A common question employers ask us is: "Can an employer contribute to an employee's HSA?" There are two ways an employer can contribute to an HSA, but it’s important to understand the regulations to do so correctly.
Employers can make tax-free contributions to their employees' Health Savings Accounts (HSAs) in the following two ways:
- Without a Section 125 Plan
- With a Section 125 Plan (Cafeteria Plan)
Remember that once an employer contributes money into an employee's account, the money is owned by the employee from that point forward, regardless of employment. They decide how and when the money is spent. Before an employer makes contributions to their employees' HSAs, they might first consider making contributions to an employee's HRA.
Employer contributions without a Section 125 plan
Employers can make tax-free contributions to their employees' HSAs without using a Section 125 plan, as long as the contributions are "comparable" for all employees participating ("comparability rules"). Comparable contributions are contributions that are the same dollar amount or same percentage of the employee's deductible for all employees with the same category of coverage—for example, self-only or family; or job category (Full-time or Part-time).
Employer contributions with a Section 125 plan
To avoid the comparability rules on their HSA contributions, employers often utilize a Section 125 plan. HSA contributions through a Section 125 plan are not subject to the comparability rules, but Section 125 nondiscrimination rules do apply. Nondiscrimination rules restrict employers from making contributions excessively in favor of highly compensated employees. Employers typically use a section 125 plan to offer matching contributions to their employees and to save payroll taxes (7.65%) on all employee contributions.
How employers can help employees with medical expenses without a Section 125 plan
An alternative to a Section 125 plan is a health reimbursement arrangement (HRA), also known as a Section 105 plan. This type of plan enables employers to reimburse employees for insurance premiums and out-of-pocket expenses like copays and prescription costs up to a maximum allowance. Like Section 125 plans, this money is tax-free. Unlike Section 125 plans, the employer only pays if and when the expense occurs—and the employee does not take money with them if they leave the company.
HSAs and HRAs are both great ways for an employer to help employees out with medical expenses. With an HSA, the employer gives an employee tax-free money through a direct contribution to an account. With an HRA, the employer reimburses employees for expenses, as they are incurred. In fact, some employers even offer employees both.
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This post was originally published February 17, 2010. It was last updated November 13, 2020.