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Health savings account benefits for employees and employers

ARTICLE | April 12, 2023

Authored by RSM US LLP


Health savings accounts (HSAs) are a popular benefit offered by employers to help employees pay for medical expenses. HSAs paired with employer high deductible health plans (HDHPs) are powerful tools to reduce health plan costs and increase tax savings for both employers and employees.

This article covers some of the advantages to employers of offering HSAs to employees. For more information on how HSAs can benefit employees, see our related article HSAs Provide a Tax-Free Way to Pay for Medical Expenses

HSAs are individual accounts held by custodians, such as banks, similar financial institutions, and insurance companies, selected by employers. They provide unique tax advantages since contributions, investment earnings, and distributions can all be tax free if the rules of section 223 of the Internal Revenue Code are met. Custodians may allow a variety of HSA investment options including stocks, bonds and mutual funds.

Health plan cost savings

All types of employers can offer HSAs to their employees including for-profit, not-for-profit and governmental entities. An employer of any size can offer HSAs if it maintains a high-deductible health plan which meets the IRS limits on minimum deductibles and maximum out-of-pocket expenses. The limits vary based on whether the HDHP is self-only coverage (for one person) or family coverage (for more than one person). These limits are adjusted annually by the IRS and below is a summary of the limits for 2023.

2023 Annual Limits

Self-Only HDHP

Family HDHP

HDHP minimum annual deductible

$1,500

$3,000

HDHP maximum out-of-pocket expenses

$7,500

$15,000

Because HDHPs typically have lower premium costs than other types of health plans, both employers and employees can reap premium savings. Given the higher deductibles, employers often encourage employees to compare their anticipated premium savings to their expected out-of-pocket medical costs before choosing to enroll in an HDHP.

Employees are only eligible for HSAs if they enroll in the HDHP and do not have other disqualifying coverage. Other employer plans which cover employee medical expenses can be disqualifying coverage including general-purpose health flexible spending accounts (FSAs) and general-purpose health reimbursement arrangements (HRAs). Therefore, employers wanting to offer HSAs to employees may need to modify their existing FSAs and HRAs (and potentially other plans) to ensure they do not hamper employees’ eligibility for HSAs. Many employers add to their benefit package a limited purpose FSA or HRA covering only dental, vision and preventive care expenses specifically for HSA-eligible employees. Employers should consult with their advisors about their plan design options.

Tax savings on contributions

Employers commonly allow employees to make pretax payroll deduction contributions to HSAs under their Section 125 cafeteria plans. This saves employees money because the contributions are exempt from federal income tax, Social Security and Medicare (FICA) taxes and most state income taxes. Employers benefit through reduced employer FICA taxes and federal unemployment (FUTA) taxes.

If desired, employers can also contribute tax-free money to their employees’ HSAs as long as the contribution limits are not exceeded when taking into account both employee and employer contributions. The employer can make contributions at any time during the year and up until April 15th of the following calendar year. Employer contributions generally are tax-deductible. Note that employer HSA contributions are 100% vested when made, so they cannot be recouped from HSAs including for employees who terminate employment.

The IRS limits on contributions are adjusted annually for inflation and the chart below summarizes the current limits:

2023 Annual Limits

Self-Only HDHP

Family HDHP

Contributions

$3,850

$7,750

Catch-up contributions (age 55 and over)

$1,000

$1,000

Employers can allow employees to start, modify or stop their HSA contributions at any time during the year. Employers are responsible for remitting employees’ payroll deduction contributions and any employer contributions to the HSA custodian.

No employer involvement with distributions

Employees can take distributions from their HSA accounts at any time without employer involvement since the funds belong exclusively to them during and after their employment with the employer. HSA custodians commonly provide debit cards to HSA account holders to use for purchases. The account holder can withdraw funds from the HSA on a tax-free basis if used for qualified medical expenses. Distributions for expenses that are not qualified medical expenses are taxable and subject to an additional 20 percent penalty tax unless made after the account holder turns age 65, becomes disabled or dies.

Since the employees own their HSA funds, employers are not involved with plan distributions. Employees, and not the employer, bear the burden of determining whether their HSA distributions are for qualified medical expenses. Consequently, employers do not need to hire third-party administrators to process claims like with FSAs and HRAs thus saving money for the employer.

Limited employer reporting requirements

Employers have a responsibility to report HSA contributions accurately on employees’ Forms W-2. Pretax employee and employer contributions are not reportable as taxable wages but are reported for information purposes on the Form W-2 in box 12 with code W. Employers should ensure that their payroll systems are set up appropriately to capture the correct dollar amounts on the Form W-2.

Form W-2 reporting is typically the only governmental reporting required of employers for HSAs. Generally, HSAs are not subject to the Employee Retirement Income Security Act (ERISA), so employers do not report them on Form 5500 (Annual Return/Report of Employee Benefit Plan).

The HSA custodian has the responsibility to report contributions and distributions to the IRS and to the account holder using Forms 5498-SA and Forms 1099-SA. HSA account holders must disclose contributions and distributions on their individual income tax returns by attaching Form 8889 to their Form 1040.

Summary

HSAs are a valuable tool for employers since they can reduce health plan costs and taxes with limited employer involvement and expense. HSAs can also help employees spend less on health plan coverage and taxes while saving money for medical expenses. Unfortunately, many employees have misconceptions that deter them from taking advantage of HSAs; therefore, employee education should be a component of any employer’s HSA program.

Additional information on HSAs is available in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

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This article was written by Lauren Sanchez, Jill Harris and originally appeared on Apr 12, 2023.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/health-savings-account-benefits-for-employees-and-employers.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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