What’s The Employer’s Responsibility for My Client’s HSA?
By Jodie Norquist, CIP, CHSP
Employers offer benefits, such as retirement plan benefits, for their employees for many reasons. These benefits often have tax incentives for employers, but they also can help them attract and retain employees who want to grow their own nest eggs as they work toward retirement.
But there’s another tax-advantaged account that both employers and employees can benefit from. Health savings accounts (HSAs) can help employees save money for current and future qualified medical expenses when paired with a high deductible health care plan (HDHP). HSAs can also help employers and employees save money on health insurance premiums and overall medical costs.
Why Are Employers Attracted to HSAs?
It’s easy to understand why employers like HSAs. HSAs are triple tax-advantaged accounts that can help employees and their families pay for qualified medical expenses. Employers can save money too. For example, if an HSA contribution is made through an employer’s cafeteria plan, the contribution can reduce certain employment taxes (i.e., Social Security and Medicare taxes (FICA), federal unemployment tax (FUTA), and railroad retirement tax). Plus, employers can take a tax deduction for any contributions they make to their employees’ HSAs. An HSA is portable, which means that if an employee leaves, he can take the HSA balance with him to his next employer. Less paperwork and hassle for the employer, and the employee retains ownership of his own HSA.
Employees like HSAs because they can
receive a tax deduction for their contributions,
carry over their HSA assets from year to year (no use it or lose it rule), and
withdraw HSA assets tax-free if they use the assets to pay for qualified medical expenses.
Employees can also treat their HSA like a retirement account, letting their investments grow tax-deferred until retirement.
While employees have control of their own HSAs, employers still have responsibilities, too.
An Employer’s Four Major Responsibilities
Employers who contribute to their employees’ HSAs have some responsibilities, including the following.
Monitor contributions
Satisfy comparability rules
Determine which financial organizations to work with
Meet reporting requirements
Monitoring Contributions
Employers must determine whether their employees are covered under the employer’s HDHP and whether they are covered under any other health plan sponsored by the employer that is not an HDHP (e.g., a health flexible spending account or a health reimbursement arrangement). HSAs are not compatible with either. Employers must also track employees’ ages to determine if they’re eligible for catch-up contributions.
Satisfying Comparability Rules
Employers who offer HSAs don’t have to contribute to their employees’ HSAs. But if they do make HSA contributions, they must make comparable contributions on behalf of all comparable participating employees during the calendar year. In other words, they can’t contribute to one group of employees and not another.
Comparability rules can be complicated, particularly in complex business or work groups, so employers should seek advice from their business advisors or attorneys to make sure they are properly meeting these requirements. If a business doesn’t satisfy the comparability rules within a calendar year, the employer could be subject to an excise tax equal to 35 percent of the aggregate amount that the employer contributed to its employees’ HSAs for that year. If the employer can prove the failure to comply with the comparability rules was a case of reasonable cause and not willful neglect, the IRS could waive all or a portion of that excise tax in certain situations.
Determining Which Financial Organizations to Work With
An employer may limit the number of financial organizations that it will forward HSA contributions to through its payroll system. Some employers may allow their employees to open HSAs at any financial organization that offers them, while others may decide to work solely with one financial organization. An employer cannot, however, restrict employees from transferring their HSA assets to another financial organization if they so choose.
Meeting Reporting Requirements
An employer must report employer contribution amounts, including amounts deferred by an employee under the employer’s cafeteria plan, on the employee’s Form W-2, Wage and Tax Statement. Employers must enter code “W” in Box 12 to indicate that the dollar amount was contributed by the employer to an HSA.
Financial organizations must report HSA contributions on Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, and HSA distributions on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. (Looking for the 2023 HSA contribution limits? You can find them here.)
HSAs Are Another Savings Tool in an Employer’s Toolbox
When an employer offers HSAs to its employees, it unlocks access to another savings tool. Especially for small businesses, an HSA program can be easy to offer and benefits everyone. For more information on HSAs, read IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
