Given the escalating cost of employee healthcare benefits, as a business owner, you may be hesitant to take this on; but healthcare benefits are a powerful perk when you’re looking for new hires, and good healthcare benefits are an important incentive to stay put for existing employees. An option for small business owners to think about if they’re interested in providing some of these benefits is an employer-sponsored Health Savings Account (HSA). For eligible individuals, HSAs offer a tax-advantaged way to set aside funds (or have their employers do so) to meet future medical needs. Here are the key tax benefits for both employees and employers:
- Contributions that participants make to a Health Savings Account are deductible, within limits.
- Contributions that employers make aren’t taxed to participants.
- Earnings on the funds within an HSA aren’t taxed, so the money can accumulate year after year, tax free.
- HSA distributions to cover qualified medical expenses aren’t taxed.
- Employers don’t have to pay payroll taxes on HSA contributions made by employees through payroll deductions.
Who is eligible for an HSA (Health Savings Account)?
Wondering if you’re eligible for an HSA? Here’s what it takes:
To be eligible for an HSA, an individual must be covered by a “high deductible health plan.” For 2019, a “high deductible health plan” is one with an annual deductible of at least $1,350 for self-only coverage, or at least $2,700 for family coverage. For self-only coverage, the 2019 limit on deductible contributions is $3,500. For family coverage, the 2019 limit on deductible contributions is $7,000. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,750 for self-only coverage or $13,500 for family coverage.
An individual (and the individual’s covered spouse, as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2019 of up to $1,000.
Employer contributions To HSAs
If you’re an employer interested in contributing to the HSA of an eligible individual, you should know that the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from an employee’s gross income up to the deduction limitation. There’s no “use-it-or-lose-it” provision, so funds can be built up for years. An employer that decides to make contributions on its employees’ behalf must generally make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer doesn’t make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period. Fiducial can walk you through all of this information and get you on the path that's right for your business.
HSA distributions can be made to pay for qualified medical expenses, which generally mean those expenses that would qualify for the medical expense itemized deduction. They include expenses such as doctors’ visits, prescriptions, chiropractic care, and premiums for long-term care insurance.
If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it’s made after reaching age 65, or in the event of death or disability, so you’ll want to watch your withdrawals and make sure they fit the criteria for qualified medical expenses.
As you can see, HSAs offer a flexible option for providing health care coverage, but the rules are somewhat complex. Contact Fiducial at 1-866-FIDUCIAL for more information, or call one of our locations and make an appointment to sit down and speak with one of our professionals about what kind of employee healthcare benefits might be the right choice for your small business.