It may not be an open enrollment period right now, but if you're considering setting up health savings accounts for your employees, now is the time to learn more about them.
When it comes to ensuring your employees can enjoy the healthcare benefits your small business provides, few fringe benefits provide the tax-advantaged saving power of a health savings account, or HSA. As they allow employees to stash pretax funds from their paychecks to help cover nearly any qualified future medical expense, HSAs are a flexible way to help your workforce take full advantage of your company's health plan. Configuring your small business's health plan can be a formidable task, but with enough information, you can decide whether offering your employees an HSA is the right step for your team.
The defining features of an HSA
With an HSA, employees have access to a specialized savings account designed for the sole use of covering healthcare costs. It must be used in conjunction with a high-deductible health plan (HDHP); employers cannot offer an HSA through any other type of health insurance plan.
According to the IRS, eligible health costs include birth control, copays, dental work, prescriptions, eyeglasses and vision care, COBRA premiums, and many other health-related costs. Costs like child care, health club fees, cosmetic surgery and weight loss programs are among the ineligible expenses.
Another restriction placed on HSAs is how much money a person can add to their account in a given year. The IRS annually sets contribution limits to keep people from reducing their income tax by too large of a figure. The 2020 contribution limit for individual coverage accounts is $3,550, and family coverage accounts have a maximum contribution amount of $7,100.
While most HSAs are fueled by an employee's pretax contributions, employers and other parties can chip in as well. Many employers offer matching contributions. Remember that every employer contribution is still subject to the annual limit set by the IRS, though, so the money coming in from the employee and the employer should not exceed that high-water mark.
Another major feature of an HSA is its "portability." In the event that you leave an employer, your HSA stays with you, acting as a savings account that you can use for health costs regardless of where you work. Other types of healthcare accounts, like flexible spending accounts (FSAs), do not allow the funding to carry over – in many cases, the accrued funds go away at the end of the year.
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HSAs and taxes
The defining feature of an HSA – and one of the biggest reasons to offer one – is its three large tax advantages. Unlike with other savings accounts, money can be deposited into an HSA directly from an employee's paycheck before the various taxes are taken out, thus reducing their taxable income at the federal level. Employer contributions are also tax-free.
Outgoing HSA funds also have a tax advantage. According to the IRS, you won't be taxed for any money you withdraw from your HSA for qualified medical expenses. When an HSA earns interest – it is a savings account, after all – that increase is also tax-free.
Most states follow the federal government's guidelines when it comes to taxes for these accounts. That being said, California and New Jersey fully tax HSAs, while New Hampshire and Tennessee tax the interest earned.
How offering HSAs benefits employers
While an HSA can be a huge benefit for employees, business owners can also enjoy some benefits for offering the accounts. Since HSAs are a feature of HDHPs, businesses automatically begin saving money by saving on health insurance premiums. Furthermore, HDHP coverage gives your employees more ownership of their healthcare needs, so the annual premiums felt by employers are not as high.
Once enrolled with an HSA, both the employee and the employer save on their taxes. Specifically, both parties save upward of 7.65% on their FICA taxes, since contributions are not considered wages.
Thanks to the tax savings that an HSA can offer an employer, more funds are immediately available for other needs within the company. You can invest more directly in your business's needs when funds aren't tied up in healthcare costs. Additionally, HSAs help a business establish a relationship with the associated bank. Such relationships are key in other areas of your business, such as obtaining loans and opening lines of credit.
Healthcare plans and HSAs are often seen as a pathway to a happier and healthier workforce. Healthcare-related bankruptcy is not a new concept in America, so helping your employees pay for their medical needs not only reduces your team's stress, it also means they will be more likely to take advantage of their health coverage. When fewer employees are out sick, your company's production and revenue numbers may increase.
Setting up an HSA as an employer
If the terms of an HSA interest you and you think it may be time to offer the benefit to your employees, you'll be happy to know that setting one up is relatively easy.
If you've already picked a health insurance provider, see if it also offers an option for HSAs. If so, it will likely have a preferred financial institution that you should use to establish your HSA. If that's not the case, or you don't like that provider's option, you can reach out to most other banks or FDIC-insured HSA providers to learn about their compatible programs.
As you search for a banking partner for your HSA, you should compare factors like fees, investment options, flexibility for both you and your employees, and how the funds are disbursed. This decision will have a major impact on your business and your employees' lives, so it's important to get it right, even though HDHPs and HSAs are known for being flexible.
Once you select a provider, you have to decide whether your business will contribute to employee accounts. You must then create a Section 125 cafeteria plan for your HSA. With such a plan in place, your employee benefits will fall under the jurisdiction of Section 125 of the federal tax code.
After you make those selections, your employees give the bank their necessary documentation and contribution amounts. Employees' HSAs are generally configured at the start of the plan as well as during open enrollment. As your plan continues, you will have to provide tax documents, like W-2s, that outline employee contribution levels and any employer contribution amounts.