HSA Employer FAQ

Answers to Frequently Asked Questions

What is a health savings account (HSA)?

An HSA is a savings account that lets your employees set aside money on a pre-tax basis to pay for qualified medical expenses. Further, if your employees choose to invest any of their funds in the account, interest earnings and investments are tax-free. Employees and employers may both contribute funds to the account up to an annual limit, and the employee owns the account. To contribute to an HSA, employees must be enrolled in a qualified high-deductible health plan (HDHP) and be HSA-eligible.

What is a qualified high-deductible health plan (HDHP)?

A high-deductible health plan (HDHP) is a health insurance plan that meets various IRS requirements, including having a deductible that is greater than a defined IRS limit. The deductible must apply to both medical and prescription expenses. Monthly premiums for an HDHP are often lower than standard health plan. In HDHP plans, individuals take on more of the up-front costs of health care.

How do HSAs help me save money?

Generally, employers have to pay 7.65% in Social Security and Medicare taxes on their employees’ total income. However, with tax-advantaged benefits, like an HSA, employers don’t have to pay Social Security and Medicare taxes on any contribution amounts that their employees set aside.

Employers also save when they offer HSAs because premiums on HSA-eligible high-deductible health plans (HDHP) tend to be lower than other health plans. Employers often use these additional funds that they’ve saved to seed their employee’s HSA. Employer seeding increase the amount that employees contribute by an average of 14 percent.

How do HSAs help my employees save money?

With an HSA, accountholders save approximately 30%* on eligible expenses, making a $1,000 expense cost them about $700. Accountholders get these savings because the contributions they make to their HSA are exempt from employment taxes.

Additionally, any money that the accountholder earns from interest and/or investing is also considered tax-free as long as these funds are used for eligible medical expenses. This means that the money that they contribute, spend, and earn through interest and investing is all tax-free.

 

 

 

 

 

*This tax example is a broad approximation of tax liability. Specific savings depend on one’s tax bracket. Further, contributions may be subject to state income tax in some states. Accountholders should consult a tax advisor for help with their own situation. Current IRS tax laws control all pre-tax payment and contribution matters and are subject to change.

What is considered an eligible expense for an HSA?

Examples of eligible expenses for an HSA include:

  • Health plan co-pays
  • Prescriptions
  • Deductible costs
  • Co-insurance
  • Vision care
  • Dental care
  • Certain medical supplies
  • Over-the-counter medications

See specific guidance regarding eligible expenses in IRS Publication 502.

What HSA interest options are available to my employees?

At EBC, we have two interest options for your HSA—a traditional interest option or a high-yield interest option. When an employee first enrolls in an HSA, their HSA cash balance will automatically start out with the traditional HSA interest option, but they can transition their HSA cash balance to a high-yield HSA option at any time.

The high-yield HSA gives employees the opportunity to earn higher interest on their HSA balance by having their funds held in a non-FDIC-insured account that is backed by a highly-rated insurance company, Pacific Life. With the high-yield feature, the road to financial wellness is more accessible for employees should they choose to take advantage of enhanced interest rates and maximize the savings potential of their HSA.

Can my employees invest their HSA funds?

Yes. Once an employee’s HSA reaches a minimum $1,000 cash balance, they can start investing their HSA funds. There are three investment models to choose from based on experience—Managed, Self-Directed, and Brokerage. Whether your employee is new to investing and is looking for a guided experience or they are a seasoned investor looking to research and trade stocks and ETFs, they will have an investment model that best fits their needs. If their investment needs ever change, they can switch their investment model at any time.

Employees can also transfer funds between their HSA cash balance and investment balance at any time.

Why should I consider supporting an account transfer process for my employees?

Supporting an HSA account transfer process is a great way to create a better accountholder experience for employees, help them save money on fees, and increase their savings potential.

Accountholders that choose to participate in an individual transfer can expect the following benefits:

  • Simplified Account Management
    Consolidating HSA funds means that participants only need to manage one account and one debit card.
  • No Unnecessary Monthly Fees
    Most individual HSAs, or retail HSAs, charge a monthly administrative fee to keep an HSA open. Consolidating HSAs reduces any unnecessary monthly fees.
  • Simplified Tax Reporting
    Consolidating HSA funds reduces the number of tax forms that a participant receives annually.
  • Maximized Interest Earned
    With EBC’s high-yield interest option, participants can earn more tax-free interest when they transfer their funds to EBC’s HSA custodian and increase their available cash balance.
  • Maximized Investment Earnings
    EBC’s HSA offers a modern and personalized investment experience to participants who have a minimum $1,000 cash balance. Consolidating HSA funds helps participants reach that $1,000 cash balance quicker and gives them the opportunity to invest and meet their long-term investment goals.
Can my employees make pre-tax contributions to their HSA?

Yes. Employees can make pre-tax contributions to their HSA if the employer has a section 125 cafeteria plan in place that provides for HSA contributions. These contributions are not subject to withholding from wages for income tax or subject to Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), or the Railroad Retirement Act (RRA). Note that employees who are considered self-employed for tax purposes (e.g., a sole proprietor, partner in a partnership, or more than 2% shareholder of an S corporation) may not make pre-tax contributions to their HSA through a section 125 cafeteria plan but may make after-tax contributions for which they take a deduction on their personal income tax return.

Can my employees make post-tax contributions to their HSA?

Yes. If accountholders contribute funds on a post-tax basis, the amount can be deducted from their taxable income when they file their personal taxes. However, if an employee makes sufficient after-tax contributions to meet their HSA annual contribution maximum, the employer may be limited in its ability to make employer contributions to the employee’s HSA.

Can I make employer contributions to my employees’ HSAs?

Yes. See the following questions and answers for more details and compliance information.

Why would I want to contribute to my employees’ HSAs?

On average, employers who contribute to their employee’s HSA see that there is an 11% increase in average HSA adoption rate and that their employees contribute an average 14% more than they would if their employer wasn’t contributing to their HSA.

How can I contribute to my employee’s HSAs?

As you may know, employers often save money when they offer HSAs because the premiums on HSA-eligible high-deductible health plans (HDHP) tend to be lower than other health plans. Employers can use these additional funds that they’ve saved to contribute to their employees’ accounts through seeding, matching, or wellness incentives.

Seeding
With a seeding contribution option, employers contribute a set dollar amount to employees’ HSA accounts. Those set dollar amounts could be a single contribution at any point during the calendar year, smaller contributions made throughout the year, or a combination of those two options.

Matching
With a matching contribution option, employers define an amount they are willing to match of an employee’s contribution to their HSA. This is similar to what employers often support for a 401(k) contribution plan. Also, employers wishing to make HSA matching contributions should make sure that their section 125 cafeteria plan includes HSA contributions as eligible pre-tax benefits because matching contributions would otherwise violate HSA comparability rules.

Wellness Incentives
With wellness incentives, employers contribute a set dollar amount to an employees’ HSA accounts after they have completed defined wellness tasks. An example of a wellness task may be completing a health risk assessment. Employers interested in using HSA contributions as wellness incentives should consult with their benefit advisors regarding wellness incentive compliance requirements under the Americans with Disabilities Act. Also, employers wishing to make HSA wellness incentive contributions should make sure that their section 125 cafeteria plan includes HSA contributions as eligible pre-tax benefits because HSA wellness contributions would otherwise violate HSA comparability rules.

Do I have to contribute the same amount to every employee’s HSA?

It depends on whether or not the employer’s section 125 cafeteria plan includes HSA contributions as eligible pre-tax benefits.

If the employer’s section 125 cafeteria plan does include HSA contributions as eligible pre-tax benefits, the employer is not required to contribute the same amount employees’ HSA accounts. However, the employer should structure its HSA contribution amounts in a manner that will pass nondiscrimination tests for section 125 cafeteria plans. This generally means that HSA contribution amounts should not overly benefit the employer’s highly compensated employees.

If the employer’s section 125 cafeteria plan does not include HSA contributions as eligible pre-tax benefits, the employer’s HSA contributions are subject to “comparability rules” that require the employer to make contributions of the same dollar amount or same percentage of the employee’s health plan deductible for all employees in the same class.

Do I have to make contributions to my employees’ HSAs?

No. However, many employers find that making contributions to employees’ HSA accounts can help improve adoption of HDHPs and HSAs, especially if they are transitioning from a more traditional type of health coverage, and increase their employee satisfaction.

Can I fully fund my employees’ HSA at the start of the year?

Yes. However, it’s important to note that HSAs belong to the individual so once the funds have been contributed to the HSA, the employer has no further control over the funds.

In addition, fully funding an employee’s HSA at the beginning of the year could cause tax issues for the employee if they do not qualify for an HSA for the full calendar year. As a result, many employers elect to fund their employees’ HSAs periodically throughout the year.

Are employer contributions to an HSA taxable to the employee?

No. However, if an employer contribution is made to a self-employed individual’s HSA (e.g., a sole proprietor, partner in a partnership, or more than 2% shareholder of an S corporation), the contribution typically is reported in the individual’s income but the individual may deduct it on their personal income tax return.

Can I offer an HSA with an FSA?

It depends on the type of FSA. Employers who are interested in enriching their benefits program and offering both a savings and spending account can offer their participants an HSA and limited health flexible spending account (FSA). It is important to note that a standard health FSA is not compatible with an HSA. Employers who already have a standard health FSA and are interested in adding an HSA can utilize our customer experience and compliance expertise to help transition administration and participation from a standard health FSA to a limited health FSA.

Accountholders maximize their savings when they contribute to both an HSA and a limited health FSA. Accountholders can use their limited health FSA on eligible dental and vision expenses throughout the year and save or invest their HSA funds to create a nest egg for the future.

Is the employer responsible for reviewing medical expenses?

The employer is not responsible for substantiating employees’ HSA expenses. The individual accountholder is responsible for determining that their account funds are being properly used and would be required to provide supporting evidence on the use of HSA funds if requested under an IRS audit.

How often can an employee adjust their HSA contributions when contributing through a cafeteria plan?

Employees contributing to an HSA through a cafeteria plan should be allowed to adjust their contributions at least once per month. Employers often set a frequency in which they will accept contribution changes throughout the year to complement their existing payroll procedures.

As an employer, am I responsible for my employees’ HSAs?

No. You do not own your employees’ HSAs, nor are you responsible for how the funds are managed by the employee. The employee fully owns the contributions to the account as soon as they are deposited.

How do I correct HSA contributions made in error to an employee’s HSA?

The general rule is that HSA contributions are nonforfeitable. However, there are limited IRS-approved scenarios where employers can request the HSA custodian to return a mistaken contribution. The HSA custodian is not required to comply with the employer’s request. It is the employer’s obligation to determine whether any particular scenario qualifies under IRS rules for the return of a mistaken employer contribution.

EBC does not provide legal or tax advice regarding mistaken employer contributions. If an employer would like to request the HSA custodian to correct a mistaken contribution, the employer should contact their Client Account Representative to discuss the available options.

How do my employees correct mistaken or excess contributions to their HSA?

If your employee made a contribution to their HSA for the wrong tax year, the accountholder can log in to their online account and complete the HSA Contribution Correction Form to allocate the HSA contribution to the correct tax year.

If your employee made contributions to their HSA in excess of the maximum annual limit, they can request a distribution of the excess amounts by logging in to their online account and completing the HSA Distribution of Excess or Mistaken Contribution Form.