Key Takeaways

  • Employer HSA contributions can be made through a Section 125 plan (pre-tax) or outside of it (post-tax).
  • Contributions are not mandatory, but if offered, must follow IRS rules, including comparability or cafeteria plan nondiscrimination rules.
  • Employers can contribute in various ways: lump-sum, per pay period, or hybrid approaches.
  • Contributions are tax-advantaged for both employers and employees.
  • Understanding how to report and document employer HSA contributions is essential for compliance.
  • HSAs can support long-term savings, making employer contributions a valuable recruitment and retention tool.

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.

Tax Benefits for Employers Who Contribute to HSAs

Employer contributions to HSAs are tax-deductible as a business expense and are exempt from payroll taxes such as Social Security, Medicare, and FUTA. This provides a financial incentive for employers to fund employee HSAs.

Additionally, HSA contributions made through a Section 125 plan reduce the employer’s payroll tax liability since employees are also contributing on a pre-tax basis. These savings can add up significantly, especially for companies with large workforces.

For example:

  • No FICA or FUTA taxes on employer contributions.
  • Contributions made under a cafeteria plan avoid additional administrative reporting requirements.

Do Employers Have to Contribute to an HSA?

No, employers are not legally required to contribute to an employee’s Health Savings Account (HSA). However, many choose to do so to enhance their benefits package and help employees manage out-of-pocket medical costs.

When employers do contribute, they must follow specific IRS regulations depending on whether contributions are made under a Section 125 cafeteria plan or directly. If using a cafeteria plan, nondiscrimination rules apply; otherwise, the comparability rule governs contributions.

Offering contributions, even if modest, can significantly improve employee participation in HSA programs and support financial wellness.

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.

When Do Employer HSA Contributions Become Available to Employees?

The availability of employer HSA contributions depends on the employer’s funding strategy:

  • Lump-sum contributions are typically available at the beginning of the plan year.
  • Per-pay-period contributions accrue gradually and align with payroll cycles.
  • Hybrid contributions may offer a portion up front, with the rest distributed periodically.

Employers should clearly communicate contribution schedules to employees, especially if they expect to use HSA funds early in the year.

If contributions are made under a Section 125 plan, the employer may have more flexibility in timing but must stay within nondiscrimination requirements.

How Do Employers Report HSA Contributions?

Employers must report their contributions to employee HSAs on Form W-2, specifically in Box 12 with Code W. This includes both employer contributions and any pre-tax contributions made through a Section 125 plan.

Proper reporting ensures that employees can accurately complete their personal tax filings and avoid any penalties. It’s also important for employers to retain internal records detailing:

  • Contribution dates
  • Contribution amounts
  • Eligibility confirmation
  • Documentation of any mid-year contribution changes

Working with a payroll provider or benefits administrator can help streamline the process and ensure IRS compliance.

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.

Alternatives to Employer Contributions

Employers not contributing directly to an HSA can still support employees in other ways:

  • Offering access to an HSA-compatible High Deductible Health Plan (HDHP)
  • Providing education on how HSAs work and their tax advantages
  • Covering administrative fees for HSA accounts
  • Contributing to an HRA or FSA as a supplement or alternative

These options can still encourage HSA use and promote employee financial wellness, even in the absence of direct contributions.

Frequently Asked Questions

1. What is HSA employer contribution and how does it work? It refers to money an employer deposits into an employee’s Health Savings Account, either directly or via a Section 125 plan. These funds are typically tax-free.

2. Are employers required to contribute to an HSA? No, employer contributions are optional but often used to enhance benefits offerings and promote employee health savings.

3. How are employer HSA contributions reported? They must be reported on IRS Form W-2, Box 12 with Code W, including any pre-tax contributions made under a Section 125 plan.

4. When can employees access employer HSA contributions? Access depends on the funding method—immediately for lump-sum contributions or gradually for per-pay-period contributions.

5. Do employer HSA contributions affect employee taxes? No. Contributions made by employers are not considered taxable income for the employee, as long as they are properly structured.

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