It’s no secret that one of the primary agenda items of the new Republican administration is to repeal the Patient Protection and Affordable Care Act (ACA) and to sign into law a plan that they feel will be more effective in managing health care costs. Their initial attempt at a new plan, called the American Health Care Act (AHCA), included an increased focus on leveraging health savings accounts (HSAs) to accomplish this goal. As the plan gets debated and modified in Congress, we do not know whether the role of HSAs will be expanded or not, but they will continue to be a part of the landscape in some shape or form.
HSAs first came into existence in 2003 and they have been gaining momentum as a way to deal with increasing health care costs ever since. If you, as a plan sponsor, do not already offer a health plan compatible with an HSA, chances are you’ve at least discussed them during your annual plan reviews. So, what exactly is an HSA and what is an employer’s responsibility relating to one?
An HSA is a tax-favored account established by an individual to pay for certain medical expenses incurred by account holders and their spouses and tax dependents. Anyone can make a contribution to an eligible Individual’s HSA. This includes the individual’s employer. However, if employers contribute to participant HSAs, employers must:
- Ensure their health plan meets high-deductible health plan (HDHP) requirements,
- Determine eligibility,
- Establish contribution method,
- Provide W-2 reporting, and
- Confirm employer involvement in the HSA does not create an ERISA plan, or cause a prohibited transaction.
High-Deductible Health Plan Requirements
Plan sponsors should make sure their plan meets certain HDHP requirements before making contributions to participants’ HSAs.
Characteristics of an HDHP
An HDHP is a health plan that has statutorily prescribed minimum deductible and maximum out-of-pocket limits. The limits are adjusted annually for inflation.
For example, for 2017, the limits for self-only coverage are:
- Minimum Deductible: $1,300
- Maximum Out-of-Pocket: $6,550
The limits for family coverage (i.e., any coverage other than self-only coverage) are twice the applicable amounts for self-only coverage. The limits are adjusted annually for inflation and, for a given year, are published by the IRS no later than June 1 of the preceding year. In addition, an HDHP cannot pay any benefits until the deductible is met. The only exception to this rule is benefits for preventive care.
Eligible Individuals can make or receive contributions to their HSAs. A person is an eligible individual if he or she is covered by an HDHP and is not covered by any other plan that pays medical benefits, subject to certain exceptions.
Employer Contribution Methods
Employers that contribute to the HSAs of their employees may do so inside or outside of a cafeteria (Section 125) plan. The contribution rules are different for each option.
Contributions Outside of a Cafeteria Plan
When contributing to any employee’s HSA outside of a cafeteria plan, an employer must make comparable contributions to the HSAs of all comparable participating employees.
Contributions Made Through a Cafeteria Plan
HSA contributions made through a cafeteria plan do not have to satisfy the comparability rules, but are subject to the Section 125 non-discrimination rules for cafeteria plans. HSA employer contributions will be treated as being made through a cafeteria plan if the cafeteria plan permits employees to make pre-tax salary reduction contributions.
Employer HSA Contribution Amounts
Contributions from all sources cannot exceed certain annual limits prescribed by the IRS. Although employer contributions cannot exceed the applicable limits, employers are only responsible for determining the following with respect to an employee’s eligibility and maximum annual contribution limit on HSA contributions:
- Whether the employee is covered under an HDHP or low-deductible health plan, or plans (including health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) sponsored by that employer; and
- The employee’s age (for catch-up contributions). The employer may rely on the employee’s representation as to his or her date of birth.
When employers contribute to the HSAs of their employees and retirees, the amount of the contribution is excludable from the eligible individual’s income and is deductible by the employer provided they do not exceed the applicable limit. Withholding for income tax, FICA, FUTA, or RRTA taxes is not required if, at the time of the contribution, the employer reasonably believes that contribution will be excludable from the employee’s income.
Employer Reporting Requirements
An employer must report the amount of its contribution to an employee’s HSA in Box 12 of the employee’s W-2 using code W.
Design and Operational Considerations
Employers should make sure that their involvement in the HSA does not create an ERISA plan, or cause them to become involved in a prohibited transaction. To ensure that contributions will not cause the health plan to become subject to ERISA, certain restrictions exist that employers should be aware of and follow. Employer contributions to an HSA will not cause the employer to have established a health plan subject to ERISA provided:
- The establishment of the HSA is completely voluntary on the part of the employees; and
- The employer does not:
- limit the ability of eligible individuals to move their funds to another HSA or impose conditions on utilization of HSA funds beyond those permitted under the code;
- make or influence the investment decisions with respect to funds contributed to an HSA;
- represent that the HSA is an employee welfare benefit plan established or maintained by the employer;
- or receive any payment or compensation in connection with an HSA.
For a comprehensive chart that compares eligibility criteria, contribution rules, reimbursement rules, reporting requirements, privacy requirements, applicable fees, non-discrimination rules and other characteristics of account-based plans, request UBA’s Compliance Advisor, “HRAs, HSAs, and Health FSAs – What’s the Difference?”.
For information on modest contribution strategies that are still driving enrollment in HSA and HRA plans, read our breaking news release.
For a detailed look at the prevalence and enrollment rates among HSA and HRA plans by industry, region and group size, view UBA’s "Special Report: How Health Savings Accounts Measure Up", to understand which aspects of these accounts are most successful, and least successful.For fast facts about HSA and HRA plans, including the best and worst plans, average contributions made by employers, and industry trends, download (no form!) “Fast Facts: HSAs vs. HRAs”.