HSAs for Employers and Business Owners: The Complete Guide

 

If you’re self-employed or a small business owner, you know that work means more than just nine to five. And you also know you face a unique set of challenges—including making the best decisions for your business when it comes to healthcare and financial wellness. If you’re self-employed or a small business owner looking for your HSA options—you’ve come to the right place. You’ll learn if you can even have an HSA, if business owners can contribute to an HSA and even step-by-step instructions on how to set up an HSA for your small business.

 
SMall Business Owner

Can I have an HSA if I'm self-employed?

The short answer is yes. But there’s a little more to it than that.

At its core, a self-employed HSA option is very similar to options for employers. Since an HSA isn’t a type of insurance, it comes down to you as a self-employed individual needing to have an HSA-compatible health plan. According to HSA rules set by the IRS, you can only open an HSA if you’re covered by an HSA-eligible high-deductible health plan (HDHP). Learn more about HDHPs and other HSA basics. So if you’re a self-employed individual covered under a qualified plan, you may open and contribute to an HSA.

You’re not eligible for a self-employed HSA if you’re covered by your spouse’s health insurance plan that isn’t a qualified HDHP. You’re also not eligible for a self-employed HSA option if you’re claimed as a dependent on another person’s tax return or if you’re enrolled in Medicare or Medicaid.

Assuming you’re already enrolled in an HSA-qualified HDHP, a self-employed HSA can be not only a crucial path to tax savings on your healthcare expenses, but also an integral part of a bigger picture financial wellness program and retirement plan. Because the reality is—self-employed individuals and small business owners most often don’t save as much for retirement compared to those who are traditionally employed. Leveraging an HSA can help you save big on qualified medical expenses while doing double-duty as a retirement account for you.

If you set up an HSA and contribute to it as a sole proprietor, you’ll be able to deduct some of your contributions on your personal income tax return. As long as you make a profit during the tax year, you can file the deduction. For 2019, the maximum HSA deduction is $3,500 if you’re participating in a qualified HDHP as single and $7,000 if you’re participating as a family. If you’re 55 or older, you can tack on an extra $1,000 to either amount. However, you can’t contribute more to your HSA than your net self-employment income.

While many who are traditionally employed can contribute to their HSA on a pretax basis, as a self-employed individual, you can make HSA contributions with after-tax dollars and then do a line item deduction on your Schedule C. It’s a little more paperwork, but still an easy way to save money on qualified medical expenses. If you have an LLC, the basic principles of your self-employed HSA aren’t much different than those of a sole proprietor. But if you have employees, there are additional considerations. Learn more about how an LLC can have an HSA.

 

Can S Corp or C Corp business owners contribute to an HSA?

There are special rules applied by the IRS to specific business entities dependent on ownership of the business—whether owned by individuals or investors. Due to these rules, certain business entities face restrictions on HSA funding.

People with questions

If you’re a 2% or greater owner of an S Corp, you’ll be affected by HSA funding restrictions. When it comes to employer contributions to an S Corp HSA, the business can’t provide owners with a tax-free contribution. Any contributions from the S Corp business to the owners’ HSAs are considered taxable income—you can’t make pretax contributions to your HSA. But while the S Corp HSA contributions are taxable to the owners, they’re also tax deductible to the business as a compensation expense. And even after-tax HSA contributions still provide a valuable tax advantage on qualified medical expenses.

On the employee side, or if you’re less than a 2% owner of an S Corp, the restrictions don’t apply—meaning an S Corp business can make tax-free contributions to their employees’ HSAs as long as they’re consistent with the current IRS regulations on employer contributions.

For C Corp business owners, since the business is considered a completely separate legal entity, the IRS views owners the same as employees. If you’re a C Corp business owner, you’re eligible for your company’s HSA, including making pretax contributions to your HSA account. Just remember, all contributions must comply with current IRS regulations on employer HSA contributions.

 

Can an LLC have an HSA?

If you haven’t already, read the answer above concerning Can I have an HSA if I’m self-employed? That’ll bring you up to speed on the general concept of having an HSA as an LLC. If you’re a single member LLC and you have an HSA-eligible high-deductible health plan (HDHP), the way your HSA will operate is essentially the same as a self-employed sole proprietor. While you won’t be able to contribute to your HSA on a pretax basis, you will be able to make HSA contributions with after-tax dollars and then do a line item deduction on your Schedule C. Bottom line—having an HSA even as a single member LLC still saves you money on your healthcare expenses.

However, if you’re an LLC with employees, you may have the option to implement an HSA for your LLC that will allow your employees to make pretax contributions. This type of LLC HSA is commonly known as a cafeteria or 125 plan. Remember, as the LLC business owner, you can’t participate directly, but offering this type of HSA cafeteria plan for your employees brings many benefits.

LLC employees in a meeting

A cafeteria plan is an employee benefits plan administered under Section 125 of the federal tax code (hence why the plan is sometimes also referred to as a 125 plan). This type of plan allows your employees to pay certain expenses with pretax income, and to choose the benefits they want (just like in an actual cafeteria!). If you choose to set up this type of plan, funding an HSA can be an option under your cafeteria plan.

Just as with you as the LLC owner, your employees must participate in a qualified HDHP to be eligible for a tax-exempt HSA. Your employees who meet eligibility requirements for an HSA can then set aside a portion of their pretax income to pay for qualified medical expenses. You as the LLC owner can also contribute to your employees’ HSAs up to maximum annual limit set by the IRS.

Another benefit is that the HSA is a portable account—meaning your employees can keep it open even if they change jobs. On top of that, the pretax deductions may help your employees qualify for other income-based tax credits, and their HSA contributions can even be invested and turned into income-producing assets.

And there’s also added benefits for you as the LLC owner. If you decide to contribute to your employees’ HSAs under your cafeteria plan, your contributions will be tax deductible as a business expense. This means those HSA contributions aren’t counted as employee income and they’re not subject to payroll tax like FICA. These favorable tax treatments, along with your ability as an owner to still make after-tax contributions to your own HSA, makes offering a cafeteria plan a smart strategy for increasing your employees’ total compensation while staying focused on your LLC’s bottom line. It also saves the LLC money by lowering FICA taxes the employer pays as the employee’s taxable income is lower.

 

How do I set up an HSA for small business?

Setting up an HSA for small business owners who don’t have employees is a fairly simple, straightforward process. Whether you’re self-employed, a single member LLC or otherwise, as you already know if you read any of the sections above, the first step to setting up an HSA for small business owners is ensuring you’re eligible to open an HSA by enrolling in an HSA-eligible high-deductible health plan (HDHP). It’s important to note, not all HDHPs are HSA-eligible, so be sure you double-check your specific plan before moving forward.

Enrolling in an HSA

Once you’ve confirmed that your HDHP is HSA-eligible, you’re ready to open your small business owner HSA account. You can open your HSA a variety of ways—through your bank, another financial institution or even conveniently online from a leading-edge, FDIC-insured HSA provider like Bend HSA. Depending on how you open your HSA, you may receive a debit card to use directly for eligible healthcare expenses. Keep in mind, if you’re opening an HSA on your own as a small business owner with no employees, your choice is an important one, because no two HSA administrators are created equal. Fees, investment options and many other variables can impact both your short and long-term HSA financial health. So do your homework, and make the right choice.

If your small business has employees and you decide you’d like to offer an HSA option for your employees, setting up an HSA requires a few more steps.

The initial step is the same as for small business owners who don’t have employees—you and your employees need to be enrolled in an HSA-eligible HDHP. From there, if you want to allow your employees to make pretax contributions to their HSAs, you need to set up and maintain a Section 125 cafeteria plan that offers HSA deferrals. As part of maintaining your cafeteria plan, you’ll be responsible for collecting your employees’ deferral elections and sending those contributions directly to your HSA custodian (we’ll cover who your HSA custodian is in just a bit). As the employer, you’re also responsible for ensuring your HSA-eligible employees don’t exceed their maximum contribution limits, since over contributing and other issues only lead to more work for you. Then, at the end of each year, you’ll need to provide the appropriate tax documents associated with your plan—that means a W-2 for your employees and an IRS Section 106 to allow your small business to deduct the benefits.

In tandem with setting up your small business’ cafeteria plan, you’ll also need to choose your HSA custodian—essentially, the administrator of your HSA account. An HSA custodian can be any bank, credit union, insurance company, brokerage or other IRS-approved financial institution that offers HSAs. Your HSA custodian holds your HSA assets in a secure HSA account and plays a vital role in all aspects of HSA administration.

Your choice of an HSA custodian is a critical one for your small business. Who you choose sets the tone for not only interest earned, fees paid and investment options available, but also for ease of use by your employees and ease of your own HSA program management as the small business owner. out what sets Bend HSA apart from the HSA custodian competition.

Once you’ve worked your way through all of the steps above, you’re on your way to better managing your healthcare expenses through a tax-advantaged HSA program for your small business.

Learning the ins and outs of health savings accounts (HSAs) is one thing. Figuring out exactly how to offer and set up an HSA program for your employees is another. But don’t worry—we’ve got you covered. Find clear answers to your questions about offering and setting up employer-sponsored HSAs here. We’ll start with the basics, like are employers required to offer HSAs for employees, and how you as an employer can set up an HSA for your employees. We’ll also cover another frequently asked question from the employer side—can highly compensated employees participate in an HSA? Let’s dive in.

 

Are employers required to offer HSAs?

Proud Employer

First thing’s first—are employers required to offer HSAs—meaning do you as an employer have to offer an HSA to your employees? The short and simple answer is no. But let’s explore the idea of requirements a bit more, as well as the reasons why you should consider offering an employer-sponsored HSA—required or not.

We’ll start by briefly covering employer healthcare requirements—specifically those under the Affordable Care Act (ACA). As an employer, you’re either subject to the ACA employer mandate for large employers, or you’re not. That mandate requires what the IRS deems as a large employer to provide a specified percentage of their full time equivalent employees and their families with minimum essential healthcare insurance. A “large employer” is defined by the IRS as any organization that employs, on average, a combination of 50 or more full time and full time equivalent (FTE) employees during six months or more of the previous year. Any large employer who fails to comply with the IRS mandate must pay a no-coverage penalty—$2,500 times the total number of full time employees minus the first 30 of those employees. This no-coverage penalty is considered an excise tax and isn’t tax deductible. Again, remember, this is for large employers with more than 50 full time employees.

If you’re a small employer—defined as an employer with fewer than 50 full time employees—you’re not subject to any mandates. This means that small employers are under no obligation of any kind to provide healthcare insurance to their employees.

But for large and small employers—mandate or no mandate—you need to look beyond requirements, and rather focus on the many benefits of offering an HSA-compatible health plan with an HSA. Because just because you don’t have to doesn’t mean you shouldn’t.

Offering an employer-sponsored HSA to your employees is a win-win for both you and your employees. For you as the employer, you’ll benefit from lower payroll taxes (if you set up your HSA to allow pretax contributions), positive upticks in employee satisfaction, leverage points for both employee recruitment and retention and lower health benefits costs. In addition, HSA programs like Bend HSA are also easy for employers to set up and maintain—and associated fees are very affordable. Your employees, in turn, will also benefit from lower taxable income, more flexibility and control of their healthcare spending and enhanced long-term savings options.

It’s clear to see that even if you don’t have to, you likely want to set up an employer-sponsored HSA.

If you read our section on HSAs for Small Business Owners and Self-Employed Individuals, you’ll recall that HSAs aren’t actually a type of health insurance, rather a complementary, tax-advantaged tool that becomes an available option when you offer an HSA-compatible high-deductible health plan (HDHP).

 

How do I set up an HSA for my employees?

Ready to set up an HSA

If you’ve come this far, you likely have a solid understanding of what an HSA is and why it’s advantageous for you to offer an employer-sponsored HSA to your employees.

But just in case, let’s quickly recap one of the main advantages of offering an employer-sponsored HSA through a platform like Bend HSA—a combination of two mutually exclusive benefits—cost savings and time savings.

On the employer side, setting up and implementing Bend HSA is simple, completely online (paperless!) and takes on average only 30 minutes from start to finish.

On the employee side, enrollment is equally as simple and is achieved completely online, eliminating any need for you as the employer, or for your employees, to chase paper forms. With Bend HSA, employee enrollment isn’t just electronic—it’s automated. All you need to do is upload your employee information into the Bend HSA system. From there, Bend automatically sends your employees emails to enroll.

That’s it. In a few quick, simple steps, your HSA program can be set up and launch out to your employees. And as the employer, you immediately begin to benefit from efficiencies that save you time and money, and lead the path to the next advantages of setting up a paperless HSA program through Bend HSA—administrative relief, plus ease of use and overall program sustainability.

With Bend HSA’s unique automation process, your employees’ enrollments are continually monitored and customized messaging is pushed out as needed to nudge your employees along through the enrollment process, utilizing positive reinforcement and easy-to-follow instructions. Along with saving you time and money, you get a huge assist with an otherwise burdensome administration process. That means no HR staff time manually uploading information, chasing paper forms, printing more paper forms and other materials, dealing with physical enrollment packets and more. And by reducing the chance of errors and omissions commonly found on paper forms, Bend’s paperless enrollment process frees up your staff’s time while providing them with an easy-to-use, sustainable platform for ongoing HSA plan administration.

Sounds pretty good, right? And also pretty easy.

Now you just need the framework for how you actually make it happen—i.e., how you structure your actual HSA program. Though the thought of the “technical” side of setting up an HSA may seem daunting at first, it’s also actually a fairly simple and straightforward process that takes less time than you think, and starts paying off immediately.

So for a moment, let’s back up. Before you can actually set up an HSA for your employees, you need to understand how to be eligible to do so. We’ve covered that previously under the section on How do I set up an HSA for my small business if you haven’t already, be sure to take some time to read and digest that section. In the meantime, let’s quickly revisit how setting up your HSA program relates to your employees.

Two People discussing enrollment

The first step to setting up an HSA for your business—and your employees—is ensuring you’re eligible to open and provide an HSA by offering an HSA-eligible high-deductible health plan (HDHP) as part of your healthcare benefit offerings. As you may or may not recall, it’s important to note that not all HDHPs are HSA-eligible, so be sure you double-check your specific plan offerings before moving forward.

Once you’ve worked your way through that process and have your HSA-eligible HDHP ready to go, the next step is to choose who will administer your HSA program and employee accounts. Remember—you can open your HSA a variety of ways—through your bank, another financial institution or conveniently online from a leading-edge, FDIC-insured HSA provider like Bend HSA. This is a critical decision, because no two HSA administrators are created equal. Fees, investment options, ease of maintenance on both the employer and the employee side and many other variables can impact both the short and long-term HSA financial health for your business and your employees. So do your homework, and make the right choice.

From this point, as you collaborate with your HSA administrator to work through all of the details on administration and HSA enrollment, you have the choice of how you want contributions to be handled—essentially if you’ll want to use a Section 125 cafeteria plan or not.

If you want to allow your employees to make pretax contributions to their HSAs, as well as have the option as the employer to make pretax contributions, you need to set up and maintain a Section 125 cafeteria plan that offers HSA deferrals.

This cafeteria plan is an employee benefits plan administered under Section 125 of the federal tax code (hence why the plan is sometimes also referred to as a 125 plan). This type of plan allows your employees to pay certain expenses with pretax income, and to choose the benefits they want (just like in an actual cafeteria!). If you choose to set up this type of plan, funding an HSA can be an option under your cafeteria plan.

Assuming you move forward with using a Section 125 plan, the final step on the technical side of your HSA setup for employees is providing the proper documentation. If you choose Bend HSA, the tax documents will be created for you. You’ll also need to provide all of your employees—including all new hires—with documents that outline the details of your health plan. These documents typically include three critical pieces:

  • Plan document: Details which benefits are included in the plan, annual limits, rules of participation, definitions and eligibility and contribution information
  • Summary plan description (SPD): Details in-depth the plan itself—everything from plan sponsorship and administration, to the claim filing process
  • Compliance confirmations: As part of offering a Section 125 plan, you must provide ongoing documentation that you’re following the comparability rule created to ensure you treat all of your employees equally and not show bias toward higher earners

From there, you’ve completed the setup phase, and with the continued support of an HSA administrator like Bend HSA, you’re ready to launch your employer-sponsored HSA to your employees.

 

Can highly compensated employees participate in an HSA?

Business Executive

Yes—highly compensated employees can participate in your employer-sponsored HSA. But there are some specific HSA nondiscrimination rules and other details regarding highly compensated employees that you need to be aware of when it comes to how they participate in your HSA.

But before we get into those HSA nondiscrimination rules and details, let’s define exactly what a “highly compensated employee” means.

A highly compensated employee is defined as any employee who was a more-than-5% owner at any time during the year or preceding year or received compensation in excess of $120,000 for the preceding year, and, if your company so elected, was in the top 20% of employees when ranked by pay.

Now that we’ve defined what highly compensated employees are, here come the HSA nondiscrimination rules and details that come along with them.

It’s important to note that specific HSA nondiscrimination rules are set by the IRS to ensure equal treatment across all of your employees in how you administer their HSAs. That means that your employer HSA contributions to highly compensated employees may not be larger than your employer HSA contributions to non-highly compensated employees. These rules also apply across all highly compensated employees, meaning you as the employer must make comparable HSA contributions to each highly compensated comparable employee. Along with the HSA nondiscrimination rules, you as the employer have the option to treat highly compensated employees as a separate class from non-highly compensated employees, as long as you make larger HSA contributions to your non-highly compensated employees. By separating these employee classes, you can make comparable HSA contributions to all of your eligible non-highly compensated employees without making any HSA contributions to your highly compensated employees.

As you see, you have some choices when it comes to how you handle your highly compensated employees within your HSA plan, but the long and short of it is that they can indeed participate in your employer-sponsored HSA.

 

As an employer, when it comes to HSAs, it’s important to play by the rules. And that includes HSA rules for employer contributions. Luckily, HSA rules for employer contributions are fairly straightforward—especially if you partner with a leading-edge HSA provider like Bend who can help you with your HSA administration every step of the way. So, if you’ve decided to make employer contributions to your employees’ HSAs, you should be able to quickly and easily navigate what you can and can’t do.

Remember—contributing to your employees’ HSAs is an added benefit that helps with everything from employee recruitment and retention, to overall employee wellness, so it’s definitely something you should consider when you’re exploring your HSA program options. Also remember, your employee contributions are tax deductible as a business expense.

Whether you’ve already made the choice to include employer contributions in your HSA program or if you’re still undecided, it’s always good to be informed. In this section, we’ll cover the most common questions employers have regarding HSA rules for employers. You’ll find out how much an employer can contribute to an HSA, if HSA employer contributions count toward maximum annual limits, the average employer contribution to an HSA and if HSA contributions have to be payroll deducted. We’ll also cover how long an employer has to deposit HSA contributions and if an employer can take back HSA contributions.

Let’s get started. Feel free to read through everything from start to finish, or skip ahead to the question you need an answer to.

 

How much can an employer contribute to an HSA in 2019?

The IRS continues to evaluate and change HSA limits year over year. In 2019, the maximum contribution limit for single-only HSA coverage is $3,500. For family HSA coverage, the maximum contribution limit is $7,000. For both single-only and family HSAs, a 55+ catch-up limit of $1,000 is available to any participating employee age 55 or older. That means the limits jump to $4,500 and $8,000, respectively.

It’s important to note—all of these limits include employer contributions to an employee’s HSA. You as the employer have discretion as to how much, if at all, you want to contribute. But theoretically, you could contribute up to the maximum contribution limits. In that scenario, you would fully fund your employees’ HSAs, and they wouldn’t contribute any of their own funds. While that’s not typical, it is a possibility if you would so choose. We’ll cover average employer contributions to an HSA a bit later.

 
Graph of Contributions

Do employer contributions to an HSA count toward maximum annual limits?

As detailed in the answer to the previous question on how much an employer can contribute to an HSA—yes—HSA employer contributions count toward the maximum annual limits set by the IRS.

Simply put, the combination of employer and employee contributions can’t exceed the maximum contribution limit for the specific HSA type, single-only or family. And remember, the additional 55+ catch-up limit of $1,000 applies to both HSA types, giving the employer and the employee an additional $1,000 total of contribution potential.

 

What is the average employer contribution to an HSA?

There really isn’t one hard-and-fast answer as to what the average employer contribution to an HSA is—employer HSA contributions tend to vary based on your company’s size, type of industry and geographic region. But while there isn’t one universal average, we have found some commonalities regarding the dollar amount of HSA employer contributions when using an indicator of employer size.

When looking across the nation, employers with fewer than 500 employees contribute on average $750 annually to their employees with single-only HSAs, and $1,200 annually to their employees with family HSAs. Employers with 500+ employees contribute on average $500 annually to their employees with single-only HSAs, and $1,000 annually to their employees with family HSAs.

Regardless of HSA employer contribution amount, remember, you as the employer must treat all of your employees equally when it comes to the contributions you provide—either a fixed-dollar amount for the contribution or a percentage based on the deductible of the specific HSA type. You can learn more about HSA comparability rules here.

 

Do HSA contributions have to be payroll deducted?

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Making HSA contributions through payroll deduction is the simplest way to set up your HSA program to avoid both income tax and payroll tax—it’s a win-win for you as the employer and for your employees. Though your employees could theoretically contribute money to their HSA outside of having it payroll deducted, they’d have to do so with after-tax money and then deduct those contributions on their tax return, missing out on the payroll tax benefit while adding burdensome recordkeeping and paperwork to their plate. So while technically HSA contributions don’t have to be payroll deducted, it’s clearly the best option to maximize the benefit of using an HSA.

And with an HSA provider like Bend, implementing your HSA program is simple, completely online, takes on average only 30 minutes from start to finish and includes important automations—including easy integration into your payroll.

When you leverage a Bend HSA with payroll integration, even frequent contribution adjustments and payroll updates are automated so you don’t have any additional workload to manage, freeing up time for your HR and payroll staff to focus on other duties.

And through cutting-edge artificial intelligence (AI) and machine learning, Bend supports and engages your employees at a deeper level by recognizing patterns and suggesting optimizations. This educates your employees to take control of their financial health, and virtually eliminates any need for your HR and payroll staff to intervene.

 

How long does an employer have to deposit HSA contributions?

How long?

As we’ve covered through all of the questions and answers in this section so far, there are certainly specific HSA rules for employers that you need to follow when administering your HSA program to your employees. Another HSA employer rule specifies how long you as an employer have to deposit an HSA contribution to an employee’s account.

Your HSA employer contributions to your employees must be promptly deposited into their HSA accounts as of the earliest date in which those contributions can be reasonably segregated from your general assets, and at maximum no later than 90 days after the payroll deduction is made.

Failure to deposit your HSA employer contributions promptly could result in a prohibited transaction, which would then result in an excise tax liability of 15% of the amount involved.

Some circumstances can arise that would result in delays to depositing HSA contributions—one common example is when an employee fails to establish their HSA account through your HSA provider. In situations like this, the prompt depositing requirement is waived as long as the contributions are deposited promptly after the employee has their account set up correctly.

Too often, employers don’t receive adequate support from HSA providers in administering HSA accounts to their employees, causing unnecessary issues and delays. An HSA provider like Bend who automates payroll management and simplifies both the administration and implementation of the HSA accounts, as well as the enrollment of employees, makes for a simpler and more sustainable HSA administration experience for both employers and employees.

 
Break the Bank

Can an employer take back HSA contributions?

If you as the employer make HSA contributions to an employee who was never technically HSA-eligible—yes—you can correct your HSA employer contribution error and take back the contribution amount.

There are also a variety of contribution-related administrative and process errors that are eligible to be remedied, as detailed by the IRS in General Information Letter 2018-0033. These include employee name confusion, incorrect entry by a payroll administrator and duplicate file transmission, just to name a few.

Regarding terminated employees, while contributions can cease from the moment of termination, you can’t take back HSA contributions prior to termination, assuming the employee was HSA-eligible.

Luckily, with Bend HSA’s sophisticated administration system and automation integrations, HSA employer contribution errors, along with other common administrative and process errors that can occur when using other HSA providers, are virtually eliminated—making your HSA administration simple, streamlined and worry-free.

Keeping accurate and up-to-date HSA program records and following HSA accounting best practices are vital elements to maintaining the short and long-term success of your employer-sponsored HSA program. When you partner with an HSA provider like Bend HSA, you get the tools you need to simplify everything from employer HSA recordkeeping, to accounting and taxes. But even with outstanding support and leading-edge automations, it’s still good to know the basics of HSA accounting and recordkeeping.

In this section, we’ll cover the four most commonly asked questions regarding HSA accounting and recordkeeping. First, we’ll cover if employer HSA contributions are taxable. Next, you’ll learn the highlights of accounting best practices for HSA employer contributions. From there, we’ll detail how to record HSA contributions in QuickBooks. And lastly, we’ll provide the roadmap for how to report your employer HSA contributions on a W-2.

You’ll find the answers you need quickly and simply so you can feel confident in your HSA employer recordkeeping and accounting.

 

Are employer HSA contributions taxable?

Tax Burden

Offering an employer-sponsored HSA to your employees that allows for pretax contributions is a win-win for both you as the employer and your employees. If you need a refresher on what it means to set up and maintain a Section 125 cafeteria plan that offers pretax HSA deferrals, we’ve got you covered.

As the employer, you benefit from lower payroll taxes, because HSA employer contributions for this type of HSA program setup aren’t included in your employees’ income and therefore aren’t subject to federal income tax, Social Security or Medicare taxes. Employer contributions are also tax-deductible as a business expense, so you as the employer benefit on the frontend and on the backend.

Your employees also win—benefiting from lower taxable income, as well as being able to use their HSA distributions tax-free for qualified medical expenses.

HSA programs like Bend HSA are easy for employers to set up and maintain—and associated fees are very affordable. 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. The more employees who make HSA contributions, the lower your payroll taxes and the greater your FICA tax savings.

 

What are accounting best practices for HSA employer contributions?

Accounting best practices for HSA employer contributions are essentially the same as the accounting best practices you follow for other financial elements of your business. At the end of the day, it comes down to keeping good records, following the rules and partnering with an HSA provider like Bend who can help you quickly and easily access the information you need, when you need it.

With a Bend FDIC-insured HSA, you can offer your employees a leading-edge HSA—without adding to your workload or burdening your team. The Bend HSA features a dashboard that gives you a quick view into your HSA program, with access to the real-time accounting data you need, including:

  • Tax savings to date
  • Your employer contributions to date and planned
  • Your employees’ contributions to date and planned
  • Employees’ contribution growth and their savings growth
  • Other important information
 

How do I record HSA contributions in QuickBooks?

Recording HSA employer and employee contributions in QuickBooks is a simple and straightforward process. And when you use Bend as your HSA program provider, the data you need is right at your fingertips.

Your first step to recording HSA contributions in QuickBooks is to determine the contributions themselves, both on the employer and the employee side. QuickBooks doesn’t automatically limit HSA annual maximum amounts, so you as the employer are responsible for determining your employees’ eligibility and annual maximum limits.

Once you’ve determined the HSA contributions, the next step is to set up the employee HSA contributions, using either QuickBooks Online Payroll or QuickBooks Full Service Payroll. Setup is identical regardless of which version you use.

  1. Go to the “Workers” menu, select “Employees” and select the employee’s name
  2. Select the “edit” (pencil) icon next to “Pay” and select the same icon again in section 4
  3. Select the sequence of: “Deduction/Contribution” – “New deductions/contribution” – “HSA plans”
  4. Select “Pretax HSA” or “Taxable HSA” (depending on your specific HSA program setup)
  5. Add a “Description,” “Amount per period” and select “Ok”

After you’ve set up the employee HSA contributions, it’s time to set up your employer HSA contributions, again, using either version of QuickBooks.

  1. Go to the “Workers” menu, select “Employees” and select the employee’s name
  2. Select the “edit” (pencil) icon next to “Pay” and select the same icon again in section 3
  3. Expand the section titled “Even more ways to pay”
  4. Select “Company HSA Contribution” and then “Done”

Complete that process for each employee, and after that’s complete, you’re set up to record all future HSA contributions directly in QuickBooks.

 
W2

How do I report employer HSA contributions on a W-2?

Though your contribution amounts to your employees’ HSAs aren’t subject to employment taxes—assuming you set up a cafeteria plan that includes HSA deferrals—you still must report the contributions on each W-2 you file for your employees. You report the contribution amount in Box 12, along with entering code W to denote your total employer HSA contribution for the year.

It’s important to note, if you as the employer and your employee both contribute to the HSA, Box 12 will show the total of the two amounts.

Complete details on reporting employer HSA contributions on a W-2 can be found in IRS Publication 969.

Bend HSA for Employers

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