Health Savings Accounts (HSAs) are getting more and more popular. This benefit can help employers recruit new hires and improve job satisfaction. However, it comes with quite a few strings. If you offer employees an HSA, you’ll need to follow certain regulations to stay compliant. Without the right tools, HSAs can be more trouble than they’re worth, opening the door for fees and liabilities. But if you have expert support, they can be a valuable way to attract and retain top talent.
What is an HSA?
A Health Savings Account (HSA) is a tax savings benefit where employees elect to deduct part of their pre-tax salary into a protected savings account. Then, they can use those funds to pay for certain approved medical expenses. Typically, HSA funds can pay for vision and dental care, prescriptions, copays, and deductibles. HSAs are usually paired with High Deductible Health Plans (HDHPs).
How does an employer contribute funds to an HSA?
Employers can contribute to HSAs in one of two ways: either with or without a Section 125 plan.
An IRS Section 125 plan is sometimes called a “cafeteria plan.” These programs have menus of benefits that employees can choose from, the same way you’d choose items at a cafeteria. HSAs are a common option under cafeteria plans. These plans can also include:
- Life insurance
- Certain health benefits
- Adoption assistance
- Dependent care assistance
- Accident benefits
Several benefits are not allowed under cafeteria plans, like employee discounts and educational assistance. Before offering a Section 125 plan, make sure you know exactly which benefits you can include.
You can also offer an HSA as a separate benefit, even without offering a cafeteria plan. In that case, you can decide whether to contribute to the HSA, and how to schedule your contributions. For instance, employers can contribute a lump sum at the start of the year or flat contributions each pay period.
Curious about the difference between FSAs and HSAs? Get the facts in this article: HSA vs FSA: Which is Best for Your Employees?
How often Should Employers Contribute to HSAs?
Employers can contribute to HSAs on one of three schedules:
- In a lump sum at the start of the year
- With smaller deposits each pay period
- In a hybrid approach, depositing 40-50% of the full amount in a lump sum and then making smaller contributions with each pay period
If your HSA is part of a cafeteria plan, you might not get to choose between these options. Instead, you may have to follow stricter state or federal regulations about the size and frequency of your contributions.
If you contribute a a lump sum at the start of the year, you’ll save time and money on admin. But this isn’t necessarily the best option. It’s important to remember that HSAs are transferrable. In other words, if an employee leaves your company, they’ll keep all the funds in the account. If you’re concerned about turnover, monthly contributions are a less risky strategy.
In some cases, you can also contribute to an HSA on a longer timeline, making deposits quarterly or twice a year. This reduces the administrative burden, but still protects you from employees who quit right after getting the lump sum.
The Limits on HSA Employer Contributions
HSAs have annual contribution limits. In 2024, the maximum contribution for self-coverage is $4,150 annually. The maximum contribution for family coverage (for employees with dependents) is $8,300 annually.
These limits refer to the total amount that goes into the account, including HSA employer contributions and employee contributions.
Different Types of Health Benefit Accounts: HSA vs. FSA vs. HRA
An HSA is just one type of health benefit account. You could also pick one of these:
- Flexible Spending Account (FSA): These accounts pay for expenses your health insurance won’t cover, like co-pays. There are several different kinds of FSAs.
- Health Reimbursement Account (HRA): This option is only available to employees with other health coverage from their employer. Unlike an HSA, the company owns these funds.
HSA Benefits for Employers
Officially, HSAs count as an employee benefit. They can also benefit employers:
- Lower payroll taxes: HSA contributions are tax-exempt. You won’t pay any payroll taxes on the money you deposit in an employee’s health savings account.
- Lower overall tax burden: Because these are considered pre-tax contributions, they lower your overall federal tax burden.
- Higher retention rates: Businesses with strong healthcare benefits have 27% lower turnover rates (Business Wire).
Proper Documentation of HSAs
HSAs require documentation. If you offer an HSA as part of a cafeteria plan, you need to give your employees:
- A plan document outlining which employee benefits are included, the rules of participation, annual limits, eligibility and your company’s contribution. It should also define the plan year.
- A summary plan description (SPD) with more details, such as the claim filing process, and information about 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.
HSAs involve a lot of documentation beyond what you give to employees:
- Your own contributions, including dates and amounts.
- Several additional tax forms, typically including Form 5498-SA, Form 8889, and including relevant information on Form W-2. Because the tax code changes regularly, make sure you stay up to date about these requirements.
When you offer an HSA, it can be hard to stay compliant. A small mistake on one of these forms can lead to steep fines and serious tax issues. HR needs a reliable system for tracking the details, every step of the way.
Stay Compliant with Paycor
Paycor’s solutions can streamline your HCM processes. With the right tools you can offer complex benefits packages, tailored to your workforce, and stay on top of compliance. Automate tedious administrative tasks so you can focus on what’s most important: supporting your employees with the right mix of benefits.
