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HSAs and Their Tax Benefits for Employers

Mar 11, 2020 8:00:00 AM

It’s no secret that health savings accounts provide many tax advantages. Those tax advantages are one of the main reasons why HSAs continue to gain steam in the marketplace—so much so that HSA accounts are expected to exceed 30 million by 2022.

But while HSA enrollment continues to grow at a rapid pace, most of the focus when it comes to HSA tax benefits revolves around individuals and employees. And while those HSA tax benefits are very real and very important, there are less publicized HSA tax advantages for employers that play an equally important role on the employer side. These employer HSA tax benefits should be anything but secret.

So, whether you’re an employer already offering an HSA program to your employees, or if you’re simply exploring the viability of an employer-sponsored HSA program for your business, you need to have a solid understanding of HSA tax benefits for employers.

HSAs Offer a Triple Tax Advantage for Your Employees

Before we dive into HSA tax benefits for employers, let’s go through a quick recap of HSA tax benefits for employees and individuals.

The main hook for employees is an HSA’s “triple tax advantage.” What that means is an employee can save on taxes in three distinct ways with an HSA:

  1. Their HSA contributions are 100% tax deductible, up to the annual maximum limit. If they contribute pretax, their contributions aren’t included in their gross income and aren’t subject to income and FICA taxes. And if they contribute after tax, they can still deduct their contributions on their tax return to lower their overall tax liability.
  2. Their HSA funds can be used tax-free for any qualified medical expenses
  3. Their HSA funds grow tax-free with no restrictions or “use it or lose it” limitations

Let’s look at a quick example and break down the annual tax savings an HSA provides to an employee with family coverage who’s in the 24% federal income tax bracket and contributes $7,100 annually on a pretax basis to her HSA:

  • Federal Income Tax Savings: $1,704
  • Social Security Savings: $440
  • Medicare Savings: $103
  • State Income Tax Savings: $426

As you can clearly see through this one example, HSA tax benefits provide a level of advantages not seen with any other account used for saving or retirement, and can be critical to employees at any income level. And they’re also important for employers to maximize the HSA win-win scenario.

HSAs Offer Powerful Tax Benefits for Employers

When it comes to tax advantages, HSAs have the unique power to be a win-win for employees and employers. What that means is that while employees are able to leverage the triple tax advantage HSAs offer, employers are also able to benefit from substantial HSA tax advantages.

For employers, HSA tax benefits come from a few avenues—offering your HSA program through a cafeteria plan that allows your employees to make pretax contributions, having your employees actively participate and contribute to their HSAs and contributing to your employees’ HSAs as their employer.

If you need a refresher on what it means to set up and maintain a Section 125 cafeteria plan that offers pretax HSA deferrals, Bend has you covered. If not, let’s dig a little deeper into how HSAs benefit an employer from a tax perspective.

Be Strategic to Make the Most of Your HSA Program and Maximize Your Employer Tax Benefits

In order to maximize HSA employer tax benefits, you first need to have your HSA program set up through a cafeteria plan, which allows your employees to make pretax payroll contributions to their HSAs and lowers your payroll tax liability. With this setup, as the employer, you also benefit from even lower payroll taxes if you choose to contribute to your employees’ HSAs, because your employer HSA contributions aren’t included in your employees’ income and therefore aren’t subject to federal income tax, or Social Security or Medicare taxes (commonly known as FICA tax). Your employer HSA contributions are also tax-deductible as a business expense, so you as the employer benefit on the frontend and on the backend.

Specific to FICA tax, it’s critical to note that it’s a shared tax expense of 15.3% between the employee and the employer. The FICA tax savings for employers alone can be so substantial that many employers choose to increase their employer HSA contributions in order to maximize their FICA tax savings. This approach can be a smart strategy for increasing your employees’ total compensation while staying focused on your bottom line.

As a quick example, an employer who has 100 employees taking advantage of an HSA under their cafeteria plan can save more than $50,000 every year in FICA tax savings alone. In two years, that employer would save six figures—no small amount—and money that would otherwise have been paid out as a tax expense.

Regardless of how you choose to handle employer HSA contributions, the next step toward making the most of your HSA program and maximizing employer tax benefits is growing both the number of your employees who actively participate in your HSA program, as well as the amount of pretax money they contribute to their HSAs through payroll deduction.

Simply put, the more employees who have HSAs and make HSA contributions, the lower your payroll taxes and the greater your income and FICA tax savings. Leading-edge HSA providers like Bend make it easy for employers to boost HSA participation by providing an easy-to-use, proactive HSA platform, designed to get employees involved and increasing their pretax payroll contributions as they go, helping to deliver consistent and optimal financial savings to both you and your employees.

HSA Benefits for Employers Go Beyond Just Taxes

Employer tax benefits from HSAs are real. But there are also some HSA benefits employers can leverage that go beyond just taxes.

Offering an HSA program in and of itself and providing your employees with the opportunity to benefit for all an HSA offers directly benefits your business from both recruiting and retention standpoints. As HSAs continue to grow and gain traction, savvy employees and top talent will come to expect a competitive HSA program from their employer of choice.

Also on the employee front, employees who choose a high-deductible health plan (HDHP) and use an HSA are typically more cost conscious and tend to have lower healthcare expenses than other employees. Attracting and retaining these types of employees can lead to lower healthcare premiums for your company, which saves you money both short and long-term.

Partner with Bend to Experience the Next Generation HSA

Whether you already have an established HSA program or are just starting down the path, do your homework and consider partnering with an HSA innovator like Bend HSA. With Bend, HSAs are easy for employers and employees to set up and maintain. And because Bend takes a proactive approach to helping employees identify eligible expenses and increase their pretax payroll contributions as they learn more about how to better manage their HSA, growth in employee contributions only further boosts your bottom line. Bend provides you with all the tools you need to be successful, including a FICA tax savings widget and much more.

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And please remember, all the HSA tax information provided within this post is for your reference only—Bend does not provide official tax or legal advice. Always consult with your qualified tax or legal adviser if you need additional help regarding your specific tax situation.

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