HSA Guide for Small Business Owners
This article is for informational purposes only. If you’re thinking of providing HSAs or FSAs for your employees, consult with your financial advisor or your insurance provider.
Picture this: You’re completely healthy. Until you’re not. And then the bills start piling up.
As a small business employer, you know this can happen to you or your employees at any time, so finding a way to save up for emergencies is key. A Health Savings Account (HSA) can help you and your team feel financially stable, and with growing premiums, can save you money.
What is an HSA?
A health savings account allows your employees to set aside pretax money to pay for qualified medical expenses. They are designed to reduce health care insurance costs for employees and employers. Employees can use pretax funds to pay for everything from doctor visits to prescriptions (including vision and dental care).
How does an HSA work?
Employees designate a specific amount of pretax dollars to contribute to their HSA account on an annual basis. By putting untaxed funds into your HSA to pay for expenses before you reach your deductible (and other out-of-pocket costs like copayments), you can reduce your overall health care costs. HSA funds roll over year to year if you don’t spend them, and can earn interest.
This is a real benefit. If you have an HSA, you don’t have to worry about using funds by year end. You can just keep saving so it’s more likely that you’ll be prepared for those really big costs.
Once you reach the age of 65, you can use your HSA funds for non-medical purposes. There’s no penalty, although you’ll have to pay income taxes on the withdrawn funds, similar to a traditional IRA. (If you withdraw funds for non-medical use before you’re 65, there’s an additional 20% tax penalty.)
You can also add a beneficiary to your HSA account. If your beneficiary is your spouse, your account can continue to be used as an HSA after you pass, regardless of whether or not he or she has an HDHP. If a non-spouse is your beneficiary, then your heir receives a distribution at the time of your death that becomes taxable income.
How much can you contribute to an HSA?
There are limits to how much an individual or a family can contribute to an HSA each year. In 2018, individuals can put up to $3,450 pretax dollars into their account, and a family can contribute up to $6,900 per year. If you’re over the age of 55, you are eligible for catch-up contributions, up to $1,000 per year.
Are there limits on who can use an HSA?
It’s important to note that an HSA can be used only if you have a high-deductible health plan (HDHP) that is HSA-qualified (insurance carriers usually label their plans as HSA-eligible).
In addition to having the right insurance policy, to contribute to an HSA you can’t have other types of health coverage (with a few exceptions), be enrolled in Medicare, or be a dependent of someone else.
What is a high-deductible health plan?
HDHPs are plans that have higher deductibles than traditional insurance plans and lower monthly premiums. That means you pay more health care costs before insurance starts to pay. For this reason, high-deductible health plans are often combined with HSAs — so you can pay those higher upfront costs with money that hasn’t been taxed.
The government defines HDHPs as a plan with these minimum deductibles and maximum out-of-pocket expenses:
|Maximum out-of-pocket expenses||$6,650||$13,300|
*Maximum out of pocket limit doesn’t apply to out-of-network services.
Remember, not all HDHPs are HSA-eligible. In 2016, only 23 percent of the high-deductible health plans on the federal exchange were HSA-eligible, according to Value Penguin. So make sure you call the insurer and ask if you aren’t sure.
What are the benefits of an HSA?
With health care costs rising, an HSA offers a financially affordable option that helps you and your employees.
Benefits for your employees include:
- Contributing to a fund with pretax funds (so the dollar earned is a dollar saved for health care)
- Growing those earnings tax-free
- Greater flexibility in their health care — they can contribute the amount they think is appropriate for their situation (up to the legal limit)
- Funds stay with the employees, even if they leave their job
- Withdrawing funds tax-free for qualified expenses
For you, as an employer, benefits include:
- Tax savings — like employees, employers don’t have to pay payroll taxes on HSA contributions (as long as they are deducted via payroll)
- A federal tax deduction for contributions made toward employee HSAs
- The ability to change HDHP plans and move HSA accounts easily
- More responsibility is put on employees to manage their health care which lessens your administration costs
- An offering that helps in recruiting top talent — and retaining those employees
What are the challenges of an HSA?
HSAs could be the right choice for you and your employees. The challenging part — for both employees and employers — is ensuring that you comply with all the guidelines around using them.
As an employer, one of the biggest benefits of an HSA is the federal tax deduction you can take. So you’ll want to familiarize yourself with the IRS documentation to ensure that your HSA offering won’t be subject to pay the federal income tax. You can learn more about HSA tax specifications on the IRS website.
For employees, it’s important to keep records and receipts for any purchase made with a withdrawal from your HSA account, in case you are audited. Without proof, your purchase could be subject to federal income tax, and there’s a chance of having to pay an additional 20 percent penalty if you are under the age of 65.
What’s the difference between an HSA and an FSA?
A flexible spending account (FSA) allows employees to contribute pretax earnings into an account that can pay for health care costs like copayments, deductibles, etc. Employers have to sponsor an FSA plan, and eligibility rules are set by the plan. In 2018, employees can contribute up to $2,650 to their health FSAs.
What are employer responsibilities in terms of setting up and maintaining an HSA?
If you want to allow employees to contribute pretax dollars to an HSA, you need to set up and maintain a Section 125 cafeteria plan that provides for HSA deferrals. As part of this, you’ll need to collect employee deferral elections and send the deferred amount directly to the HSA custodian.
You’ll also want to work with your employees to figure out who is eligible for an HSA and how much they can contribute. While most of the responsibility for this falls on the employee, the employer does have some responsibility not to exceed those contribution limits (and mistakes often lead to more work for the employer).
And at the end of each year, you will need to provide the appropriate tax documents (a W-2 for employees and the forms that allow your businesses to deduct the benefits — IRC Section 106).
That means you need to keep good records around how much your employees contribute from each paycheck.
There are a lot of rules and regulations regarding setting up and maintaining an HSA, so be sure to talk with your accountant or lawyer prior to starting your program.
How can you open a health savings account?
You can open an HSA through your bank or other financial institution. In many cases, health care providers offer a debit card to access funds for these purchases.
How do you make sure that HSA contributions are deducted through payroll?
Once you’ve decided how to administer an HSA, you also need to determine how to make sure you’re deducting the right amount of money from each employee’s paycheck to pay for those benefits.
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One way is to use a payroll service like Square Payroll. Square Payroll automatically calculates deductions and contributions when you run payroll to save you time (no manual calculations necessary). Those amounts are kept in your bank account so you can distribute it to the applicable providers to ensure accuracy. Then we also determine the taxability and reporting requirements for each benefit to make sure you are compliant. Learn how to set up benefits in Payroll.
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