employee since it is not considered income, and is tax deductible by the employer
3. Pre-tax Funding
Both the employer and the employee make contributions to the employee’s HSA before taxes. This plan is a combination of the employer making direct contributions and the employee deferring their pay into and HSA. This plan also allows the employee to participate in a Section 125 plan, such as a Premium Only Plan or a Flexible Savings Account. Both plans are funded by pre-tax deductions and are only offered through group medical plans.
4. After-tax Employer Contribution
Here, employees have more independence with their HSA—they are responsible for opening the account on their own, without the employer’s involvement. The employer then allows for a post-tax payroll deferral. This deferral works similarly to other payroll; however, instead of being deposited into a checking account, a portion of the already-taxed income is deposited into the employee’s checking account. It is important to note that this type of plan does not change the employee’s or the employer’s tax situation, as the deferral occurs after taxes—it is simply convenient for the employee and helps increase HSA participation in your company.
5. Rollover from IRA
This is a once-in-a-lifetime tax-free option in which employees can transfer funds from their Independent Retirement Account (IRA) to their HSA. This serves as a beneficial option especially for employees who need money in their HSA in a pinch. The amount of money rolled over is limited to that year’s maximum contribution limit for HSAs minus other contributions made to the HSA that year. Once the money is rolled-over, the employee can access it tax-free for their medical expenses.
Employers and employees have a plethora of options to contribute to the employee’s HSA. To learn more about recent changes made to HSA contribution limits, click here.