Learn about the potential benefits of setting up an HSA for your employees.
A Health Savings Account (HSA) is a financial account used with a qualifying high-deductible health plan (HDHP) that allows employees to pay for health care expenses on a pre-tax basis.
It takes a few steps to set up an HSA for the employees of your small business. First, decide on the HSA contribution amounts for employees with qualified HDHPs. Next, create a Section 125 plan that enables employees to contribute tax-free dollars to the HSA. Employers and employees then send their contributions to the HSA custodian (typically a bank), and the business prepares the appropriate tax documentation for the end of the tax year.
What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-favored savings account that, when paired with a high-deductible health plan (HDHP), can be used to help your employees pay for qualifying medical expenses. An HSA-compatible HDHP typically has lower monthly premiums than lower-deductible health insurance plans, and contributions to an HSA may be made on a pre-tax basis, up to annual IRS limits.
Both employers and employees can contribute to an HSA, and there are several benefits of using an HSA for each group.
- For employees: Employee contributions to an HSA are paid before tax, allowing them to cover their out-of-pocket costs with pre-tax dollars. An HSA is connected to a specific individual, not their job. Unused money in employees’ accounts can roll over year to year, potentially growing over time, and can earn tax-free interest.
- For employers: All employer contributions to employee HSAs can be used as an income tax deduction for your small business. Employers also will not have to pay for payroll taxes on the pre-tax contributions of employees. The lower premiums of an HSA-compatible HDHP for employees may mean reduced cost-sharing for the employer.
It is important to know that not all HDHPs are HSA-eligible, so be sure to select an HSA that works for the needs of your small business.
Overall, an HSA may be an affordable, tax-favorable option to consider for both small business owners and their employees.
Interest in HSA-eligible plans among businesses
HSAs have become more common in recent years. A Society for Human Resource Management (SHRM) report on employee benefits in 2019 found that interest in HSAs and employer contributions to HSAs has grown since 2015.
According to eHealth’s 2018 small business health insurance report, few employers offering HSA-eligible plans fund them, with 21 percent of small employers saying they offer an HSA-eligible health insurance plan to their employees. Of these employers, 16 percent contribute money to their employee’s HSAs.
What are the steps required to set up an HSA for employees?
Setting up an HSA for your small business employees is a straightforward process. Here is an overview of the required steps.
- Determine plan eligibility and contributions – First, find out if your employees have HSAs though eligible high deductible health plans, either provided by the business or purchased individually. Then, decide how much employees will contribute to their HSAs, as well as whether your business will contribute to their accounts.
- Create a Section 125 plan – A section 125 cafeteria plan allows employees and employers to contribute tax-free dollars to the HSA. The plan can be made available to employees, spouses, and dependents. Either your business or a payroll service can set up one of these plans.
- Manage contributions and tax documentation – After implementing the Section 125 plan, employees can send HSA payments to their custodian or bank-administered account. As an employer, you are required to send your payments to employees’ accounts (if you decide to contribute to their HSAs). Your business is also required to provide the appropriate tax documents, including W-2s, to your employees at the end of the tax year.
Keep in mind that both employees and employers must adhere to annual HSA contribution limits. In 2019, individual HSA holders are allowed to contribute a maximum of $3,500, and HSA account holders with a family can contribute a maximum of $7,000, according to the IRS.
Overall, offering an HSA can be an affordable way to supplement the health insurance plans of your employees while also providing tax advantages for your business.
eHealth makes it easy to find HSA-compatible health insurance coverage for your business by allowing you to clearly identify and compare different group plans. Learn more about your options for small business health insurance by visiting eHealth.com or speaking with our licensed health insurance agents.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.