HSA Employer Contribution | 2022 Guide to Health Savings Accounts
Updated · Oct 06, 2022
Health Savings Accounts (HSA) allow you to save tax-advantaged money for medical expenses.
Many employers contribute to their staff’s accounts. It’s a win-win situation.
It helps individuals handle healthcare costs. Plus, it makes a company benefits package attractive for job applicants.
This article discusses in detail the HSA employer contribution and all the rules, taxes, and limits associated with it.
Read on to understand the full scope of HSA from the employee and employer perspective.
What Is HSA?
An HSA is a savings account that allows you to set aside money for medical expenses.
It is available to anyone with a high deductible health plan (HDHP).
The biggest perk is that HSA contributions are tax-deductible. That doesn’t apply to all deposits, though.
Employer contributions are excluded from taxable income.
As such, they are not eligible for additional deductions.
This makes HSAs a great way to save for healthcare costs.
Another benefit to HSAs is that they give more flexibility than, say, employer-sponsored life insurance.
For starters, there is no time limit on using the savings. Remaining funds roll over to the next year.
Individuals can reimburse themselves for a wide range of medical expenses.
The list includes doctor's visits, prescription drugs, dental and vision care, and many more.
Annual IRS HSA Contribution Limits 2022
The IRS imposes limits on the contributions to individual and family accounts.
In 2022, the HSA contribution limits are $3,650 for individuals and $7,300 for families.
In addition, there is a required minimum deductible for HDHP to be HSA qualified.
As of 2022, that is $1,400 for individuals and $2,800 for families. The maximum deductibles are $7,050 per person or $14,100 for families.
There’s no HSA employer contribution limit per se.
The only condition is that the total employee and employer deposit doesn’t exceed the IRS allowed amount.
Triple Tax Advantages
HSAs offer a triple tax advantage.
- Tax-deductible contributions
- Tax-free earnings from investments
- Tax-free money for qualified medical expenses
That said, if you use the money for non-qualified expenses, you will need to pay taxes and a 20% penalty fee.
After the age of 65, the penalty no longer applies.
You can use the fund for any purpose, but only medical costs will be tax-free.
How Does an HSA Work?
A company or individual can contribute to an employee HSA through payroll deduction, deposit, or transfer.
The account holder can withdraw money from their HSA to cover eligible expenses until they reach their deductible.
This includes things that the HDHP plan doesn’t offer, like dental or vision care.
Employers’ contribution to an HSA can make a company’s benefits package much more attractive for applicants.
But not every employee will be eligible for one.
To establish an HSA, you must have a High Deductible Health Plan (HDHP).
In addition, you can’t be enrolled in a non-HDHP, FSA, or Medicare plan.
The only compatible exceptions are a limited-use FSA, dental and vision plans, and disability insurance.
Lastly, you can’t have an HSA if you are named as a dependent on another person’s tax return.
So, employer HSA contributions will be valuable for people who cover these criteria.
What Is the Employer Contribution to HSA?
Employer contributions to HSA are not mandatory.
They are an optional addition to a company’s benefits package.
They come with tax advantages for the account owner and the contributing organization.
There’s no restriction of the frequency of deposits, as long as they are within the HSA employer contribution limit.
The company can make payments in a lump sum or in regular installments throughout the year.
Employees often prefer the first method. That way, they can use the sum to cover big expenses.
But this option hides some risks for employers.
First, paying out the HSA employer contribution to all workers at once is a big financial burden for the company.
Second, the employee could take advantage of the benefit and leave their job before the end of the year.
In other words, it's money the organization could've saved if paid in installments.
As an alternative, some employers choose a combined approach.
They make a lump-sum payment at the beginning of the year. Then, they pay the rest of the contribution in monthly or quarterly installments.
Regardless of the approach, the total contribution must remain within the IRS HSA limits for 2022.
That includes the deposits made by the employer and the account holder. Otherwise, the employee will have to pay taxes on the excess amount.
Now, let’s see what the rules companies must follow when providing this benefit are.
Employer Contributions to HSA—Rules
There are two ways an employer can contribute to an HSA—with or without a Section 125 plan.
Below, we cover each option in more detail.
With a Section 125 Plan
A Section 125 plan, also called a cafeteria plan, lets workers set aside part of their salary on a pre-tax basis.
Usually, the employer sets up automatic payments to the employee or their dependent’s HSAs.
The main benefit of using a Section 125 plan is that HSA contributions are made on a pre-tax basis.
Plus, that way, employers don’t have to follow the comparability rules.
We explain what they are next.
Without a Section 125 Plan
Employers can also contribute to their employees' HSAs without a Section 125 plan.
They just need to follow the IRS Publication 969 comparability rules.
The employer can divide their staff into three classes—full-time, part-time, and former employees. They can offer different contribution levels to each group.
The HSA comparability rules for employers are to provide the same amount or percentage of the deductible limit under the HDHP to employees in the same class.
If they violate these rules, employers may have to pay a 35% penalty tax on all HSA contributions.
Employers should provide details about their HSA contribution program in their employee documentation.
This information should include:
- How the employer and employee contributions are made
- Which employees are eligible for the program
- What happens if an employee leaves the company
- The total amount both parties will contribute to the account
Most importantly, the employer and the individual need to report their HSA contributions on Form W-2 in Box 12 with Code W.
Alternatives to HSA Employer Contribution
An HSA is not the only way to provide health benefits to employees.
Below, we present two more options.
An integrated health reimbursement arrangement (HRA), also known as a group coverage HRA (GCHRA), is a way to reimburse employees for medical expenses not covered by the group health plan.
How does this work?
The employer sets apart an amount that the employee can use as reimbursement for medical expenses.
The GCHRA is subject to the same rules and regulations as other HRAs.
That said, it has some advantages over employer HSA contributions.
Both options include tax-free reimbursement for medical expenses.
But an Integrated HRA doesn't require an HDHP.
Plus, it’s more cost-efficient than an HSA.
The employer doesn't have any financial responsibility unless the employee submits a request.
The unused amount stays with the employer.
The health stipend is an amount of money added to the employee’s paycheck to help offset the cost of healthcare.
The employer can provide it as a lump sum, in monthly, quarterly, or annual installments, or as a reimbursement.
The biggest advantage over an employer HSA contribution is that the workers decide how to spend the money. There are no regulations.
However, that means the amount is subject to annual income tax requirements.
There are a few different types of health benefits employers can provide.
In this article, we focus on the HSA employer contribution.
We also discuss the pros and cons of other options—namely, group coverage HRAs and health stipends.
Read our full guide to see if HSA is the right choice for you or your employees.
With an eye for research, Aleksandra is determined to always get to the bottom of things. If there’s a glitch in the system, she’ll find it and make sure you know about it.