How employers can contribute to HSAs

Many organizations provide a health savings account (HSA) to their employees to offset rising healthcare costs. While HSAs are employee-owned accounts, many employers wonder if they can contribute to their employees’ HSAs, and—if so—how much.

Employers aren’t required to contribute to their employees’ HSAs, but there are two ways they can choose to do so. This blog will go over HSAs, how employers can contribute to them compliantly, and highlight other health benefits available to you.

Takeaways from this blog post:

• Employer contributions to HSAs are optional, but most employers provide funding for employees' accounts
• Employers can contribute to HSAs either with a Section 125 plan or without one
• Using a Section 125 plan provides more flexibility for setting different HSA contribution amounts and offers significant tax savings.

What is an HSA?

An HSA—or a health savings account—is an account made up of both employee- and employer-contributed funds that can be used to pay for approved healthcare expenses, such as vision and dental care, prescriptions, and annual deductibles. Employees typically pay for qualified expenses with a debit card issued by the bank or financial institution that hosts the HSA.

An individual or an employer can open an HSA, but the individual always owns the account, meaning HSA funds stay with the employee even after they leave their workplace.

HSA contributions are excluded from an employee’s income and aren’t subject to federal income tax, Social Security, Medicare, or federal unemployment taxes. Also, according to HSA eligibility rules, employees (and their employers) can only contribute to their HSA if they’re enrolled in an HSA-qualified high deductible health plan (HDHP).

If employer and employee contributions fund an HSA, maximum contributions must remain within the annual contribution limit set by the IRS. If the annual contribution limit is surpassed, the excess contributions may be taxable to the employee.

However, employees who are age 55 and older can take advantage of additional catch-up contributions and add $1,000 per year to their HSA.

HSAs are a unique health benefit option with triple tax advantages:

• Tax-deductible contributions as a business expense
• Tax-free accumulation of interest and dividends
• Tax-free distributions for eligible expenses

HSAs remain popular with employees because HSAs don’t expire, so the eligible individual can withdraw HSA funds to pay for qualified medical expenses at any time, making it an ideal retirement savings vehicle.

How does an employer contribute funds to an HSA?

Employer contributions to an HSA are optional, but most employers provide some funding for employees’ accounts, particularly during their first few years on the job. Having some kind of employer contributions to HSAs makes an employer-sponsored HDHP more financially appealing to prospective job candidates because it offers greater employee coverage.

HSA employer contribution happens in two ways—either with or without a Section 125 plan. Let’s go into more detail on both options below.

Option 1: Contribute with a Section 125 plan

A Section 125 plan, also known as a cafeteria plan, is an employee benefits plan that allows workers to take a portion of their income and put it toward eligible expenses, including HSA contributions, on a pre-tax basis. You can allow employees to contribute to their HSAs via payroll by adding a Section 125 plan with HSA deferrals as an option.

Setting up automatic payments simplifies and improves employee savings. You can also contribute to your employees’ HSAs as part of the Section 125 plan.

The advantages of using a Section 125 plan combined with an HSA are:

• Employee contributions to the HSA can be made through payroll deferral on a pre-tax basis
• Employees may pay for their share of health insurance premiums on a pre-tax basis
• Employers and employees save on payroll tax
• Employer contributions are tax-deductible as the IRS considers them a business expense
• Employers avoid the comparability rules for HSA contributions
• However, all contributions, including matching contributions, are subject to Section 125 nondiscrimination rules

You gain significant savings by allowing your employees to contribute pre-tax money to their own HSA via payroll deduction. Employee and employer contributions may be combined and forwarded directly to the savings institution that facilitates the HSA for even more efficiency.

Option 2: Contribute without a Section 125 plan

You can still make a pre-tax contribution to your employees’ HSAs without a Section 125 plan. While Section 125 nondiscrimination rules don’t apply, you must still comply with comparability rules found in IRS Publication 969¹.

The comparability rules govern HSA employer contributions that aren’t made through a cafeteria plan. These requirements define how you structure your contributions and what you must do when eligible individuals fail to establish their HSAs on a timely basis.

To be comparable, employer contributions to employee HSAs must be:

• The same dollar amount, or
• The same percentage of the HDHP deductible

The comparability rules apply to all employees in the same employment category, such as full-time or part-time, with the level of HDHP coverage, like single or family coverage. Employers who violate the comparability rules may receive a 35% tax on all HSA annual contributions.

Using a Section 125 plan for employer contributions provides more flexibility to set different HSA contribution amounts by employee categories. For this reason, plus the significant tax savings, employer HSA contributions are more beneficial in conjunction with a cafeteria plan.

Alternatives to HSAs

If you’re not sold on HSAs, you have two other great health benefit options. One alternative is a health reimbursement arrangement (HRA), also known as a Section 105 plan. You can also take the route of implementing a health stipend.

We’ll dive into both options below so you can learn how to supplement your group health plan coverage further.

Integrated HRA

An integrated HRA, also known as a group coverage HRA (GCHRA), integrates with group health insurance plans. An integrated HRA helps you supplement your eligible employees’ out-of-pocket medical expenses listed in IRS publication 502 that aren’t fully paid for in their group health plan.

With an integrated HRA, rather than pre-funding a savings or spending account, the employer sets a monthly allowance amount and keeps it until employees submit a reimbursement request.

Unlike HSAs, you don’t need an HDHP to use an integrated HRA, but it can help keep your costs down by bridging the gap between offering an HDHP and minimizing health insurance premium costs.

Like Section 125 plans, integrated HRA funds are tax-free. But you don’t have any financial responsibility until an employee incurs an eligible medical expense making HRAs more cost-effective. Any unused funds at the end of the year stay with you—not the employee.

Health stipend

Another way for you to help workers cover healthcare costs is to offer a health stipend. A health stipend is a sum of money given to all employees that is added to their paychecks as extra wages. 

A stipend’s distribution depends on the organization. Stipends can be a lump-sum contribution or made on a recurring basis, such as weekly, monthly, or quarterly. Stipends can also be given up-front or offered as a reimbursement. Unlike HSAs, there are no maximum contribution limits with stipends, so individual employer contribution levels may vary. 

While a stipend is more straightforward to administer than an HSA or HRA, you can’t require employees to prove they purchased healthcare items with their stipend money. Because the funds aren’t regulated, they can be spent however the employee chooses.

For example, you can intend for your employees’ to use the stipend to purchase self or family coverage, but they may decide to use it on wellness programs, childcare expenses, or simply extra wages.

Also, stipends are considered added income and, therefore, subject to personal income tax return requirements by the annual tax filing deadline. Taxable income aside, stipends are a great way to supplement your group health plan and give your employees control over their healthcare expenses.

They can entice candidates to your company and improve productivity, resulting in a happier overall workforce. You can also offer them to international employees, contractors, or employees who don’t qualify for premium tax credits.

Conclusion

Cafeteria plans are the most tax-advantaged way for employers to contribute to their employees’ HSAs. However, you have the option of contributing to employees’ HSAs without a Section 124 plan.

If you don’t want an HSA but still want to supplement a group health plan, an integrated HRA or a health stipend are great ways for you to help your employees with their medical expenses. These benefits pack a punch and increase the power of your employee benefits programs.

Making an informed decision about your health benefits can help maximize value for your employees and your company. If you’re ready to choose a personalized health benefit for employees, schedule a call with PeopleKeep, and we’ll get you started.

This post was originally published on November 13, 2020. It was last updated on December 26, 2023.

1. https://www.irs.gov/publications/p969