Health insurance has been the undisputed champion of employee benefits for as long as most of us can remember. The earliest benefits packages were built on health insurance with retirement plans and a few voluntary benefits thrown in. Things have not changed much in recent years. With that being the case, every employer should take a good look at health savings accounts (HSAs).
HSAs come with a boatload of restrictions. That means not every employer could legally offer one. But without looking into them and how they work, there is no way to know for sure. Furthermore, investigating HSAs is well worth the effort when you consider the benefits to both employees and employers.
A Tax-Free Cash Account
In a nutshell, an HSA is a tax-free cash account through which eligible employees can pay for qualified healthcare expenses. HSAs are made possible through Section 125 of the IRS code. As such, they are considered cafeteria plans.
An employee enrolled in an HSA sets aside a certain amount of money to cover healthcare expenses, like office visits and prescription meds. The money is set aside through pre-tax payroll deductions that are forwarded to the plan administrator. When an employee has qualifying expenses to cover, a withdrawal for that purpose can be made.
Employers can contribute to HSAs as well. Doing so benefits them in several ways. First, it reduces their own tax liabilities. Second, it improves their standing among employees who appreciate the contributions. Third, doing so can lower an employer’s total cost for healthcare benefits.
There Are Restrictions
HSAs come with restrictions. The biggest restriction is that they can only be offered alongside certain types of health plans. The most common scenario has an employer pairing an HSA with a high deductible health plan (HDHP). HDHPs are minimum essential coverage (MEC) plans with comparatively high deductibles but lower monthly premiums. They do not cover as much, and they cost employees more in terms of out-of-pocket expenses.
In addition, employees are not eligible to participate in an HSA if enrolled in a non-HSA-compatible health plan during a given plan year. Medicare and Tricare participants are also ineligible for HSAs.
HSA Tax Benefits
The big draw from both employers and employees is the tax benefits HSAs afford. BenefitMall, a brokerage general agency, encourages brokers to discuss the tax benefits as a way to encourage employers to consider HSAs.
From the employee’s standpoint, there are three tax advantages to consider:
- Contributions – All contributions to an HSA are made with pre-tax payroll deductions. Any amounts contributed do not count against an employee’s taxable income. That means they do not pay taxes on that money.
- Earnings – HSAs can earn interest and dividends throughout the year. Fortunately, those earnings are also not taxable. That makes an HSA a tax-free investment vehicle of sorts.
- Withdrawals – Even withdrawals made to cover qualifying healthcare expenses are not taxed. As long as money is used in accordance with the rules, it is never taxed at any point in the process.
Moving on to employers, their tax benefits are mainly derived in relation to FICA, FUTA, and SUTA payroll taxes, all of which are based on a percentage of an employee’s taxable earnings. When employees contribute to HSAs, their taxable income goes down. And when taxable income goes down, employers pay less in payroll taxes.
HSAs represent one of the best ways to help employees with certain types of health plans cover their healthcare costs with pre-tax dollars. Every employer should at least investigate the HSA to see if it is something they can offer.