Employer Contributions to HSA: Everything You Need to Know

Employer contributions to HSA (Health Savings Account) occur in two ways: with a Section 125 plan or 'Cafeteria Plan' or without a Section 125 plan.

About HSAs and Section 125

A Health Savings Account (HSA) is a tax savings benefit for employees. The plan allows employees to allocate a specific portion of their pre-tax salary to the plan. The money that accumulates in the plan can be used for approved expenses. These may include areas such as dependent care services, dental care, vision care, and medical or health issues.

IRS Section 125 is responsible for the governing of a Cafeteria Plan. It is a reimbursement plan that allows employees to direct a specific dollar figure of their gross income to one or more accounts. The contribution is taken before taxes are calculated. Qualified expenses include coverage for group-term life insurance, assistance with adoptions, health and accident benefits, long-term care services, and dependent care.

What Are the Average Employer Contributions to HSAs?

There are two HSA contribution levels for employers. For employers whose companies have fewer than 500 employees, the average contribution for a single employee is $750 and $1,200 for an employee with a family.

For employers whose companies have more than 500 employees, the average contribution for a single employee is $500, and for employees with family, the average contribution is $1,000.

What Is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement, also referred to as a health reimbursement account, is an employer health benefit plan. The plan is employer-funded, offers tax advantages, and is approved by the IRS.

The purpose of an HRA is for an employer to reimburse employees for any out-of-pocket medical expenses incurred as well as health insurance premiums.

What Are the Rules Affecting Employer Contributions to HSAs and HRAs?

For both Health Savings Accounts and Health Reimbursement Arrangements, caps are in place regarding contributions.

An HSA has a maximum contribution of $3,400 from both the employee and the employer for single employees. For employees who have dependents on their insurance plan, the contribution is $6,850. Employees age 55 or older have an additional $1,000 "catch-up" contribution.

Since the employer is responsible for all funding to a Health Reimbursement Arrangement, there are no limits in place regarding an employer's contribution to an employee's HRA.

What Are the Contribution Levels for a Flexible Spending Account (FSA)?

For 2018, the limit to an annual contribution to a medical Flexible Spending Account is $2,650. For Dependent Care FSAs used for child care expenses, the cap is $5,000.

The average contribution by employees ranges from $500 to $1,500 for HSAs and HRAs. Employer contributions differ depending on the type of industry the company is involved in and the region.

Because complicated rules and regulations are involved regarding the limits for FSA contributions, it is best to discuss the rules and regulations with a professional.

What Are the Most Common Approaches to Employer Contributions?

Employers have the choice between up-front lump-sum contributions or flat contributions. With an up-front lump sum contribution, employees benefit by having immediate access to funds early in the year to cover high expenses.

For employers choosing the up-front lump-sum contribution, their concern is with company cash flow and the loss of employees who may quit their jobs early in the year.

Employers choosing to make flat contributions are finding this option to be more beneficial as they can manage their cash flow. This option also puts the contributions on the level of being earned each pay period. Instead of employees having access to a lump sum immediately, the contribution is per pay period.

Employees faced with high expenses early in the year may need to pay those expenses with personal funding or negotiate payment terms.

A hybrid approach to contributions allows employers to deposit a portion of the contribution — around 40 to 50 percent — in a lump sum at the beginning of the year. The remaining percentage of the contribution is deposited in installments throughout the rest of the year.

By using the combination of up-front lump sum and flat contributions, the employer is providing the employee with funds in case they are needed at the beginning of the year. For the employee to have access to the remaining funds being contributed through the rest of the year, the employee must continue his or her employment. This serves as a safety feature for employers.

An employer may also choose to make contributions at set periods throughout the year. In some cases, an employer may split the contributions into quarterly or semiannual deposits. This approach serves two purposes. First, it minimizes the number of deposits an employer makes, and second, it protects an employer from employees who take the lump-sum contribution and quit their jobs.

What Documentation Is Needed for Pre-Tax Contributions?

An employer should have information providing the details of the HSA contribution program included in their employment documentation for employees. This information should include:

  • A thorough explanation of how employer and employee contributions are made using Section 125. This information should be available if the program is being allowed by the employer.
  • Information on the requirements to be eligible to contribute and participate in the program.
  • The total amount an employer may contribute to the program.
  • Information on how much an employee can contribute.
  • An explanation for employees regarding any changes in timing or restrictions to the options they've elected for their plan.

What Is the Comparability Rule?

This rule allows an employer to divide their staff into a maximum of three classes. These are full-time, part-time, and former.

Within these classes, an employer has the option of offering differing contribution levels, which includes zero. The employer must treat all employees equally, providing a flat-dollar amount for the contribution or a percentage of the deductible for family and single plans.

If an employer does not follow the rule, an excise tax penalty is imposed.

If you need help with employer contributions to HSA, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.