The flexibility of HSA programs has led to rapid growth and acceptance of Health Savings Accounts, but has also created misunderstandings for employers implementing HSA programs. Some employers assume that the individual nature of HSAs relieves the employer of all compliance burdens, while other employers assume they can exercise a greater amount of control over employees' HSAs than is allowed. This article focuses on the special rules that apply to employers implementing an HSA program and clarifies the responsibilities of the employer, employees, and the HSA custodian.[1]

Flexibility in Level of Employer Involvement. Employers interested in HSAs face a variety of potential levels of involvement.

  • Employer-Provided HDHP or Not: An employer may or may not offer a group High Deductible Health Plan (HDHP). Employers are allowed to offer the HSA benefits described in this article to HSA-eligible employees even if the employer does not offer the corresponding health insurance.

  • Employee-Funded HSA: Employers are not required to help fund employees' HSAs and may choose not to do so. In this option, the employee is on his/her own to open and fund the HSA. The employer could offer a direct deposit feature to the employees' HSAs provided the employer properly reports the contribution as ordinary income on the employee's Form W-2.

  • Employee-Funded HSA, Pre-Tax through Payroll Deferral: Employers can help employees fund their HSAs by allowing for HSA contributions pre-tax through payroll deferral. This requires that the employer adopt a Section 125 Cafeteria Plan with an HSA option.

  • Employer Pre-Tax Contributions: Employers may make direct contributions to their employees' HSAs subject to the HSA comparability rules.

  • Employer Pre-Tax Contributions and Pre-Tax Payroll Deferral: Employers can combine an employer contribution with pre-tax payroll deferral to create the most powerful combination of HSA benefits for employees.

Pre-Tax Employer Contributions Trigger Special Rules. The IRS defines an "employer contribution" as a pre-tax employer contribution or a pre-tax employee payroll deferral and employers that make pre-tax HSA contributions trigger the special group HSA rules. HSAs are tax-driven accounts and basing the rules on the tax status is appropriate. Accordingly, special HSA group level rules apply even if an employer has only one employee that receives a pre-tax HSA contribution. Conversely, an employer with many employees with HSAs is not subject to the HSA group rules provided the employer only allows after-tax payroll contributions into the HSAs or no contributions at all.

No Employer Pre-Tax Contribution Eliminates Special Rules. Employers that offer no assistance for HSAs, or only offer after-tax HSA payroll deferrals, do not face any of the special rules that apply to group HSA plans. An employer in this position is capitalizing on the unique benefit of HSAs in health benefits law – that individuals can open and contribute to an HSA without employer involvement and still get a tax break. This allows for those employees that would benefit from an HSA to do so on their own. This approach works well for small businesses that are struggling to finance even a portion of the health insurance premium and are not equipped to expand employee benefits.

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