What Employers Need to Know about HSA

As an employer, do I own my employees’ HSAs? Can I control how they spend the money in them?

Employers do not own employees’ HSAs. The employee owns the contributions to the account as soon as they are deposited, whether those contributions are made by the employee or the employer. The employer cannot control how the money is spent, either.

Employee contributions can be made to HSAs on either after-tax or pre-tax basis. If made on an after-tax basis they should be counted as an above-the-line deduction on their tax return, effectively making their contributions tax-free. If they want to make the contribution pre-tax it can be done through a Section 125 (also called a “salary reduction” or “cafeteria plan”).

Employer contribution limits

As much or as little as you want (while staying below the legal limit on the account of $2,600 or $5,150 for employees with family coverage).

Contribution frequency

Employers can contribute in a lump sum or in any amounts or frequency you wish. There is no requirement that the contributions be made regularly (in accordance with pay checks, for instance)

Employer contributions must be “comparable”, that is they must be in the same dollar amount or same percentage of the employee’s deductible for all employees in the same “class”. You can vary the level of contributions for “full-time” vs. “part-time” employees, and employees with “self-only” coverage vs. “family coverage”. You do not need to consider employees who do not have HDHP coverage as they are not eligible for HSA contributions.

Benefits through a Section 125 plan

Section 125 plans (also known as “salary reduction” or “cafeteria” plans) must meet a different set of rules. Under these plans, contributions (both from employer and/or employee) must meet “non-discrimination” rules. These rules require the employer to ensure that contributions do not favor higher compensated employees.

Matching contributions

“Matching” contributions must occur through a Section 125 plan. Non-discrimination rules still apply.

Your company can make pre-tax contributions to your employees’ HSAs as long as you do so for all eligible employees. You don’t have to offer health insurance.

Contributions by owners and shareholders of S corps, partnerships, and LLCs

Owners and officers with greater than 2% share of a Subchapter S corporation cannot make pre-tax contributions to their HSAs through the company by salary reduction. Any contributions made to their HSAs by the corporation are taxable as income. However, they can make their own personal contributions to their HSAs and take the “above-the-line” deduction on their personal income taxes.

Partners in a partnership or LLC cannot make pre-tax contributions to their HSAs through the partnership by salary reduction. However, they can make their own personal contributions to their HSAs and take the “above-the-line” deduction on their personal income taxes.

Self-employed persons

Self-employed persons may not contribute to an HSA on a pre-tax basis and may not take the amount of their HSA contribution as a deduction for SECA purposes. However, they may contribute to an HSA with after-tax dollars and take the above-the-line deduction.

Employers that sponsor ERISA-covered group health plans are allowed to add an HDHP option and offer programs designed to enable employees to establish HSAs to pay for medical expenses not covered by the HDHP.

Congress, in enacting the Medicare Modernization Act, recognized that HSAs would be established in conjunction with employment-based health plans and specifically provided for employer contributions. The IRS has stated that HSAs probably will not be considered employee welfare benefit plans established or maintained by an employer. This is true if where employer involvement with the HSA is limited, whether or not the employee’s HDHP is sponsored by an employer or obtained as individual coverage.

HSAs generally are not considered “employee welfare benefit plans” for purposes of the provisions of Title I of ERISA. Employer contributions to the HSA of an employee doesl not result in Title I coverage where, as discussed above, employer involvement with the HSA is limited.

Finding that an HSA established by an employee is not covered by ERISA does not, however, affect whether an HDHP sponsored by the employer is itself a group health plan subject to Title I. In fact, unless otherwise exempt from Title I (e.g., governmental plans, church plans) employer-sponsored HDHPs will be employee welfare benefit plans within the meaning of ERISA section 3(1) subject to Title I.

More info for Employers

Do employees understand HSAs? A report in Benefit News last year indicated that many employees do not spend sufficient time on learning their options and that a face-to-face talk may be the best way to make them learn about HSAs.

 

In discussing whether, and under what circumstances, HSAs established in connection with employment-based group health plans would be subject to the provisions of Title I of ERISA, FAB 2004-01 states that generally such HSAs would not constitute an “employee welfare benefit plan” as defined under section 3(1) of ERISA, if employer involvement with the HSA is limited. Specifically, HSAs meeting the conditions of the safe harbor for group or group-type insurance programs at 29 CFR §2510.3-1(j)(1)-(4) are not considered employee welfare benefit plans within the meaning of section 3(1) of ERISA. However, a finding that an HSA established by an employee is not covered by ERISA does not affect whether an HDHP sponsored by the employer is itself a group health plan subject to Title I. In fact, FAB 2004-01 states that unless otherwise exempt from Title I (e.g., governmental plans, church plans), employer-sponsored HDHPs will be “employee welfare benefit plans” within the meaning of section 3(1) of ERISA and, thus, subject to the fiduciary responsibility provisions of Title I.

The mere fact that an employer imposes terms and conditions on contributions that would be required to satisfy tax requirements under the Code or limits the forwarding of contributions through its payroll system to a single HSA provider (or permits only a limited number of HSA providers to advertise or market their HSA products in the workplace) would not affect the above conclusions regarding HSAs funded with employer or employee contributions, unless the employer or the HSA provider restricts the ability of the employee to move funds to another HSA beyond those restrictions imposed by the Code.

The federal government does not consider HSAs “employee welfare benefit plans” for purposes of the provisions of Title I of ERISA. Employer contributions to the HSA of an eligible individual will not result in Title I coverage where employer involvement with the HSA is limited. Finding that an HSA established by an employee is not covered by ERISA does not, however, affect whether an HDHP sponsored by the employer is itself a group health plan subject to Title I. In fact, unless otherwise exempt from Title I (e.g., governmental plans, church plans) employer-sponsored HDHPs will be employee welfare benefit plans within the meaning of ERISA section 3(1) subject to Title I.

 

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