As the cost of providing employee health care benefits continues to rise, it’s is a good time for your business to consider setting up an employer-sponsored Health Savings Account (HSA). A HSA is a tax-advantaged savings account where an eligible employee or their employer can set aside funds for future medical expenses.
HSAs have three significant tax advantages:
1.) Employers and employees do not pay taxes on contributions to HSAs. The deductible contribution limit in 2019 for self coverage is $3,500 and $7,000 for family coverage. Those 55 and older can make an additional $1,000 contribution a year to “catch up.”
2.) Withdrawals to pay for qualified medical expenses are not taxed. Users can take out funds any time to pay for copays, deductibles, and other medical costs that the insurance plan does not cover. If a participant takes funds out of a HSA for anything other than qualified medical expenses, the withdrawal is taxable. An additional 20% tax is applied on top of that for individuals under the age of 65. You can see the full list of qualified medical expenses here.
3.) Interest earned is tax-free. The beauty of a Health Savings Account is that there is no “use it or lose it” policy; unused funds will roll over year after year, and any interest gained is tax-free.
Who is eligible?
HSAs are only available to employees covered by high deductible health plans (HDHPs). HDHPs have lower premiums and are generally less expensive for employers. For 2019, high deductible plans have an annual deductible of at least $1,350 for self-coverage and at least $2,700 for family coverage. Annual out-of-pocket expenses (other than premiums) required for covered benefits cannot exceed $6,750 for self-only coverage or $13,500 for family coverage.
If an employer makes contributions on its employees’ behalf, they generally must make comparable contributions to the HSAs of all similar participating employees for that calendar year. If the employer does not, they are subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.
HSAs provide a flexible option for providing health coverage, but the rules are somewhat complex. Contact us if you’d like to discuss offering this benefit to your employees.