If you are an employer, you are likely looking for ways to save health care costs without hurting the overall morale of your employees. One option to explore is offering high deductible health plans (HDHPs) to reduce your rising premium costs.

By enrolling in a HDHP, your employees may be eligible to open a health savings account (HSA). Not only does an HSA allow your employees to save for health care expenses now and into retirement, it also provides them with many attractive tax benefits.

But that’s not all! Since employer HSA contributions are tax-deductible as a business expense, you could reap some of these tax benefits, too.

Money saving options for employers

There are two ways you can make tax-free contributions to your employee’s HSAs: with a Section 125 plan or without a Section 125 plan.

Section 125 is part of the IRS tax code that allows employees to convert a taxable benefit (like salary) into non-taxable benefits. It allows employees to be paid with benefits (like health insurance premiums) on a pre-tax basis. You can use a section 125 plan to offer matching contributions to your employees which saves on FICA payroll taxes (7.65%) for all employee contributions. Add that up across every employee account and you could have a healthy boost to your bottom line.

Without a Section 125 plan, employers can make tax free contributions as long as they are “comparable” for all employees participating, according to the IRS comparability rules. Comparable contributions are defined as contributions that are the same dollar amount or same percentage of the employee’s deductible for all employees with the same category of coverage.

Many employers use a Section 125 plan because HSA contributions are not subject to the comparability rules — though nondiscrimination rules do still apply. Nondiscrimination rules restrict employers from making excessive contributions in favor of highly compensated employees.

Triple tax advantage for employees

HSAs are tax advantaged* accounts that allow both you and your employees to contribute into the account so your employees can pay for qualified medical expenses now and save for the future. The triple tax advantages include:

  • Funds can be contributed into the account on a pre-tax basis. The money contributed by you and your employees through payroll into to the HSA is also not subject to social security (FICA) and Medicare taxes.
  • Funds can be invested and grow tax free. There is also no expiration date on an HSA and no required minimum distribution like there is from a 401(k) or IRA. This means that accountholders can potentially spend years growing the funds in their HSA — all tax free.
  • Funds used for qualified medical expenses are tax free. Spending HSA funds on non-qualified expenses, such as to pay for a vacation or buy a new big-screen TV, will result in taxes and an additional 20 percent penalty.

Thanks to all of these tax advantages, offering an HSA with employer contributions can create a win-win situation for both you and your employees

We make managing an HSA easy!

Independent Health is proud to partner with HealthEquity, the leading administrator of HSAs in the nation. Through this collaboration, Independent Health is the only health plan in Western New York that offers an integrated HSA product with complete automated enrollment and claims payment solutions that makes it easier for employers and their employees to manage, use and maximize an HSA. Visit our website to learn more.

In addition, if you currently offer a HDHP to your employees, check with your Independent Health account manager to see if you’re eligible to add an HSA, too. It’s something you can do at any time during your plan year.

*HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Independent Health and HealthEquity do not provide legal, tax, financial or medical advice. Therefore, please consult a tax advisor regarding your state’s specific rules.