With the rising cost of health insurance premiums, it’s no wonder that high-deductible health plans (HDHPs) are gaining in popularity. For employers, these plans are a great way to offer employees healthcare at a reasonable cost. Employees with HDHPs have the option to put money into a health savings account (HSA), which means they can be prepared to cover some of the out-of-pocket costs associated with a high deductible plan. It also means that they can benefit from the triple tax advantages associated with HSAs: all of the money they put into the account, withdraw from the account, and earn from the account is tax-free. But employees aren’t the only ones who will benefit from making contributions to HSAs. As an employer, offering a HDHP and then contributing to your employees’ HSAs has tax advantages for you, as well.
Two Ways to Contribute to HSAs
Nearly half of all employers who offer HDHPs offer an HSA alongside those plans, and almost 40% of them contribute to their employees’ HSAs. It’s worth joining them: with a relatively small contribution to your employees’ HSAs, you could potentially save thousands of dollars a year in taxes. Before we break down the numbers, let’s look at the two different ways you can contribute to employees’ HSAs, and which might be right for you.
- Through a Section 125 cafeteria plan: Section 125 of the IRS code, otherwise known as a cafeteria plan, is a way to offer your employees a list of a la carte benefits, which they can then choose from and pay for pre-tax. This basically boils down to employees being able to convert their taxable income into non-taxable benefits, or get “paid” on a pre-tax basis with benefits like health insurance premiums. You can offer your employees an HSA as part of a cafeteria plan and then match their contributions to it. By doing this, you are reducing the amount of their paychecks (but making up for it with healthcare benefits), and so will save on payroll taxes (7.65%)
- Without a Section 125 cafeteria plan: You can still make pre-tax contributions to your employees’ HSAs even if you don’t offer them through a cafeteria plan, but you will need to follow the IRS’ “comparability” rules. This means that you have to offer “comparable” contributions to all employees within the same category of coverage – for example, either the same dollar amount or the same percentage of employees’ deductibles.
Many employers choose to offer HSAs through a cafeteria plan so that they are not subject to the comparability rule. Doing it this way makes sense for you if you want the flexibility to choose what contribution to offer to which employees. Keep in mind that these contributions are still subject to nondiscrimination rules, so you can’t choose to give huge contributions to your more highly compensated employees, for example.
Offering your employees an HSA alongside an HDHP has financial benefits for them, but it also has benefits for you, even if you’re spending money to match their contributions. Matching your employees contributions to their HSAs does double duty: it incentivizes them to contribute and it helps you save money on your payroll taxes, because HSA contributions are deducted from your payroll on a pre-tax basis. Here’s an example of how offering your employees an HSA-qualified HDHP would work:
- You offer your employees an HSA-qualified high deductible healthcare plan with an annual deductible of $1500, and a low monthly premium of $350. You pay 80% of the premium ($280) and they pay 20% (only $70). You’re saving money on premiums, and you can encourage employees to put the money they’re saving on premiums into a triple tax advantaged HSA.
- Your employees put $50 per month into their HSAs, and you match that contribution. So that’s $100 per month total, or $1,200 per year put into their HSAs. That money will help them offset any medical expenses that they have for the year.
- Now the math: if you contribute $50 per month to 25 employees that’s $1,250 per month, or $15,000 a year. But, if you take that amount and multiply it by 0.765 (your share of the payroll tax rate), then you’ll find that you’d be saving $11,475 in taxes. Not bad.
- Your HSA contributions are also tax-deductible as a business expense, so you save money in two ways.
One thing to remember when offering a plan like this is that you need to encourage as many employees as possible to actively participate in the HSA program, and to contribute as much to it as they can. The more employees who have HSAs and contribute to those HSAs, the lower your payroll – and the lower your payroll taxes. It’s a win-win situation.
Offering an HDHP with an HSA is definitely a great option if you’re looking to save money while still looking after your employees’ health and finances. If you’re unsure where to begin when it comes to HDHPs, HSAs, and cafeteria plans, EZ can help you get started, and answer all of your questions, every step of the way. We can also find you fast, accurate quotes and sign you up for a great plan – all for free! No hassle, no obligation. To get started with us today, simply enter your zip code in the bar above, or to speak with an agent directly, call 888-350-1890.