It’s no secret that health savings accounts (HSAs) offer numerous tax benefits. These tax savings are one of the primary reasons why HSAs are gaining traction in the market. However, while HSA participation continues to increase at a rapid pace, the majority of the attention when it comes to HSA tax benefits is focused on employees. While those HSA tax benefits are great, there are less well-known HSA tax benefits for employers that are just as significant. These employer HSA tax benefits should not be kept a secret. So, whether you’re an employer that already offers an HSA program to your employees or you’re just looking into the affordability of an employer-sponsored HSA program for your company. You need to understand HSAs and the benefits they have for you.
What is an Employer Sponsored HSA?
An HSA is a tax-advantaged savings account that can be used to help your employees pay for eligible medical expenses when combined with a high-deductible health plan (HDHP). An HSA-compatible HDHP often has lower monthly premiums than lower-deductible health insurance plans. And HSA contributions are tax-deductible up to annual IRS limits. A small business can deduct all employer contributions to employee HSAs as an income tax deduction. Employers also do not pay payroll taxes on employees’ pre-tax contributions. Employees’ lower premiums under an HSA-compatible HDHP may result in cheaper cost-sharing for the business overall. It is important to note that not all HDHPs are HSA-eligible, so be careful when choosing.
Setting Up An HSA
Creating an HSA is a simple process. Here’s a rundown of the steps.
- Determine Eligibility – Determine whether your employees have HSAs through approved HDHPs supplied by the company or acquired privately. Then, select how much employees will contribute to their HSAs and whether your company would match their contributions.
- Create a Cafeteria Plan – A section 125 cafeteria plan allows employees and employers to contribute to the HSA tax-free. Employees, spouses, and dependents can all participate in the plan. One of these programs might be set up by your company or a payroll agency. Employers must write a document outlining the benefits offered, contribution limitations, and participation restrictions. As well as other information required by the IRS before launching a section 125 benefits plan. Depending on the plan, they may also be required to conduct non-discrimination tests to verify that it does not favor highly compensated or specific employees. Starting a cafeteria plan can be challenging without the right understanding. Which is why many employer’s hire a third-party administrator to set up and administer their cafeteria plan.
- Manage Contributions – Employees can submit HSA payments to their custodian or bank-administered account after the Section 125 plan is implemented. If you wish to contribute to your workers’ HSAs, you must submit your payments to their accounts as an employer. At the close of the fiscal year, your company must also supply your employees with the necessary tax documentation, including W-2s.
Keep in mind that annual HSA contribution restrictions must be followed by both employees and employers. For 2023, the HSA contribution limits for self-only coverage are $3,850 and $7,750 for family coverage. For 2024, the HSA contribution limits for self-only coverage will be $4,150 and $8,300 for family coverage. Those aged 55 and up are eligible for a $1,000 catch-up contribution.
Employer Tax Benefits
When it comes to tax benefits, HSAs have the unrivaled ability to benefit both employees and employers. While employees can profit from the triple tax advantage that HSAs provide. Businesses can also benefit from significant HSA tax advantages. Employers can obtain HSA tax benefits through payroll and FICA tax benefits. To maximize HSA employer tax benefits, you must first set up your cafeteria program.
With this setup, you benefit from even lower payroll taxes if you choose to contribute to your employees’ HSAs. Because your employer HSA contributions aren’t included in your employees’ income and thus aren’t subject to federal income tax, Social Security or Medicare taxes (commonly known as FICA tax). Employer HSA payments are also tax-deductible as a company expense, so you gain both on the front and back end. It’s important to know that FICA tax is a 15.3% split tax burden between the employee and the business. Company FICA tax savings can be so significant that many employers prefer to increase their company HSA contributions in order to maximize their FICA tax savings. This method can be a sensible way to increase your employees’ total compensation while keeping your bottom line in mind.
Maximize Your Benefits
Regardless of how you handle employer HSA contributions, the next step in making the most of your HSA program and maximizing employer tax benefits is to increase both the number of employees who actively participate in your HSA program and the amount of pretax money they contribute to their HSAs through payroll deduction.
As an example, a firm with 100 employees that use an HSA through its cafeteria plan can save more than $50,000 per year in FICA tax savings alone. That employer would save six figures—a significant sum—in two years. Money that would otherwise have been paid out as a tax expense. Essentially, the more employees who have HSAs and contribute to them, the lower your payroll taxes will be, as will your income and FICA tax savings.
Small Business Owner’s HSA
You may be wondering if you qualify for an HSA as a small business owner. This is determined by the nature of your business as well as your health insurance. A requirement for establishing and contributing to a small business HSA is that your health insurance needs to be an HSA-eligible HDHP. When it comes to HSA contributions for individuals, business owners face different requirements than their employees. There are extra requirements that apply depending on the type of small business you run.
A self-employed HSA option is fundamentally identical to choices for employers. Because an HSA is not a sort of insurance, you must have an HSA-compatible health plan as a self-employed individual. According to IRS HSA rules, you can only open an HSA if you have an HSA-eligible high-deductible health plan (HDHP). It doesn’t matter if the qualified HDHP is yours or your spouse’s; it just has to be HSA-eligible. If you are classified as a dependent on another person’s tax return, you are not eligible for a self-employed HSA option.
A self-employed HSA can be not just a way to get tax savings on healthcare spending, but also an essential component of a retirement plan. Because, in most cases, self-employed individuals and small business owners do not save as much for retirement as those who are traditionally employed. An HSA can help you save money on eligible medical expenses while also serving as a retirement account for you.
You can deduct some of your contributions on your personal income tax return if you set up an HSA and contribute to it as a sole proprietor. You can claim the deduction if you make a profit during the tax year. However, you may not contribute more to your HSA than your net self-employment income. While many employees can contribute to their HSA before taxes, as a self-employed individual, you can make HSA payments after taxes and then deduct them as a line item on your Schedule C. It requires slightly more paperwork, but it is still a simple approach to save money on qualified medical bills.
S Corp and C Corp Owner HSAs
The IRS has particular requirements for specific corporate entities based on ownership—whether held by individuals or investors. Certain corporate entities are restricted from receiving HSA funding as a result of these requirements. HSA financing limits apply if you own 2% or more of a S Corp. When it comes to employer contributions to a S Corp HSA, the company cannot provide owners with a tax-free contribution. Contributions from the S Corp firm to the owners’ HSAs are taxable income. You cannot make pretax contributions to your HSA. While S Corp HSA contributions are taxable to the owners, they are also tax deductible to the company as a compensation expense. Even after-tax HSA contributions provide a considerable tax break on eligible medical expenses.
On the employee side, or if you own less than 2% of a S Corp, the restrictions do not apply. Which means that a S Corp business can make tax-free contributions to their employees’ HSAs as long as they comply with current IRS standards on employer contributions. Because a C Corp is an entirely different legal entity, the IRS treats owners the same as employees. If you own a C Corp, you are eligible for your company’s HSA, including making pretax contributions to your HSA account. Remember that all contributions must adhere to current IRS requirements on employer HSA contributions.
If you are a single member LLC with an HSA-eligible high-deductible health plan (HDHP). Your HSA will function similarly to that of a self-employed sole owner. While you will not be able to contribute to your HSA before taxes, you will be able to contribute after-tax to your HSA and claim a line item deduction on your Schedule C. Bottom line, even as a single member LLC, having an HSA saves you money on healthcare costs. However, if you are an LLC with workers, you cannot directly participate, but offering this type of HSA cafeteria plan to your employees has numerous advantages.
Working With EZ
If you want to save money while still looking after your employees’ health and finances, offering an HDHP with an HSA is a terrific alternative. If you’re not sure where to start with HDHPs, HSAs, and cafeteria plans, EZ can help you get started and answer all of your questions along the way. We can also provide you with quick, accurate quotes and enroll you in an excellent plan – all for free! There is no hassle and no obligation. To get started with us today, simply enter your zip code in the box below. Or call 877-670-3531 to talk with a representative immediately.