Payroll Briefs

Championing the Advantages of an HSA to Employees

July 10, 2023

There are many advantages to both your business and employees by offering a Health Savings Account (HSA) solution as part of your overall benefits package. With inflation leading the headlines over the last few months, most business owners are keeping a close eye on costs. Although it can be difficult to control the costs of core functions, such as overhead and materials, there may be some latitude in your employee benefits.  

Many employers have lowered their benefit costs by offering a high-deductible health plan (HDHP) paired with an HSA. If you decide to move forward with this plan, make sure you have a strategy in place to communicate the advantages of an HSA to your employees.  

The Basics 

An HSA is a tax-advantaged savings account funded with pre-tax dollars. HSA accounts are a type of consumer-directed health plan, which is a personal health care account used to pay for medical expenses. Unlike the similar-sounding flexible spending account (FSA), another tax-advantaged account to help pay medical costs, the HSA is not tied to the employer.  

Funds for this account can be withdrawn tax-free to pay for a wide range of qualified medical expenses. An employee may only contribute to an HSA if they have an HDHP — generally a health plan that only covers preventive services before the deductible. For 2023, an HDHP is defined as a plan with a minimum deductible of $1,500 ($3,000 for family coverage) and maximum out-of-pocket expenses of $7,500 ($15,000 for family coverage). 

For the 2023 calendar year, the annual contribution limit for an HSA is $3,850 for individuals with self-only coverage and $7,750 for individuals with family coverage. If you’re 55 or older, you can add another $1,000. Both the employer and the plan participant can contribute to the HSA. Contributing to your employees’ accounts could be a way to enhance the attractiveness of this new benefit. Do note the contribution limits are combined not per payer. For example, if the employer contributed $1,000 to an employee’s family HSA account, the employee would be able to contribute $6,750.  

Another requirement of the HSA you need to be aware of is an account holder cannot be enrolled in Medicare or covered by a non-HDHP insurance (such as a spouse’s plan). Once an individual enrolls in Medicare, they are no longer eligible to contribute to an HSA. However, the account holder can still withdraw funds from an existing HSA to pay for qualified expenses, which expand starting at age 65.  

Advantages for Employees  

There are three major advantages to clearly communicate to employees: 

  1. Lower premiums. Not all employees are going to be excited when you tell them you are switching to a high-deductible plan. Show them a comparison of the current plan to show how much they will be saving per month. HDHP premiums tend to be substantially lower than those of other plan types.  
  2. Tax advantages times three. HSA plans are known as a triple threat when it comes to tax liability, and everyone would like the opportunity to lower their taxes. First, all contributions made to the HSA are made pre-tax, which lowers the participants’ taxable income. Second, funds left in the account grow tax-free. Third, distributions from the HSA are tax-free as long as the withdrawals are used for qualified medical expenses.  
  3. Retirement and estate planning benefits. Unlike other tax-advantaged accounts, there is no “use it or lose it” clause. Participants own their accounts; they are not tied to the employer. The funds in the HSA may be carried over year to year, continuing to grow tax-deferred indefinitely. Once the participant turns 65, account holders can withdraw funds penalty free for any purpose, however, funds that aren’t used for qualified medical expenses are taxable. 

Advantages for Employers 

While participants are enjoying the benefits noted above, you will appreciate lower payroll costs, a federal tax deduction and reduced administrative burden.  

While employees are leveraging the triple tax advantages, as the employer, you will also benefit from tax advantages. Neither you nor the employee are required to pay payroll taxes on HSA contributions deducted through payroll. You will receive a federal income tax deduction for any contributions made into your employee’s HSA accounts, and for the amounts they contribute via payroll deduction. Employers benefit through reduced employer Federal Insurance Contributions Act (FICA) taxes and Federal Unemployment Tax Act (FUTA) taxes. 

Employees can take distributions from their HSA accounts at any time without employer involvement since the funds belong exclusively to them during and after their employment with the employer. This leads to less work on your end for offering this benefit to your employees. Employers do have the responsibility to report HSA contributions accurately on employees’ Forms W-2. At DM Payroll Solutions, we ensure our clients’ payroll is set up appropriately to capture the correct dollar amounts on the W-2.  

It is plain to see that an HDHP and HSA pairing has major benefits for your business and your employees. DM Payroll Solutions offers access to end-to-end solutions that help organizations just like yours manage benefits administration with an online portal. Automatic workflows transfer demographic information, payroll deductions and compensation adjustments between DM Payroll Solutions and benefit management systems, streamlining the process for businesses. To learn more about our benefits administration feature, contact us today.