5 Important HSA Questions Employers Ask Before Choosing an HSA-Compatible HDHP

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By Christle Johnson, QKA, CIP

 Employers increasingly are turning to high deductible health plans (HDHPs) for their employee medical coverage. The stated objective is to give employees greater control over their own health benefits and motivate them to be cost-conscious healthcare consumers while also lowering their premiums. HDHPs that meet certain qualifications allow employees to save with a health savings account (HSA) on a pretax basis to cover their eligible out-of-pocket medical expenses.

With open enrollment just around the corner, you may be contacted by employers with HSA questions. Here are five important questions they may be asking.

What type of health insurance plans are compatible with an HSA?

A health plan is considered an HSA-compatible, or HSA-eligible, HDHP if it satisfies the following deductible and out-of-pocket expense requirements. These amounts are subject to annual cost-of-living adjustments (COLAs).

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If the plan uses a network of providers, plan provisions specific to out-of-network services are not taken into account for satisfying the deductible and expense limitations that are required for a plan to be considered HSA-compatible. Instead, only deductibles and out-of-pocket expenses for services within the network should be considered to determine whether the HDHP is HSA-compatible.

Employees have eligibility requirements as well, and these are described in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

Must employers contribute to their employees’ HSAs?

Employers are not required to contribute to their employees’ HSAs, but they may contribute on behalf of their employees up to the annual statutory limit, which also is subject to annual COLAs. If they choose to do so, employers generally must make comparable contributions to all comparable participating employees (i.e., eligible individuals with comparable coverage during the same period).

Contributions are considered comparable if they are the same amount or the same percentage of the HDHP’s deductible for eligible employees within the same category of coverage (self-only or family). The comparability rules are applied separately to full-time employees, part-time employees (i.e., employees who are typically employed fewer than 30 hours per week), and former employees. IRS Publication 969 provides more details on comparable contributions.

Employers that do not comply with the comparability rules during a period are subject to an excise tax of 35 percent of the aggregate amount the employer contributed to its employees’ HSAs for that period. Employers must file Form 8928, Return of Excise Taxes under Chapter 43 of the Internal Revenue Code, to pay the excise tax.

Can employers offer HSAs through their cafeteria plans?

Yes. Employers may include both the HDHP and HSA as options through their cafeteria plan, thus allowing employees to pay HDHP premiums and contribute to their HSAs through payroll deduction. These payroll deduction elections must be made prospectively, and employers may use automatic enrollment (negative election) for HSAs offered through a cafeteria plan. All HSA contributions made through a cafeteria plan technically are deemed to be employer contributions, including contributions deducted from employee pay. These are excluded from the employees’ taxable income, making it unnecessary for employees to claim income tax deductions for them.

Employers may make matching HSA contributions based on employees’ salary reduction contributions made through the cafeteria plan. These contributions are not subject to income tax withholding, Social Security or Medicare taxes (FICA), federal unemployment tax (FUTA), and railroad retirement tax.

If such employer contributions are made through a cafeteria plan, HSA comparability rules (described earlier) do not apply, but such contributions are subject to Internal Revenue Code Section 125 (cafeteria plan) nondiscrimination rules.

Can employers claim a tax deduction for HSA contributions?

Contributions made directly to an HSA by an HSA owner generally are deductible by the HSA owner. But contributions made through a cafeteria plan are treated as employer contributions, deductible by the employer. As stated earlier, while employees cannot take deductions for these contributions, such contributions reduce their taxable gross income.

Contributions by a partnership to a bona fide partner’s HSA are not considered contributions by an employer. The contributions are treated as a distribution of money and are not included in the partner’s gross income. Contributions by a partnership to a partner’s HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner’s gross income. In both situations, the partner can deduct on her individual income tax return the contribution made to her HSA.

Contributions by an S corporation to a two-percent shareholder-employee’s HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee’s gross income. The shareholder-employee can deduct the contribution made to his HSA.

Do employers report employee HSA contributions to the IRS?

Yes. Employer contributions, including employee contributions under the cafeteria plan, must be reported on the employee’s Forms W-2, Wage and Tax Statement. The employer must enter Code W, Employer contributions to a health savings account (HSA), in Box 12 to indicate that the dollar amount was contributed to the employee’s HSA.

Additionally, the HSA trustee or custodian reports the total amount contributed to an individual’s HSA on Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information. HSA owners must report all HSA contributions on Form 8889, Health Savings Accounts (HSAs), and on Schedule 1 of Form 1040, U.S. Individual Income Tax Return.