With the rising cost of health insurance, employers and employees alike are looking for the best ways to save money on medical expenses. One option that can be beneficial to both small business owners and their employees is the health savings account (HSA), which is available when an employee selects a high deductible health plan offered by the employer.
What Is a Health Savings Account?
When employees choose a high deductible health plan (deductible must be at least $1350 for individuals or $2700 for families) from their employer’s health plan offerings, they can establish a health savings account. The HSA is an employee-owned savings account that employees can use to save money for out-of-pocket medical costs such as doctor visits and prescriptions, as well as to save for medical expenses that will be incurred after retirement. In 2019, the maximum contribution allowed for individuals is $3500 (although those 55 and older can contribute an additional $1000) and the maximum for family coverage is $7000. In addition to the amounts contributed by the employees themselves, any amounts contributed by employers to their employees’ accounts count toward that maximum.
What Are the Advantages for Employers?
The most obvious benefit for employers is that by offering HSA-eligible high deductible health plans, they can save a substantial amount on the health insurance premiums they must pay each month for employee coverage. The downside of these plans is that employees must pay higher amounts for their medical costs out of pocket until their deductible is met.
However, if employees establish an HSA, employers are permitted to make contributions to those plans that can alleviate some of those extra costs for their employees. The employer can take a federal income tax deduction (and in most states, a state tax deduction) for the full amount of the employer’s contribution, which is considered a business expense.
HSA fees are low, and HSAs are uncomplicated for employers to establish. In addition, it is easy to move from one insurance carrier to another, as there are no penalties associated with changing insurance carriers.
In addition to the savings on taxes and insurance premiums, HSAs enable employers to attract and retain good employees by offering an enticing benefit. As discussed below, HSAs are appealing to employees as well as employers.
What Are the Advantages for Employees?
In addition to the tax deduction for employers, HSAs provide several tax benefits for employees. When an employee contributes to an HSA through a payroll deduction, the full amount of the contribution is pre-tax. In other words, it reduces the employee’s taxable income.
Note: Special IRS rules apply to business owners such as LLC members, partners in partnerships and 2% or greater owners of S corporations, precluding the business from giving those owners tax-free contributions to an HSA. Those contributions are considered taxable income to the owner but are tax deductible to the business.
In addition, funds contributed to an HSA grow tax-free and belong to the employee for life, even if the employee subsequently changes jobs. The funds contributed by the employer vest immediately, becoming the property of the employee. Unlike some other types of accounts, employees do not have to worry that unused amounts will be forfeited at the end of the year.
Employees may withdraw amounts from an HSA to pay for qualified medical expenses tax free. However, funds withdrawn from a 401(k) to pay medical bills will be taxed, so some employees use HSAs as an alternative type of retirement account to save for future medical expenses.
Choosing the best health plans for your business can involve a confusing maze of IRS and ACA rules and regulations. As part of our legal services for businesses, we can help you understand the legal requirements and tax implications of your choices. We invite you to call us today to schedule a meeting.