What is an HSA?

Health Savings Accounts are employee-owned medical savings accounts with premium tax-saving benefits.

The distinct tax-advantaged treatment of Section 125 HSA contributions lets it serve two purposes for the
account owner:

1. The HSA uses tax-free dollars to reimburse eligible medical expenses incurred by the account owner or covered dependents as needed; and,
2. HSA accounts also serve as investment vehicles for retirement, when distributions can be used to pay for health care (tax-free) or other expenses.

Why should an employer offer an HSA in a Section 125 Cafeteria plan?

Offering employees access to an HSA through a company’s Section 125 Cafeteria plan has three perks for the employer:.

• Improved overall employee benefits package

Lower group health premium for employees with an HSA

An employer could save thousands of dollars per year on group health premiums (and substantial premium savings for the employee as well) through the lower cost of an HSA’s required HDHP alone.

Whether it is an insurance premium or HSA contribution, that amount is no longer counted in the employee’s wages. In turn, the amount is not subject to FICA, FUTA, and other state and local payroll taxes. This is a savings of between 8% and 10% for most employers.

Improved overall employee benefits package

Non-Cafeteria plan HSAs

Unlike an FSA or HRA, an employee can open an HSA on their own – outside of an employer’s benefit plan – so long as the employee’s health insurance meets the HDHP requirements set for an HSA. In this situation, the employee would take the HSA income tax benefit when filing taxes that year.

However, the employee misses an additional 7.65% FICA tax savings available only when the HSA is funded
through the employer’s Section 125 Cafeteria plan. And, the employer loses the potential FICA tax savings
plus reduction of FUTA and (in most states) state unemployment or workers’ compensation taxes.

When an employer provides an HSA option through its benefit plan, an employee may opt to capture those lost
tax savings by switching to the employer’s HSA. Plus, the employee doesn’t have to wait for a tax refund to
benefit from the HSA tax advantages and the employer reduces taxes, too.

Plan Document Required

All the IRS requires for tax-advantaged treatment of Cafeteria plans – including a Health Savings Account – is that a written plan document be completed by and on file with the employer.

Employers with an existing Section 125 plan document must update it to include the HSA and any new limited FSA options.

HDHP Rules

The IRS sets an inflation-adjusted minimum annual deductible and out-of-pocket plan limit each year for HSA-qualifying HDHPs. Here are the current figures:

The contribution limits above are for total contributions to an HSA from employee and/or employer:

Contributions

Health Savings Accounts may be funded by the employee, employer, or both:

Contributions may come from the employee, the employer, or both, so long as the total amount abides by the annual limit set by the IRS.

Employee contributions

In a Section 125 HSA, employee contributions are taken as pre-tax salary deductions according to the election form completed during open enrollment period.

The annual election amount is not pre-funded; however, funds deposited into an HSA are immediately available to pay or reimburse eligible medical expenses.

Employers often choose to contribute to employees’ HSA accounts. These deposits go into the same bank or investment account as the employee’s contribution goes and are immediately vested.

Health care expenses

Funds deposited into a Health Savings Account are immediately available for the employee to use to pay (using an HSA debit card) or reimburse themselves for eligible medical expenses.

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Year-end balance

There is no surrender of unused contributions to an HSA at the end of a plan year. Funds remain in the bank
or investment account, accruing interest, until the account owner/employee calls upon it to pay medical
expenses.

HSA with Health FSA

To be eligible for the HSA, the employee may not also have other health coverage that could pay the HDHP
deductible. This means that an employee cannot have an HSA and a standard Health FSA at the same time.

If an employee with a Health FSA plans to open an HSA in the next plan year, the Health FSA must be spent down to zero or surrendered before the start of a new plan year.

For example, the employee will change to the HDHP with HSA on the first day of the plan year (January 1), so must either spend or surrender the Health FSA by December 31 of the previous year. The Health FSA cannot be
carried into the new plan year with a carry-over or grace period provision.

Limited FSAs for HSA participants

An employee may have an FSA that is limited by design to only pay expenses outside of the HDHP deductible.
For those employees, an employer may include in the Section 125 plan document:

Post-deductible FSA

Only pays benefits after the HDHP deductible has been satisfied.

Limited Purpose FSA

Pays dental, vision and other medical expenses not covered by the HDHP

Retirement

At retirement age, the account may still be used for tax-free medical expenses.

Also, HSA distributions may be taken for a non-medical purpose without incurring the 20% tax penalty.

Many employers use a dollar-match incentive to encourage employee savings for retirement as well as to help employees’ build retirement savings.

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How to start a Section 125 HSA for employees

To meet the Section 125 written plan document requirement to pre-tax HSA contributions, an employer’s
existing Cafeteria plan document must be updated to include the HSA module.

Core Documents provides employers with everything they need to establish an IRS-and DOL-compliant plan with its $129 CoreHSA plan document package (.pdf). This cost reflects a one-time setup fee, not an annual subscription fee.

Setting up the CoreHSA plan document

The HSA plan document must be kept on site so it is available in the event of an IRS audit or DOL inquiry, or if an employee asks to view it.

The plan document does not need to be filed with any governmental entity

Accounting

Section 125 HSA contributions can accumulate in the general asset account of the company until payment is due; a separate HSA trust account is not necessary.

Maintenance

The employer must update the plan document and conduct discrimination testing annually.

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Contact Us

Want to make sure you’re choosing the tax-saving options best for your particular situation? Get in touch with an expert on Section 125 HSA plan design. Send us an email or call our friendly, knowledgeable staff at 1-888-755-3373.